Caterpillar CAT Confirms Bull Trap and Tests November Lows

Jan 26, 2009: 2:48 PM CST

Caterpillar (CAT) announced today that it was laying off 20,000 employees, which sent the stock down to test the November lows and officially confirmed a Bull Trap that was sprung in early January.

Let’s see Caterpillar (CAT) on the Daily Chart:

Caterpillar CAT Daily Chart

I’ll leave the fundamental news to other websites and will only focus on the technical picture currently.

We had an official trend reversal to the upside as we went into 2009 with price forming both a higher high and higher low, then the moving averages crossed (slightly) bullishly, forming a confluence support cradle… which failed, trapping nimble bulls who bought into these bullish developments.

The Bull Trap is officially confirmed today since price has tested its November and October 2008 lows, a prospect that ’should not’ have happened if the bullish reversal was valid.  Caterpillar now stands on a precipice – a careful balance.  If we break the October lows of $31.61 per share (today’s low as of this writing was $31.70), then odds become overwhelming that we continue lower in the stock, but the balance comes from the fact that price could find support at this level, confirming a triple-bottom on a triple-swing positive momentum divergence.

In short, from a technical perspective on the daily chart, Caterpillar is finely balanced beween doom and hope at the moment, and it might be best to wait until a clear victor (buyers or sellers) emerges before entering a new position here.  Although, this would be a decent spot to enter if you are a Caterpillar bull, because you could place your stop just beneath this level and would stand to make a good profit should price find support here.

Do additional analysis (including higher timeframes) to see the larger picture for Caterpillar, but for the moment, let it be an example of a “Bull Trap” that signaled a valid entry for bulls before price reversed, surprised them, and tested its prior low.

Corey Rosenbloom
Afraid to

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Strong Education Stocks APOL and ESI Clobbered

Jan 26, 2009: 12:33 PM CST

I had mentioned earlier that we were seeing relative strength in education stocks such as the Apollo Group (APOL) and ITT Education Services (ESI), both of which made fresh 52-week highs last week.  However, Monday morning saw these stocks get clobbered in early trading.  Let’s look at them and see this development.

Apollo Group (APOL): Daily

Apollo Group APOL Daily Chart

Apollo was “riding the 20″ meaning it was basically using the rising 20 day EMA as a trend channel support line until today (Monday) when the 20 was broken as we are getting a deeper retracement off a negative momentum divergence.

Price made new highs at $90 per share (not seen since 2004) and then immediately backed off that level as investors consolidated gains in what appears to be a profit-taking swing.  Volume failed to confirm the new price highs as we saw a volume divergence develop as price broke to new highs (higher prices on lower volume).  That should have tempered the bulls’ optimism.

Still, APOL has shown remarkable relative strength to the S&P 500 and many other stocks as well, but investors are letting out a bit of the steam currently.

Let’s look at ITT Education (ESI) on the weekly chart, which has a very similar structure to the APOL weekly chart, only Apollo made new highs while ESI formed a double-top.

ITT Educational Services (ESI) Weekly:

I’ve also added a bit of Elliott to this chart.  We had an “ABC” corrective wave take us down to the March 2008 lows before embarking on what appears to be a fresh five-wave impulse to the upside in both of these stocks.  If this count is correct, then we’ve finished Wave 1 up into July and then formed an ABC corrective wave down into the October lows and are now in the midsts (or peaking) in a 3rd Wave to the upside with a 4th Wave down yet to come (we are likely in that 4th Wave now) and a final 5th Up still on the horizon.

Setting the Elliott Count aside, we see that price experienced resistance at the $130 level, which was the exact high as the October 2007 peak alongside the broader equity market.  ESI bottomed in early 2008 as the market began accelerating its slide, though make no mistake that a plunge from $130 to $40 was a devastating corrective swing.  It may be amazing to investors that the stock recovered its losses this quickly (in just over a year’s time).

Price fell 70% from peak to bottom here, and then rose around 225% from the March low to the $130 peak.  This underscores a major point in investment and trading.  When your account falls 70%, you don’t need a 70% rise to get you back to break-even… you actually need a 225% rise which – under all circumstances – is extremely difficult.  This underscores why you need to guard diligently against major losses in your portfolio and use disciplined stop-loss strategies.  It’s preferable to take small hits than it is to take one catastrophic loss if you can help it.

Still, continue to watch these and other education-based stocks to see if they continue to show relative strength or if this may be an early sign of major weakness.  One would expect education-based stocks to do well in a time where so many workers are being laid off, as they perhaps return to finish degree programs or go into new fields in a competitive job market.

Corey Rosenbloom
Afraid to


Weekend Links for January 25 2009

Jan 25, 2009: 7:22 PM CST

Here’s a portion of the links I compiled for the NewsFlashr Business Blog Editor’s Picks this week (which are selected from the Business Blog section of NewsFlashr) with a few extra links here.

Barry Ritholtz lists the “Six Errors” as written by Princeton Professor Alan Blinder (along with original source) and shares some of his thoughts. Six Ideological Errors that Led the Financial Crisis

Dr. Steenbarger lists key points and aspects short-term traders should keep in mind – watch the bigger picture of how markets relate to one another and how large participants and factors (affecting supply and demand) actually move markets. Macro-Perspectives for Short-Term Traders

I also wanted to highlight two other recent posts by Dr. Steenbarger:

The Importance of the Opening Price which details some of the information you can learn in the earliest moments of trading.

Also, Five Pitfalls to Avoid in Jobs with Proprietary Trading Firms – for those successful at-home traders who want to step up to trading larger size.

Mish (Global Economic Trend Analysis) asks and tries to answer the question, “Is Big Inflation Coming?“  Worth the read.

Rob Hanna takes us through some of his experience and research on key strategies that don’t perform as well when using stops. This is part one of the series so check back for follow-up. Stops – When Not to Use Them

The Wall Street Nation takes a look at 13 stocks that were once bright stars – quality companies whose stock once traded at a much higher price in the past, but all of which now trade at less than $1. Once Quality Stocks Now Under $1

The Zignals Blog published a brief video entitled “What is Technical Analysis and How to Use it?” which can serve as a good introduction to those unfamiliar with the topic or where to start.

Robert Salomon lists the major business bankruptcy filings in 2008 from the list of the 231 companies who filed. That’s less than in 2001 (289) but still more than anyone would like. Notable Bankruptcies of 2008


A Weekly Look at the XLF Financials with Elliott Wave

Jan 24, 2009: 12:24 PM CST

With a very volatile week behind us, let’s step back and take a look at the XLF Financial Sector from its 2007 peak to present.

XLF Financial SPDR:

XLF Weekly Financial Chart

The XLF actually topped in May 2007, five months ahead of the October 2007 stock market top which underscores the assumption that Financials lead the broader market.  If they continue to lead, then we’re not in a positive scenario for equities.

Price broke the November lows last week to carve in a fresh low at $8.00 per share (a level 77% off its highs), which by no means is bullish.  The one slight optimistic picture is that we painted a hammer or dragonfly doji candle at these lows, though that by no means is a good enough reason to buy.

We see price as beneath all three key moving averages on the weekly chart, and they are in the most bearish orientation possible, though we are extended roughly $6 beneath the falling 20 week EMA which one would think would signify ‘oversold’ conditions but look at the 3/10 Oscillator – it is indicating that we’re not quite oversold and that we would have a bit more to travel down before we registered a new low.  Anything else would result in a positive divergence, which might actually be what happens.

Notice that the oscillator made a new momentum low in November, signaling lower prices were yet to come – they came this week.

A few readers have asked me to do an Elliott Wave count on the XLF and here is one interpretation – albeit a bearish one – on the XLF.  You’ll need to click on the chart for a larger image.

XLF Possible Elliott Wave Count:

Elliott Wave XLF Interpretation

What I’m showing is the more bearish of the two possibilities, similar to that on the S&P 500.  I’m showing us as having completed a fourth wave up within a larger (circled) Wave 3 down and that we are currently in fractal 5th of larger scale Third Wave down which is likely about to complete.  The only two labels missing from this count at the end (right) would be the (5) and then circled 3 when this downswing is complete.

The good news with this count is that when this downswing completes, we would have put in the end of the hideous 3rd Wave down and would be entering a Fourth Wave (circled) up, which could take us anywhere from $13.00 to $16.00 before resolving back down to new potential lows mid-2009.

I call this the most bearish count because it implies that a final low will take place much lower, as the final 5th wave would terminate at a lower price that the alternate count.

The good news for BOTH scenarios is that we should expect Wave 5 to have equality with Wave 1, which was about $5.00 ($36.00 – $31.00).  Because Wave 3 was a (massively) extended wave, expect Wave 5 to equal that of Wave 1 (or perhaps – most bullishly – truncate at the bottom of the major Wave 3 (circled).

The alternate – which I deem “bullish” – count is the following:

Where I have (3) at the November lows, it would actually be Circled 3 (major 3) meaning that the 3rd wave terminated at the November lows and that we now have completed a Circled (major) 4 corrective wave and that – if that’s the case – then we’re already in Circled (major) 5, meaning the ‘bottom’ would be closer (perhaps just a few more swings away) and would terminate at a higher price than the count I’ve shown.

The good news for BOTH scenarios is that we should expect Wave 5 to have equality with Wave 1, which was about $5.00 ($36.00 – $31.00).  Because Wave 3 was a (massively) extended wave, expect Wave 5 to equal that of Wave 1 (or perhaps – most bullishly – truncate at the bottom of the major Wave 3 (circled).

If it seems confusing, don’t worry – Elliott Wave is not the holy grail, but it’s like any other indicator which is open to interpretation.  Use it to manage risk and open your mind to possibilities and give you structure, but don’t follow it blindly.

Keep watching the XLF and key financial stocks closely, as we would expect to see strength here (which we’re not) before believing the market could recover or – dare I say – bottom.

Corey Rosenbloom
Afraid to


Extreme Triangulation

Jan 23, 2009: 11:36 PM CST

As I mentioned earlier this morning, the US Equity Indexes are experiencing a strange phenomenon – let’s call it ‘Extreme Triangulation.’  It’s not actually a triangle, but price is being almost entirely contained within the range of the previous day, drawing price to a finely balanced zone.  Let’s view this action from multiple sources.

S&P 500 15-min chart:

SP500 January 23

What I wanted to highlight with the S&P 500 is the fact that we’re narrowing each day’s range as we come into balance.  I’ve taken the day’s high and low and extended them fully into the next session to show how the highs and lows are compressing and price is staying completely within the prior day’s range.  This is an abnormal phenomenon to occur for more than one day.

To be far, Tuesday’s action was quite volatile, but Thursday and Friday – with the exception of one nip outside the range – were both in the previous day’s range.  This is telling us that the market is digesting news from all directions and is currently in ‘balance’ between buyers and sellers… and that it is likely to break soon from this balance into a trend move (or directional burst).

Let’s see this same pattern on the NASDAQ, which is showing far more volatility and gaps.

NASDAQ 10 min chart:

January 23 NASDAQ

NASDAQ based traders have had a rough time this week, as price made perfect plunge on Tuesday, did an opening test drive on Wednesday, was quite erratic on Thursday, and made a sustained up-move after a large gap-down on Friday.  Just look at the intraday action on the chart – it makes one very confused chart.

Finally, let’s sum up the action with the Russell 2000 and see its symmetrical triangle consolidation pattern forming.

Russell 2000 10-min:

Russell 2000

Again, with one slight nip out, price has contained itself within two converging trendlines that will be forming an apex very soon about the 445 level… which is almost exactly where price is situated currently.

Price cannot stay contained within a triangle forever, and it is expected to break one way or the other (odds favor to the downside but that by no means is guaranteed).

The best play may be to place a sell-short stop around 440 and a buy (long) stop at 450 and join the market once it breaks, with the other side serving as an initial stop.  That would be easier than trying to trade within the triangle or predict in which direction price will break.

Keep watching these patterns closely and do a little extra analysis on the weekend.  We could have a sustained breakout move on our hands sometime next week.

Corey Rosenbloom
Afraid to

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