Goldman Sachs Impresses with a Sharp Rally

Mar 18, 2008: 12:19 PM CST

Unless the Fed Cut shocks markets to the downside, Goldman Sachs (GS) will post an incredible rally today. Yesterday, the stock traded as low as $140, and today, we’ve reached intraday highs of $171. Let’s look:

Earnings today beat estimates. Analysts expected a profit of $2.58 per share, but were surprised with reports that Goldman reported $3.23 per share profit. When a company beats earnings by that much, gaps of this magnitude are relatively common.

I did want to point out two previous positive momentum divergences on the daily chart, which served to shock the shorts and create a temporary rally (divergences are often resolved by a simple counter-swing move, rather than a trend reversal).

Price breached the key $20 period moving average. Remember how I said that this week would be news driven, rather than technical analysis driven. The Federal Reserve still has to release its decision (as of 1:15 EST as I write this post) and don’t forget that the end of this week signals the volatile and unpredictable “Triple Witching.”

Nevertheless, not to be outdone, Lehman Brothers (LEH) also showed an impressive and stellar reversal, doubling off yesterday’s $20 intraday low:

The Financial Sector as a whole has been battered the last few months, and so percentage increases will likely occur more here than in other sectors. Those funds who are short are forced to cover rapidly, as bottom fishers are throwing their lines out in droves, snagging up ‘cheap’ shares of companies who they feel will not return to those levels any time soon. Time will tell, of course.

Here’s a peek at the rest of the AMEX Sector SPDRs intraday prior to the Fed Cut Announcement:

(UPDATE: The Fed cut rates .75 bps)

Be sure to keep an eye on the Financial Sector, as it tends to lead the market. I’ll wait to analyze these developments further until after the close… and preferably this weekend.

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Bear Stearns is Cut in Half and then Doubles

Mar 18, 2008: 10:28 AM CST

Although many bloggers (myself included) were using Bear Stearn’s Monday’s decline from $30 to $2 as a reason not to stress NOT catching a falling knife, one can’t deny today’s result – which is that the stock has more than doubled intraday from yesterday’s close.

From an intraday low near $3.50 yesterday, Bear (BSC) has reached an intraday high today of $8.50 – more than doubling for nimble, aggressive traders – impressive to be sure.

However, look at the nature of the trading in this once mighty stock. Trading jumped from level to level with space between, meaning that there was an urgency to acquire shares at perceived ‘bargain basement prices.’

You have to admit – it takes guts to buy a stock with such negative widespread news, but for those that went against all the teachings of solid trading rules (never try to catch a falling knife; never buy a stock less than $10; follow the charts, not the news; etc), some of those who violated the rules to their peril could have doubled their investment/trade today (and probably will try to hold, thinking the stock could go back to significantly higher levels).

Whatever becomes of Bear Stearns, it will provide many educational lessons to newer and advanced traders who are willing to study what happened and what went wrong (or right, for the short-sellers).

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More Amazing Intraday Action

Mar 17, 2008: 7:13 PM CST

Monday was a day to remember in the US Stock Market. Let’s look quickly at what happened:

The Dow Jones (up 21 points today) showed the most relative strength today, thanks in part to JP Morgan Chase (JPM) which appreciated 10% today. Unfortunately, this came at the expense of Bear Stearns (BSC) which closed the day down 84% (closing just under $5).

Let’s peek at the intraday chart to see the volatile conditions and let’s see if we can make sense of them:

While gaps greater than 1% are less likely to fill (than gaps less than 1%), large volatility price swings (and gap fills) are not uncommon on days like this (after all, the last occurrence was January 22nd, 2007).

The first play (trade) is to trade to fill the gap (fade the gap) which was immensely profitable for those who were aggressive.

The second trade if the gap completely fills would have been a reversal trade to play in the direction of the initial gap or impulse momentum move (first red arrow at 11:00am).

This trade fell shy of its initial target (the opening price), but price rallied back to set-up another short-sell trade at 1:00pm that led to a practical momentum buy divergence that resulted perhaps unexpectedly in a large momentum impulse and a new momentum high. That was impossible to predict (from the structure), but the reaction (green arrow just before 3:00pm) was predictable, which was what I classify the “Impulse Buy” trade that launched price through yesterday’s close and onto new highs for the day.

A second momentum divergence (sell swing) set-up into the close as well.

The QQQQ ETF (NASDAQ) was not as lucky as to complete this ‘perfect’ pattern, and in fact the NASDAQ closed down 1.6% today.

Unfortunately, the NASDAQ made new lows for the year:

If the NASDAQ leads the market both up and down, this does not bode well for the broader market.

On a final note, crude oil prices (and some other commodities) plunged today, in anticipation of a potential economic slowdown. Crude Oil fell 4% today.

There are many more charts I could show, and I recommend browsing around and scanning today for your own set-ups across different markets and stocks.

Please recall that the Fed announces its Interest Rate decision tomorrow in the afternoon, and unless you know what you are doing and how the volatility can pick up madly at this time, I strongly recommend that newer traders sit this one out.

Trade safely in this environment.

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Bear Stearns, Classic Capitalism, and the Market is Always Right

Mar 17, 2008: 9:53 AM CST

Adam Hewison, INO.com President, sums up the sentiment I’m sharing in this news release which explains why “trying to catch a falling knife” can cut your account to shreds. If you were a Market Club member, you likely caught the signal on this stock 12 days ago. I liked Adam’s quote, “Markets often glide, then they slide, but they slide faster than they glide.”

Hewison recently released a fresh educational this morning video entitled “How to Avoid Market Meltdowns” where he describes this situation further, and analyzes the monthly and other charts of Bear Stearns, and explains how the Market Club’s ‘trade triangle technology’ tool signaled members 11 ahead of time of Friday’s plunge to get short or exit positions in the stock.

Granted, if you were proficient at technical analysis, you would have recognized the downtrend and increasing momentum, but their members receive simple signals that are a composite of different factors of technical analysis.

I wanted to provide some quotes from the article that’s contained in the link above, as well as a few quotes from the brief video.

“Never buy because a price looks low, and never sell because a price looks too high. It doesn’t matter what you think.”

“You can only determine the trend by using pure market action. The easiest way to do this is by using a program that tells you in plain English what the market is doing.”

“We are going to see some amazing market and trading opportunities this year. So plan now to make some big profits. It’s important to stay cool, listen to what the markets are saying and have a “Game Plan” that works.”

“Let the markets have their say … all you have to do is listen.”

Thank you to Adam for sharing this information with us and all other traders.

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Market Fades 200 Point Gap

Mar 17, 2008: 9:25 AM CST

As if you weren’t looking for another reason to be amazed by the current market, the weekend developments sent shockwaves through the US Stock Market, causing a 2% gap down Monday morning opening… which has already been erased less than 2 hours later.

Just imagine the fear and panic as the unaware traders turning on their stations this morning. What’s worse is the dread felt by those on Sunday evening, who knew something big was in the air thanks to the surprise Fed cut and Bear Stearns $2 buy-out.

The price shock from those developments was erased initially.

Market action is almost always amazing, in the fact that it slams traders on both sides of the market and defies nearly all expectations.

If you read some of the news sites last night or bloggers’ interpretation of these events, you probably thought the world was about to end. While the market did experience significant overnight weakness which may have caused you to sell in panic this morning, your initial fear was unwarranted. The market may indeed skyrocket lower from here (as the market is currently in a swing-down right off last Friday’s close, and came down to $119.00, beneath the key moving averages), but you felt a pain worse than fear if you sold early this morning – you felt intense regret.

While there is still a lot of price action to play out for the day and week, the initial winner was the one who ‘faded’ the gap and essentially traded against the news. It took extreme courage to do so, either that or you must have been unaware of the news, because buying stock this morning (into the gap) would have forced severe cognitive dissonance!

However, the charts are what they are and the first play whenever there’s an overnight index gap is to fade the gap back to yesterday’s close and then play the impulse (reversal) in the direction of the gap after the market closes the gap.

Despite what you may hear on the news, these trades sometimes produce immense profits quickly for those who are able to fight off their natural impulse to panic and join the crowd.

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