The reason we stay in cash in times of uncertainty and confusion is to avoid days like yesterday. I think this heatmap pretty much sums up what happened yesterday when the House failed to pass the rescue plan:

I don’t know about you, but I’d much rather trade after the fact than gamble before a significant market changing event. In this volatile market capital preservation is key. When all the sectors are bloody red, CASH IS KING! Refer to my “Waiting For A Direction” article for more on this.

The S&P500 is in a classic downtrend but what is different about this chart? It is not marked up like all the others on H.A.S., lol. Unfortunately with all this government intervention this market will probably not do what they are “supposed to do”, we aren’t exactly working with a natural market this week…so all the technical analysis should be thrown out the door. Again, there is a lot of confusion in this market right now, if you were reading other blogs last night, you would’ve noticed that everyone had their own opinions about the market. All of this confused me even more, that’s why I decided to wait until today to make a new post.

Remember the 1150 level I mentioned on September 18, 2008? Well we broke that level yesterday, so shouldn’t we be heading lower today? It sure doesn’t look like it! Instead, it looks like the government will be pushing for Plan B this week. I must admit that I did go bargain hunting late yesterday, but even if Plan B goes through, I would be skeptical. As Plan B advances, there will be good opportunities for short-term trades. Always protect your trades with stop losses and be quick with the trades. Keep a close eye on the markets, if you don’t have time to do this, stay away from the markets. It’s much better to stay on the sidelines than getting stuck on the wrong side of the fence. Remember, in times like these your goal should be capital preservation and ANY RALLY IN A BEAR MARKET SHOULD BE GUILTY TILL PROVEN INNOCENT!

Richard
richard[at]hedgeagainstspeculation.com

Boy I’m exhausted! It’s been a long week for me…and from the looks of it, the coming weeks will be just the same. But anyways, I hope the rest of you are doing well. Most of you know that I don’t usually make a post if I feel that the overall direction of the market is still the same but I thought I’d make one anyways. It’s been a while, so why not, eh? But before you read any further, I should again mention that none of my opinions about the market have changed…so if you haven’t read my previous post please go ahead and do so :) 

While some bloggers are full out bullish right now, most are just confused with the general direction of the markets. These bullish bloggers are indicating inverted head and shoulder patterns (refer to the below example) and W formations.

It is very rare for me to not pick a direction, but I’d have to agree with most of the bloggers…I don’t know WTF is going on! Taken from Trader Mike…”Here’s what Rev. Shark had to say about the current environment, or as he called it, a freakshow market:

This is one of the most difficult markets I have ever tried to trade. Most of the experienced traders I know are frozen and doing nothing because the action is so random. I’ve heard this called a “freakshow” market because things are so far from normal. No one seems willing to trust a trade to work for more than a few hours, and that just adds to the randomness.

As both Alan Farley and Dan Fitzpatrick have said, we just have to wait it out. Just don’t lose money now, and sooner or later, we’ll get some better trading. I’d almost prefer a big one-day crash to speed things up, but I don’t think it is going to happen that way. We are going to slowly and painfully work through this.”

To sum it up, most people (like myself) are clueless right now…everyone’s eyes are on the government rescue package. Do yourself a favor and position yourself in cash right now…I’ve mentioned this in many of my posts but CAPITAL PRESERVATION IS KEY!

It is still likely that the government will follow through with this package, but if I had to speculate on what’s going to happen next I’d tell you that in the short-run we’re going to head up but even if the bailout goes through people will eventually realize that the economy is still in the ruins…and another leg down will begin.

Richard
richard[at]hedgeagainstspeculation.com

September 18, 2008’s 1 pm post edited:

What a turn in events! Are we finally going bullish or are we still very bearish? I honestly don’t know…what I do know is that we’re at a critical stage in the markets. If the S&P 500 closed below 1150 today, life would’ve been much easier. There would’ve been no reason not to go short the markets, instead we got news of a possible U.S. government plan to rescue banks from risky mortgage debt. This turned the markets completely around bringing hope to the worst financial crisis in decades. If this plan follows through we could see a rare bullish run/short-term market bottom, if we don’t follow through this market will come crashing down again.

What I thought we had this morning was an example of a suckers rally, a sharp upturn in stock prices that suckers traders into getting long the market.

It sure looked like it when I made my original post at 1 pm but as you can see everything changed right when news of a possible U.S. rescue package surfaced. I did however expect a suckers rally this morning though, these rallies happen all the time in a major bear market. If you studied the market last night, you would’ve expected a bounce as well…the S&P500 sat right at a major trendline.

Again, my original post was made at around 1:19 pm, at that time the S&P500 was trading at 1,154.49. This was fine for the markets, but if we closed below the 1150 mark today, this index would have no where to go but down. We were trading below 1150 for some time before 1 pm but as I had warned, we had to close below 1150 to be completely bearish again. I must admit, I acted too early because I did get into the inverse ETF (TWM) at that time, I was planning on using it to hedge some of my remaining longs…but this might hurt me in the end. I must say, things are looking much better in the markets right now. The Securities and Exchange Commission is considering taking the dramatic step of temporarily banning the routine practice of betting against company stocks. But we aren’t sure if this ban will apply to all public companies, to all financial companies or to just selected financial companies. Now other bloggers are indicating that a bull flag is forming in the weekly charts…this along with all the good news makes me wonder if we have hit a bottom. I’m not going to deny that we may have hit a short-term market bottom, but a true bottom is still hard to believe. The economy as we know is still in a rough state, any sort of bad news would tumble this market yet again. I’m not as optimistic as the others…breaking below 1150 in the S&P is not completely out of the picture folks, it could very easily happen…if we do, we’ve got no where to go but down.

Those who have followed my trading in the past know that I rarely post stock picks. I tend to focus all my energy on the overall direction of the markets. I’ve been getting several emails about this issue, so I thought I’d share a site with you instead. For some good stock picks refer to Momentum-Trader. I really look up to this blogger and think he’s a fantastic trader.

Richard
richard[at]hedgeagainstspeculation.com

It’s rare that you’ll see two seperate posts from me about a similar subject, but the bankruptcy of Lehman Brothers and the sale of Merill Lynch is too big of an issue to mention only once. If you haven’t read yesterday’s “The Plummet-fueled by Lehman Brothers and Merrill-lynch” post yet, please refer to it first.

The Dow Jones plunged over 500 points today! Everything looked fine up until the end of the day when we broke below the key range of 11,000. Just like the S&P 500, we tested the July 15th lows and broke them.

We ended Monday just under our key support level, if we open lower Tuesday morning and stay within this range 30 minutes into the trading session we should continue to plummet further. Moreover, if AIG can’t hold it together I think we could see a new bottom set in. The U.S. indices should crash to create new lows tomorrow…a rally without government intervention is not likely to happen.

As of today, the credit crunch is not just a U.S. issue but a global one. Lehman is popular over in HK, a crash in Asia is definite since most of Asia had today off. As Lehman liquidates it’s assets, the banks and brokerages will have to adjust their balance sheets accordingly. More future writedowns will come followed by even more eventual failures. Again, we can only turn this market around if the Fed bails out companies, but as election day nears the Republicans are unlikely to spend tax payor’s money on bailouts. The Consumer Price Index report tomorrow may also provide relief but remember, the CPI is a lagging indicator. I hope all of you in the States, especially those in larger institutions, have backup plans and savings to fight through these upcomgin hard times. I know you’re thinking “well how do I know if my firm is in trouble?”…a good place to start would be to look at the failing companies (LEH, BSC, WM, AIG) to see which companies hold the biggest stakes in these.

I think I’ve had enough to say about the recent news…so I’d like to take this opportunity to thank all my readers who have followed my articles since January 2008. I’d also like to make a special thanks to those who have been spreading the word about H.A.S. Without your help this blog would’ve never grown as much as it has in the past year. Just a simple “I’ve heard some good things about this blog” like 101DoFollowBlogs‘ comment keeps me motivated to write more often.

Richard
richard[at]hedgeagainstspeculation.com

Phew, good thing Grace Cheng had a copy of my “The Plummet” article cause I accidentally deleted the original one. Anyways, here’s the original post from yesterday:

Just as I was about to make a post on the status of the markets, I hear news of investment banks Lehman Brothers (LEH) and Merrill Lynch (MER). But before we turn to the big news, let me show you what I was seeing in the S&P500 (^GSPC) over the weekend. Looking at the big picture, I drew the following trendlines:

We ended Friday right at resistance…this indicates that we should hang around this mark on Monday or shoot down from here. We were due to test the 1200 mark again in the next few days. But after news that investment bank Lehman Brothers will face the prospect of liquidation and Merill Lynch agreed to be sold to Bank of America…we might just break below 1200 tomorrow! The futures are down 300+ points already and gold is rising.

You can easily find articles on this breaking news, but I’ll post some interesting excerpts from Wall Street Journal to sum up what has happened late Sunday:

As worries spread across Wall Street that Lehman wouldn’t survive, brokerage firms, hedge funds and other traders moved to disentangle themselves from trades with Lehman. When hopes of a potential sale dimmed, a quiet Sunday on Wall Street turned into a mad rush. Executives and traders hurried to their offices or worked their phones to unwind outstanding contracts with Lehman and to gauge their overall exposure.

“We have never seen anything like this,” said analyst Glenn Schorr, who covers the investment banks for UBS AG. “There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers.”
The convulsions could lead to even tighter credit, higher borrowing costs and moribund capital markets, as securities firms and commercial banks try to further limit risk and preserve capital. Those moves could cause the U.S. economy to slow further.

The future of about 25,000 employees at Lehman and an additional 60,000 at Merrill is up in the air. Lehman’s work force already has shrunk by about 3,000 in the past year. If the firm essentially goes out of business, most of the remaining employees are likely to lose their jobs. That would deal another blow to New York City’s economy, resulting in lower tax revenues on personal income, real-estate transactions and corporate income.

With the demise of Bear Stearns, three of the Street’s five major independent brokers could end up disappearing, leaving only Goldman Sachs Group Inc. and Morgan Stanley.

Just a little update boys & girls:

I will be taking profits on SDS today, I still own TWM but I didn`t realize that I was overdrawn on my trading account. Knowing the markets, the fed will be trying to do something to correct this mess in the next few days. Further, if AIG can borrow funds, the market should get a bit of relief.

Richard
richard[at]hedgeagainstspeculation.com