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Trading Lessons

Stock Market Crash More to Come

Stock-Markets / Financial Crash May 07, 2010 - 12:26 AM GMT

By: Anthony_Cherniawski

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleDow Plunges Most Since 1987 Before Paring Losses - The Dow Jones Industrial Average posted its biggest intraday loss since the market crash of 1987, the euro slid to a 14-month low and yields on Greek, Spanish and Italian bonds surged on concern European leaders aren’t doing enough to stem the region’s debt crisis. U.S. Treasuries surged.


The New York Stock Exchange told CNBC that there were no system errors during the Dow’s plunge as speculation of bad trades swirled through the market. The Nasdaq OMX Group Inc. said it is working with other markets to review the plunge.

“It’s panic selling,” said Burt White, chief investment officer at LPL Financial in Boston, which oversees $379 billion. “There’s concern that the European situation might cool down global growth and freeze the credit markets.”

Bank Swaps Surge as Moody’s Raises Sovereign Contagion Alert

The cost of protecting European bank bonds from default surged to the highest level in 13 months as Moody’s Investors Service said lenders face “very real, common threats” from the region’s fiscal crisis.

Banking systems in Greece, Portugal, Italy, Spain, Ireland and the U.K. may come under pressure as the crisis worsens, Moody’s said in a report today. The ratings firm said yesterday it may downgrade the Portuguese government and its banks after Standard & Poor’s last week cut the sovereign debt of Greece, Portugal and Spain.

(Financial Times) Analysts said the euro’s breach of $1.30 against the dollar could have an impact on the behaviour of the world’s central bank reserve managers, which could drive the single currency lower still as they pondered its status as a reserve currency.

Diversification of global reserve holdings has been a source of support for the euro in recent years as central banks sought to adjust their portfolios away from the US dollar.

VIX challenges its broadening formation.

-- The VIX challenged the top trendline of its Broadening Formation, closing above short-term Trend Support at 22.15. Yesterday I suggested that the VIX may break above 29.22 in the near future. It closed in the upper half of its weekly trading band and has a potential target of 60.

The CBOE Put-Call Ratio for equities ($CPCE) came down a little at .97 today. Retail investors are now net neutral today. The pros have cut back on the $CPCI to 1.23 (less bearish) at the end of the day. The 10-day average is still high at 1.47. The NYSE Hi-Lo index closed down 129 points today to -125, the lowest level since last March.

SPY back-tests the Broadening Top

Action: Sell/Short/Inverse -- SPY plunged below daily Trend Support/Resistance at 113.50. It bounced off weekly Trend Support/Resistance at 105.00 and remains sandwiched between the two.

The Broadening Top leaves little doubt that the next extension could leave SPY testing 65 by early June.

There are other variations, but for the present, I suggest that an attempt to buy the market may be made tomorrow. If it fails, the circuit breakers may be invoked either Friday or Monday.

The QQQQ tests lower suport at 41.

Action: Sell/Short/Inverse -- QQQQ tested the bottom trendline of its Broadening Formation and took out the February low. The bounce back to 47 was to be expected. It closed at weekly Trend Support/Resistance at 46.60. The next move should take out the bottom trendline of the Broadening Formation. There may not be a retest of the lower trendline once it is crossed. The NASDAQ is investigating the possibility of some erroneous trades made this afternoon.

ZeroHedge is shut down, so there will be no rebuttal. I suggest that this was simply a panic selloff.

XLF continues its decline.

Action: Sell/Short/Inverse --XLF has much further to go to test the bottom of its Broadening Formation. Yesterday I suggested that XLF may decline in a series of 1s and 2s leading to an extended breakdown. It appears that this observation was correct. The bottom of the formation for XLF may happen sooner than early June. Citigroup pleads innocence of erroneous trades today.

FXI took out its February low.

Action: Sell/Short/Inverse -- FXI is in a confirmed bearish trend. The cross of the short-term Trend Resistance below the intermediateterm Trend Resistance confirms the decline as well as the violation of the last Seasonal Cycle low in February makes this decline doubly bearish. The Shanghai market declined 4.11% in overnight trading, confirming the downtrend.

GLD soars in a panic throw-over.

Action: Neutral -- GLD came within a point of exceeding its December high. As it stands, the corrective pattern barely qualifies as labeled. A further push above 118.76 invalidates the wave c and above 119.54 creates a new high. Nonetheless, I am more bearish than bullish on GLD. GLD has a giant wedge formation in the weekly as well as the daily charts, so once it turns, it may collapse. I am simply waiting for it to decline below shortterm Trend Support/Resistance to make a position in it.

USO’s decline continues.

Action: Sell/Short/Inverse -- USO made big headway toward its lower trendline. Given the close proximity of that trendline, I suggest that USO may fall much deeper. Once below 34-35, there is virtually no support for USO until it reaches single digits. I am not sure what kind of calamity may befall us, but it appears that there may not be very many using oil later this year.

TLT made a huge spike today.

Action: Neutral --TLT spiked even higher as panic buying hit treasuries. It remained above short- term Trend Support at 91.51.

The cycle pattern is calling for a decline into a trading cycle low in mid-May. It has exceeded the top of its daily cyclical range. The weekly range allows for TLT to go as high as 105, but it may have already seen the top. We could see an inversion of the cycle, where the called-for low is actually a high, but I am not taking any chances of an abrupt and strong reversal at this point.

UUP continues upward.

Action: Buy/Long -- UUP remains above short -term

Trend Support at 24.12. There is a pivot on Friday-Monday that we may want to monitor, but frankly I see no end to the pattern, yet.

The cycles call for a potential low in mid-May but that still leaves UUP an opportunity for another week or so of gains, if UUP continues rallying through its pivot. The pattern and the breakout still support UUP going higher in the short term.

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Anthony M. Cherniawski, President and CIO http://www.thepracticalinvestor.com

As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals

Disclaimer: The content in this article is written for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information in this article is the opinion of Anthony M. Cherniawski and subject to change without notice.

Anthony M. Cherniawski Archive

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