October 2008

The rally looks bound for at least 9105, or perhaps 9138, since it has already exceeded the 8935 midpoint associated with the latter number, a Hidden Pivot. However, if 9105 were to be exceeded on a closing basis for two consecutive days, we'd be looking at a possible nuclear detonation capable of blowing the Indoos all the way up to Kingdom Come: 10011. Stranger things have happened on Wall Street -- or perhaps not -- but there's no point in trying to look at it rationally. Some attributed yesterday's thrust to the mildly bullish outlook espoused by Bob Farrell in a conference call yesterday to Merrill's brokers. He thinks that recent lows near 7900 could hold for a while, and although we disagree, anything that Bob Farrell says will always deserve the benefit of the doubt.

We blew out eight Citi December 25 calls (CLE) for a $120 trading loss, since Citi failed initially to get any lift from the release of less-than-disastrous earnings (only by current standards -- the loss was more than $2 billion!) The stock eventually rallied, unable to ignore the general hysteria that carried most other stocks higher, but on its own, Citi looked like warmed-over crap yesterday. My hunch is that the stock will not only test the $12 low made last week, but break it and go much lower. For that reason, we'll be looking to leg into a far-out-of-the-money calendar put spread, much as we attempted to do in GM just as it went into its recent death dive. Citi would be a great short for us at 18.02, a midpoint resistance on the hourly chart, but the stock has very seldom accommodated us by rallying to a fat target. In any case, stay tuned!

The futures crushed a Hidden Pivot support at 806.50, implying there is another wave of selling coming. If so, my minimum downside expectation would be 747.40, a Hidden Pivot derived from the somewhat arcane pattern shown in the accompanying chart. If there's a battle between bull and bears, it will likely take place near 803.30 the midpoint pivot associated with the 747.40 target.

Crude did everything we asked of it yesterday, stair-stepping its way down to the lowermost of three Hidden Pivot targets that had been identified here. The intraday low at 68.57 exceeded the target by 33 cents, which in this vehicle is not quite enough for us to infer that more weakness is likely over the near term. If the rally does indeed continue, look for a midpoint pivot at 73.72 to show some stopping power. However, a decisive breach of that hidden resistance would portend more upside over the near term to as high as 75.39.

Anyone who was worried that the stock market had taken leave of its senses should have felt greatly relieved after yesterday's 733-point drop in the Dow Industrials. Added to the plunge from the previous day's fleeting high at the opening, the Indoos have now given back 1264 points of their ill-gotten, 1900-point gain from Monday's low. Could it be that Wall Street isn't so crazy after all? (Click on image to enlarge) Some have attributed the latest bout of selling to scary numbers from the retail sector, others to the mounting specter of recession-or-worse, or even to the prospect of the left-most member of Congress becoming our next President. But we'd like to think investors are focused on the more immediate, and worrisome, matter of what will happen next week when insurance payments on several hundred billion dollars worth of Lehman default swaps come due. As the Wall Street Journal noted yesterday, 'No one quite knows who owes what and if they're good for it.' Indeed. Small wonder, then, that Paulson and Bernanke have been working so feverishly on the final details of their latest handout to the banks -- a $250 billion 'injection,' as it is being called. (We will have more to say about this in the days ahead, and if you'd like to receive Rick's Picks commentary free each day by e-mail, just click here.) $250B Divided by 9 The $250 billion will be apportioned among nine banks, and although this sum would have been considered a big number just two months ago, these days it is just pin money -- an indeterminately small, and presumably ineffectual, handout coming from who-knows-where. Our take is that, spread among the nine banks, it won't be enough to cover even three days' worth of bad news from the banking sector,

We hold eight Citi December 25 calls (CLE) acquired yesterday for 0.43. We did so on the opening, riding a market-maker bid pegged so criminally low that, even when the stock plummeted later in the day, our options lost only a nickel in value. We'll hold onto them for now while continuing to offer eight (not four, as stated earlier) October 20 calls (CJD) short for 0.39, g-t-c. My goal for this gambit is to produce a profit of at least $800 and to have no risk in the position by Thanksgiving. We'll likely need some help from Paulson, though, in the form of some extravagant giveaway to Citi, which otherwise is headed to the grave. Most immediately, the stock looks bound for a minimum 15.38, a Hidden Pivot that you can bottom-fish at your discretion with a very tight stop.

Hidden Pivots aside, lows made six years ago in the range 7200-7400 represent serious support, since a penetration of the lower number would erase the gains of one of the greatest bull runs in U.S. stock-market history. Most immediately, the Indoos face jeopardy down to at least 8294, a midpoint Hidden Pivot support that you can replicate on the daily chart with these coordinates: A=10883 (10/01), B=7883 (10/10) and C=9794. Plug these numbers into you calculator and you'll see that, if the support is decisively breached, it would portend more downside to as low as 6794 -- or perhaps even to 6194 if a higher point 'A' comes into play.

During yesterday's real-time tutorial session we looked at three bearish Hidden Pivot targets that appear likely to play out sequentially over the next 3-4 days. Here they are for the benefit and guidance of all subscribers: 72.10, 70.93, and 68.90. The accompanying chart shows how these numbers were derived. If you bottom-fish any of them, a stop-loss of 20-30 cents is suggested. ______ UPDATE: So much for the 3-4 days I'd allotted for crude to do its thing. Today's wicked downdraft took out all three targets enroute to an intraday low at 68.57, just 33 cents beneath the worst-case pivot. The overshoot is small but significant enough to imply that we have not yet seen a bottom.

In night trading, the December contract looked set to probe a midpoint Hidden Pivot support at 9.960. Its provenance -- a one-off 'A' from the hourly chart, is shown in the accompanying chart. A decisive breach of that number, or a two-day close beneath it, would imply more downside to at least 8.725, or 8.300 if any lower. Alternatively, it would take a thrust today exceeding 11.870 to turn the hourly chart decisively bullish.