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 February
1, 2009 Commentary (monthly edition)-
It's been
another month already? Boy, did that go fast. Things went pretty much as I had
expected, with more range trading pushing on that bottom, and treasuries
selling off as we last discussed. I think it would be particularly good for
readers to review last month's commentary before reading today's work, as I
plan to attempt to save chart space as much as possible for the current charts,
and hence dovetail the previous work into this work seamlessly, but without the
bridge charts. That's a nice trick if I can pull it off. If everyone is
familiar with where we left off I may just be able to do it.
I don't
really have a lot to ramble on and on about today, so after one comment on
something from last month's commentary, we'll get right to work. Although no
one e-mailed me or otherwise commented on this, it started bothering me right
after I posted the last commentary. I really didn't want to go back and revise
it, so I decided to just discuss it a bit in today's post. It has to do with
what I was saying about possible levels on the S&P based on the P/E and
earnings. I wasn't paying close enough attention to the simple mathematics when
I tried to explain my thoughts. Let's look at that.
If the P/E
swung to 10 and the earnings were $45, the price of the S&P would be 450.
That's just simple math. I had mentioned a low end S&P of 300, and when I
did that what I was thinking was from a sentiment perspective, if people
thought the earnings would be much higher and the P/E shrank, then it may cut
it back that much. After having thought about it, it really wasn't as solid of
reasoning/explaining as I first thought when I wrote it. So, let's say that at
the current most often given likely earnings of $45 and a P/E of 10, the
S&P would be 450. I have now seen some earnings estimates at $35-$40. That
would put the S&P at 350-400 with a P/E of 10, and if the P/E swung to a
really low end P/E of 7, at that $35 in earnings we'd be at S&P
245!
Now, I'm not in any way suggesting we will see these low numbers.
Keep in mind the 'context' of the discussion last time. I was trying to point
out how these people who say the S&P is super-undervalued here and is the
'buy of the century' based on valuations, well, maybe it isn't so undervalued
at all. By simple math, if the S&P was about 900 (approximately where it
was at the time of the last commentary when I brought this up) and earnings
were about $45, the P/E would be 20.
My point is, bragging on a P/E of 20 as
'super-undervalued' and 'the buy of the century' sounds more like an
infomercial than an honest evaluation. So, as I implied before, talk to me at
245-350 if the earnings hold up at $35-$40 and I may agree we are at 'once in a
lifetime' valuations. And I'd still have a caveat that I'd also want to believe
the financial system and economy was turning around and not on the verge of
collapse. Enough on that.
As we begin, I'll start with a discussion on last
month's 'Jim's Chart of the Month'. As I said, I will save one chart space by
not showing the chart in here. It does make for a nice record as all the
commentaries go into the archive, but I think we can skip this month, as this
is a monthly chart, and likely will be shown many more times down the line. For
now, review the chart from last month's commentary, and also, before you
proceed, pull up this month's chart of the month (scroll up to the upper left
sidebar and click there to pop it up, which I hope everyone does every month),
since the updated version is right there, as this month's chart of the
month.
So, rates did jump up as expected, as seen in the bar for this last
month. You can see the key area just overhead that I am going to keep an eye
on, as well as a much higher area for down the road. From a timing standpoint,
with those June and end of year reversal times we have been following, we may
not see anything at that higher area for a long time. On the other hand, it may
just explode up there if treasuries virtually collapse, you never know. Myself,
I'm a bit surprised we did move this much already, and it wouldn't shock me a
bit if we rolled back down before a really big move up. Perhaps to a new low,
perhaps just a good 'test'. I also wouldn't be surprised if this is it here and
rates just keep going up. It's now up to the price action.
Let's look at
some of that price action, since the monthly chart doesn't have a lot of
detail. I'll start with the 10-year rate chart, the same as the chart of the
month, but on the daily timeframe to show more detail.
Rates jumped up nicely (treasuries down,
then), with what looks like a nice 'wave 1' initial thrust, followed by a 'wave
2' pullback, and now we are in 'wave 3'. Everyone should recall that I use my
own version of 'practical Elliott', taking some things that help me from that
philosophy, and adding it into my own mix. With that in mind, don't think I am
caught up in any strict application here, because nothing could be further from
the truth. But, there is something important for me here that is motivating me
to do a 'pseudo-count' here.
This looks like it may be an ABCD here, or at that last little
swing high where it started down, before it gave up on that and did that last
burst up. That would have been a nice setup for this to roll right back down
again, and either 'test' that median line lower parallel more fully, or just
continue down. I was watching this very, very closely to see how it would act.
A burst over the ABCD area would be a clue for me that this may more likely be
moving up beyond a simple correction. I was also keeping in mind that after
such a big move down, if this wanted more down, it may need more of a
correction up than a small, simple ABCD. To look for additional clues, I look
to other related issues, too.
Let's look at the 30-year rate chart, also on
the daily timeframe.
I think that the 10-year is the 'key'
treasury to watch for longer term, but with all the talk about the Fed
potentially buying long-dated treasuries, that increases the 'distortion' in
this maturity, and increases the importance for me of watching those rates. The
30-year definitely moved down more than the 10-year, and when I look at this
chart I think much more 'wave 3' than ABCD. It still could be an extended ABCD,
but it looks way more impulsive to me than corrective. And look at that scale
compared to the 10-year. That's a big backup in rates in a short period. Not
exactly what they wanted now, is it?
Let's go back to that TLT chart from last
month. I hope everyone followed this in real time.
The arrow shows about where we left off last
time. Those familiar with my work and my personal preferences as to entry trigger style should be
salivating over the triggers this one had. Now, notice the follow-through here.
It also gave a nice .486 pullback (retracement not shown on the chart, but you
can do the work, it's the obvious pullback up to about the arrow level) for
adding on or as a possible second entry. So, as you can see, treasuries did
keep selling off hard, and even stock traders could have taken advantage of
this via the TLT here, or other vehicles that are out there.
Now, could
this be an ABCD right in here? Yes, it could be, and I'm surely watching all
three of these (and the actual treasury futures charts, of course), but for now
the assumption is to stay with the trend until the trend tells me otherwise.
So, keep an eye on the area outlined on the monthly chart, and do your own
work, as there are other places to watch, and look at the 'congestion' areas
coming up soon that are so obvious on the above charts. Hmmm, I wonder if those
would line up with that area on the monthly? Well, go to the monthly, look at
the level, and look back at the daily 10-year chart above. Hmmm.
Okay, let's
look at a totally different concept, and then we'll cover a nice series of
setups from this last month to wrap up. Let's look at a daily chart of the Dow
Jones Transports.
Let me relate a story from a short while
back, before the market collapsed. I may have discussed this a bit in a
previous commentary, I can't recall. I mentioned to a really big name that I
thought when MER (as well as a few others) was breaking to new lows as the rest
of the market held up that this was an ominous sign. He didn't agree, and opted
for the long side of several brokers. They bounced a little bit, and then
collapsed, leading the market to the bottom. I respected the sign when a key
issue like MER wasn't acting bullish, but instead was setting a new bear market
low. I watch things like this. Now I am seeing something similar, and getting
similar responses from people (which is good news, in my opinion).
As everyone
talks bullish about the market, the transports are within a hair of a new bear
market low. They almost got it a few days back, then they popped up a little,
and are now heading right back down. Take a look at some key (in my opinion)
stocks, in and out of the Transports. Look at FDX, at a new bear market low.
Look at GE, at a new bear market low. WMT. MSFT. CAT. The rails, by a long
ways. The dryshippers (look at DRYS) are rolling hard and look ready to crater,
and look how low they already are. I won't even mention financials. I could go
on, but the point is made. This is an ominous sign. This is the kind of action
one would expect in a new bull market? This is the kind of action I'd expect
right as another leg down starts. Just something to think about.
Let's move on
to some setups I saw in GS recently. I covered some of this in the forum, as it
unfolded. Even in there, where I have theoretically unlimited space, and can
use much bigger chart size, and I can post unrestricted, I realized I still
only covered a tiny fraction of what was going on. In that way it can be quite
frustrating, how cumbersome it is to show everything I am watching on clean,
uncluttered charts, and verbally explain every detail and nuance. In here, with
a lot less room, and very tiny charts, it can be maddeningly frustrating. But,
I'll still try, with a very small section, done in a very abbreviated version.
Still, I think it shows some nice material, and I will give some direction to
other things the readers can construct for themselves to study.
Let's look at
a daily chart of GS.
I spotted this nice-looking ABCD in GS,
coming at at a key median line (in red) from a very large set that I had that
goes back to 2007. I also had a smaller set coming into the area, and two
super-tight 'sub-groupings' right there with key numbers in them. It is outside
the scope of this commentary, but my more serious students will also see
something here within the ABCD itself, too. I posted this one in the forum,
along with a little note joking "Call me crazy, but..." because who would think
short side GS here after that run and all the bull talk? This one looks
particularly nice when you can see the entire large set, and the contact points
for that.
GS triggered particularly nicely off the area, with not only a few
of my favorite triggers, but also some really sweet standard median line set
triggers. What made the discussion most interesting, from an educational
standpoint, was the areas I was watching as this started to drop off the
potential trade area. In older to show this with as few chart spaces as I have
available here I have to do two steps at once, and this tends to distract the
reader to what happened in the second step, so try to first just look at the
move down for now, until I switch to the next phase.
I'll add on
another set, and one of my 'crazy' trendlines, and remove off the pattern and
Fib notations, for now, for clarity.
The first arrow shows the original potential
trade area (PTA) from above. I mentioned in the forum an area on the way down I
was watching, and on the lower timeframe it reacted there a bit, and then
continued down, as I expected. How I formed that area, and what I tend to do as
far as management, is clearly laid out is Kane Trading on: Trade Management.
I then mentioned the next key area I was watching, at the second arrow. The
median line set lower parallel came in there, and my 'crazy' trendline, all at
the big sets' division line. There were other things (not shown) in there, but
this was the key framework for the area.
There was also a big price action
clue that the move down may be done here that I only show to mentor students, so those that have
worked with me should see that. GS hit the area, after having dropped off the
initial PTA over $33 by my data, high to low. It may not look like much on this
chart, but it was quite a move for a swing play. Now, look what GS did from
there. It went right back to that original line, at the third arrow, and
started to roll again.
Let's go back, now, to the original chart, with the
additional set and 'crazy' trendline added on.
As this was moving up, and I was watching
that original median line and PTA level, I also spotted a smaller, but still
interesting area on the lower timeframe. I had originally planned to show it on
say a 5-minute chart, but I decided I didn't want to do an eighth chart and
recreate all the work down lower. I thought it would make a great exercise for
the reader. As this moved up it hit that original downsloping line from the
smaller set. You can see this here on the second last bar before the final gap
up (five bars back from the ultimate last bar). You can barely see that there
is any reaction there on this daily chart. But pull up 5 and 15-minute charts,
and get this line on there.
Now, I had more here than this single line, but assuming
you constructed a PTA here that you liked (do the work and it should come
together for you). I posted this in the forum just as it was about to trigger
on my second entry spot. This gave an awesome early entry trigger, followed by
an equally nice second entry trigger. GS dropped just under $6 high to low, by
my data, on the 5-minute chart (this is on 1/26/09, for those of you recreating
this), right to a super-tight triple key Fib convergence at a key line, where
it turned and continued the swing trade uptrend beautifully. As soon as it hit
that area and stopped dead I couldn't help but post a 'Woo-hoo!' comment in the
forum. I never cease to be amazed at how the market does what it does.
What I am
hoping the reader sees here is how the 'context' of a setup, or series of
setups, may give me 'bias' for lower timeframe setups. And by 'lower
timeframe', I don't solely mean intraday. If I have a monthly setup that is
playing out, that may give me a lower timeframe 'bias' to look for trades on a
daily chart. A 60-minute setup may give me 'bias' for a 3-minute intraday
'daytrade', and so on. It is not uncommon or unreasonable to be on both sides
at any given time. I could have been long some call options on the move up as a
swing play, and been short some stock intraday on a 5-minute chart play, for
example. And now GS has moved almost $10 off that median line already. Just as
a general observation, I find GS to be a very 'harmonic' stock.
As I wrap up,
let's revisit something from last month. Let me quote from the last commentary:
"...and into this mix the VIX has a big ABCD completing in here at the old
range top that it started to react to Friday that I suggest everyone do a
workup on, since the potential implications are great." Did you do the work, I
hope? The VIX ABCD did produce a nice reaction, right off the expected area.
That initial move I mentioned that Friday was the low for the ABCD setup. This
led to a move of over 20 VIX points by my data, and the DOW dropped almost
1,200 points. Hmmm, can't say I didn't see that coming. And if you did the
work, you can't say you didn't see it coming, either. Now, please tell me you
were ready for this, work done, in hand, ready to watch it play out? I can lead
a horse to water, but if he just ain't thirsty...
As I conclude, let me say that I
think we are in for a lot more great action, and I want to try to enjoy it as
much as possible, because things may quiet down some day. Most bear markets, as
far as my experience shows, end when the public is disgusted with the market,
not when they are all bullish, saying the bottom is in and stocks are great
here. Personally, I think there is a lot more to go with this economic debacle.
I think many more shoes will drop, there will be a lot more write-downs and
things to be revealed. Unless they get some traction inflating a new bubble
(which will have even more dire consequences down the road, in my opinion),
which is their style, this is going to take a long time to unwind and clear
itself out. Hence the secular bear cycle, the one almost no one seems to
accept.
When I said over and over this is most like '73-'74, I said it
because of the placement within the secular bear cycle. I had like a 99%
disagree rate. Yet we did set the new low below the entire previous bull, just
like '73-'74. And although there were cyclical bulls in that secular cycle, as
there always are, the 'breakout' of the new secular bull wasn't until '82, some
eight or so years later. For us, that might be 2017 for the next secular bull.
And that is what I have been saying all along, using the on average 17.2 years
for this cycle, based on my research, and starting at the 2000 top.
The most interesting thing to me
will be when the next cyclical bull starts. I suspect not for awhile, but you
never know when enough manipulation can change sentiment enough for the
illusion to create the next cycle. All I can say is, I am a firm believer we
are in a secular bear trend now until likely 2017, even if we are going
straight up in a cyclical bull at some point, as I know we will, and I'm 100%
long. The only difference between me and most others is that, like in 2007,
I'll be ready when the end comes near, not giddy with unbridled bullish passion
and optimism that 'this time it's different'.
The next commentary will be next
month's edition, posted by Sunday evening, March 1, 2009.
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