December 2008

How would one know if the 7449 low recorded on November 21 is destined to become a major bottom? Already, a couple of our more technically astute colleagues have speculated as much, and one of them, Porter Stansberry, even thinks the low will come to mark one of the best buying opportunities of the last 30 years. Another, Peter Eliades, has sounded this spooky technical note: The last time a market crash like Monday’s produced a positive McClellan Oscillator reading was on August 12, 1932  -  “a month after what was perhaps the most important market bottom of the Twentieth Century.” Peter says that although the jury is still out concerning the meaning of Monday’s +25 McClellan reading, he cannot rule out the possibility that history is about to repeat itself. From a Hidden Pivot perspective, there is no evidence yet that an important turn is at hand. However, we can still offer a simple benchmark for determining when the Industrial Average would warrant our serious attention. The chart above shows how a thrust of just 329 points could turn us quite bullish overnight. Specifically, the Indoos would need to push past the three numbered tops without a correction lasting longer than a single day. The first of those peaks lies at 8831, and it doesn’t matters how long it takes the blue chip average to get there from current levels. But once the Dow has exceeded 8831, which you could view as a starting line, it must sprint past the remaining two peaks without pausing for breath. Any less would imply the rally is just a garden-variety bear squeeze. (If you’d like to be signaled when this occurs, by way of having Rick’s commentary delivered free to your e-mail box each day, click here.)

The futures were creating moderately bullish impulse legs on the lesser charts Tuesday night, suggesting that the buoyancy might continue into Wednesday. Another positive sign was that the intraday low occurred 1.60 above the 771.70 pivot whence we might have expected a bounce. These signs are encouraging but too subtle to get excited about. The outlook would brighten even more, though, with a push past the 791.20 target shown in the accompanying chart.

I don't attempt any fancy tricks with stochastics because the simple ones have always served me well. In the Diamond chart shown, my primitive way of looking at it sees a succession of five price lows on the daily chart, each of which has generated a corresponding stochastic (i.e., oversold) low. Because there is only one minor divergence between any of these pairs of lows, it can be inferred with reasonable confidence that the dominant trend is more likely to continue rather to reverse. As such, I will put even more weight on the criteria spelled out in today's commentary before I infer that a major bottom is in.

The downtrend has given us an ABC pattern with a single-bar 'B' and 'C', as well as two possible A's that have been etched with equal delicacy. Bottom-line: Crude is likely headed south, to at least 44.71; or if any lower, to 43.58 (with an outside shot at 39.28 over the next 7-11 days). If you plan on bottom-fishing, please note that this vehicle usually requires stops of at least 20 cents -- even when price targets are so exquisitely defined as the ones flagged above.

So volatile have the markets become in recent months that the Dow’s fourth-biggest drop in history may warrant barely a yawn if stocks spend the rest of the week recovering, more or less. Some were attributing yesterday’s avalanche to news that November manufacturing activity in the U.S. took its biggest plunge in 26 years. But what will the pundits say if the Indoos gain it all back and perhaps more by week’s end? That investors are waxing “optimistic” about the recession ending now that it has finally been declared? Sooner or later, these guys are going to figure out that the stock market’s ups and downs don’t correlate with events in the real world. Our take is that shares plummeted simply because the short squeeze that drove them to hysteria last week ran out of laughing gas. Not that Helicopter Ben didn’t try his darndest to keep the guffaws coming. The quote of the day from the Fed chairman was that more interest rate cuts are “certainly feasible.” As indeed they are. Actually, if the Fed plays its cards right we could be enjoying monthly rate cuts, five basis points at a time, till the summer of 2010. But would that help pick up the tempo of the economy? Our guess is no, and you don’t need to be an economist to understand why: Consumers simply aren’t in a borrowing mood. They’d probably come around, though, if they were confident home prices were about to soar again. How low would interest rates have to be for that to happen? Bernanke acts like he knows the answer to that question, but in truth, it’s like asking, what would it take to recapitalize Lehmann Brothers or Bear Stearns at $200 per share. (If you’d like to have Rick’s commentary delivered free to your e-mail

In case I didn't make it clear enough in yesterday's commentary, let me state for the record that I don't share my colleagues' optimism about a sustained rally from these levels. My friend Tom Tankka cited parallels to the 1930s that imply a powerful bear rally is overdue, but I think economic prospects are more grim right now, and expectations of a recovery far more delusional, than they were following the Great Crash. We had a sound money system then, Americans were not nearly so deeply in hock, and fully 30% of the labor force was engaged in agriculture, literally living off the land. This time around, to make just one telling comparison, 15% of New York City's top earners were living off a financial economy that no longer exists. From a technical standpoint, what you should notice about last week's 1400-point rally is that it didn't surpass even a single prior peak of daily-chart degree. This is not the way powerful bear rallies begin, and although the 7449 low may endure for a while, the Indoos are telling us that they lack the guts to put on a convincing show.

DaBoyz were uncharacteristically timid Monday night, holding the futures in a relatively tight range near the day's close. The move from Friday's top was bearishly impulsive on the intraday charts, but we'll need to see how the next down-leg plays out before we can make an educated guess about the amount of buying power percolating beneath the surface. If there is plenty of it, the c-d follow-through leg should not even reach its 'p' midpoint, let alone its 'd' target.

Sloppy action left no clear downside Hidden Pivots to tout, but if the futures retrace 0.618 of their gains since the November 13 bottom at $700, that would imply more weakness down to at least 751.10. Alternatively, it would take a print today at 786.30 to turn the 30-minute chart (although not the hourly) faintly bullish.

Immediate upside potential is to 9.530, a minor Hidden Pivot, but the futures would have to close above it to hint that they are ready to take on a daunting wellspring of supply just above 10.200. Alternatively, if Silver were about to fall apart it would be signaled by a two-day close below 8.810. Downside potential thereafter would be to as low as 6.855.