Link: Seven Deadly Sins of Deregulation

Sep 19, 2008: 9:36 AM CST

Robert Kutner of The American Prospect published an article entitled “The Seven Deadly Sins of Deregulation and Three Necessary Reforms” that I wanted to highlight for some background information on a possible explanation of the economic situation we’re experiencing.

Kutner writes:

“The current carnage on Wall Street, with dire spillover effects on Main Street, is the result of a failed ideology — the idea that financial markets could regulate themselves.”

He outlines his “Seven Sins” and explains them further.

Sin One: Allowing Mortgage Lending to Become a Casino.

Sin Two: Allowing Unregulated Bond Rating Agencies to Decide What was Safe.

Sin Three: Failing to Police Sub-prime.

Sin Four: Failure to Stop Excess Leverage.

Sin Five: Failure to Police Conflicts of Interest.

Sin Six: Failing to Regulate Hedge Funds and Private Equity.

Sin Seven: Repeal of the Glass-Steagall Act.

The full article addresses these ’sins’ in full detail.

Keep your wits about you and learn as much as you can from what’s happening.

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Gold’s Stunning Two-Way Reversal

Sep 18, 2008: 7:49 PM CST

If you haven’t been following gold prices lately, there’s something interesting that may grab your attention and is at least worth a second look.  First, gold prices skyrocketed 10% Wednesday and then rose by a similar amount today, yet closed lower on the day.  What gives?  Let’s look at these developments.

First, Gold ($GOLD) on the Daily chart:

Gold prices initially violated the 200 day moving average in late July and trended sharply lower to $740 per ounce before forming a positive momentum divergence prior to the neckbreaking rally of this week.  Notice the mini-bear flag that formed that in late August that truncated prior to reaching its target.  These are good examples of these patterns for further reference.

Nevertheless, gold broke above the bearishly slanted (and oriented) moving averages and now hovers at possible support (from the prior swing high and the 50 day EMA).  As you’ll see from the weekly chart, the 50 week EMA is currently providing resistance, though a penetration has occurred.

Gold Prices Weekly:

Though the MA orientation is still positive, the 20 EMA is not far away from a cross beneath the 50 EMA, and if price closes beneath $850 per ounce on Friday, we’ll still have the moving averages acting as primary resistance.

Gold is generally a ’safe haven’ from inflation and uncertainty, but if people who fled the stock market in fear begin to regain confidence, then we could expect to see these recent gains in gold disappear quickly (as evidenced in the stunning intraday reversal today).

Let’s see that on the GLD – the Gold Trust ETF.

GLD (Gold ETF) 5-minute:

There were a couple of price consolidations and another mini-flag pattern and buy set-ups at the rising 20 period EMA, but ultimately price ran up to form its intraday high in the afternoon and then began its gentle slide which turned into a sudden sell-off as the broader stock market indexes recovered quickly and violently.  This pattern could continue into the weekend if the markets are strongly higher on Friday.

Keep in mind it’s quadruple witching, which often brings unpredictable price swings and volatility as large funds unwind and roll positions in the futures and options market as needed.

Guard your accounts!


Underperforming Emerging Markets

Sep 18, 2008: 10:13 AM CST

A reader asked me to check on emerging markets and discuss their recent underperformance since the July market bottom.  Here, I look at the MSCI Emerging Market Index, and compare it to the EAFA (Europe/Asia/Far East) and the S&P 500.

First, let’s put them all together and look at their performance for 2008:

The EFA (the EAFA will be referred to as the “EFA” as this is the ETF) held its own with the S&P 500 and actually outperformed into May, but shortly after the May market peak, both the EFA and Emerging Markets Index began underperforming, with the Emerging Market Index showing the greatest underperformance – off 35% for 2008 while the EFA is down 25% and the S&P is down roughly 20%.

Let’s take a closer look at the Europe/Asia/Far East ETF – the EFA on a daily chart:

The EFA peaked in May along with the S&P 500, but price has steadily declined at a much faster pace and began losing relative strength shortly after the top.  We are seeing dramatic underperformance currently.

Notice where I marked the “July Bottom” – it looks like nothing more than an afterthought and price traded higher for only six days before forming a doji at the sharply declining 20 day EMA, setting up a short-sell signal which was validated as price resumed its relentless downtrend into present.  The moving averages are in the most bearish orientation possible (20 below the 50 below the 200).

Odds are we’ll get some sort of retracement to (or close to) the 20 day EMA so stay clear of any new short trades here.  Notice the massive volume into September.

Let’s pull the perspective back and now look at the Emerging Markets Index, and use the GMM – the S&P Emerging Markets SPDR ETF (tradable fund) for a proxy.

The Emerging Markets SPDR:  The GMM

Notice how strong emerging markets performed into the May highs which actually made new highs for 2008 (while the S&P was clearly away from new highs).  However, from this 2008 peak, price began a steady and accelerating decline into September.

These markets tend to be volatile and can add returns in up-markets, but during downturns, these prices can fall faster than the S&P 500.  Emerging markets have not been the rapidly increasing haven they have been and if a global slowdown is coming, then they’re likely to continue to outperform, especially those tied specifically to commodities/exports should commodity prices continue to fall.

Be safe out there.

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A Quick Look at Apple Inc AAPL and Technology

Sep 17, 2008: 7:54 PM CST

The selling pressure was not contained today to Financial stocks – the NASDAQ lost 4.94% today, the greatest decliner of the four major US Equity Indexes, followed closely by the Russell 2000 (off 4.82%).  Many technology and small-cap stocks fell greater than 5.00% today.  Let’s take a quick snapshot of Apple Inc (AAPL) and view its daily and weekly graphs.

Apple Inc (AAPL) Daily:

What surprised me and many other traders I’m sure is that Apple set-up a relatively strong buy signal – a potential bullish flag – at the $170 level after a new momentum high followed by a clean and orderly retracement to the confluence of support via the 20 and 50 day EMA (complete with doji candles).

Ultimately, the trend failed to shift back to the upside and the support was taken out which set-up a test of the 200 day SMA which also formed a doji and potential entry pattern – it also failed.

Since then, investors have punished the stock from $180 to less than $130 in the span of a month – a sharp decline.  We now have a new momentum low registering on the chart and we have to pull back to the weekly chart to find potential support.

Apple Inc (AAPL) Weekly:

The weekly structure (overlaid with Fibonacci retracements) shows potential support comoing in at the 2008 price lows and 61.8% Fibonacci retracement at roughly $120.00 per share.

Should price break $120 solidly on a weekly closing basis, this would set up a potentially quick test of the rising 200 week moving average and also ’round-number’ support at $100.00 per share, which would likely cause bulls to step up and acquire sizeable positions at those prices.

Also, breaking beneath $120 per share would officially classify Apple as being in a confirmed downtrend on the weekly chart (having formed a lower low, lower high, and then swinging down to take out the swing low at $120).

I mentioned that other Technology stocks suffered today, though Apple was hit particularly hard.  Let’s view a snap-shot of performance today on the broad sector.

Technology Sector as a Whole (S&P 500 HeatMap courtesy

There were only three green spots in today’s trading in technology:

Nvidia (NVDA) actually rose 4.28% which – if you view its daily chart – appears to be in a retracement back to the $11.00 level to the 20 day EMA – it’s in a confirmed downtrend and is experiencing a counter-trend retracement.

SanDisk (SNDK) actually offered a significant ray of light, jumping (gapping) up almost 40% today.  A massive bullish divergence preceded today’s action, and it’s one you might want to look at for a potential long-term position trade.

Finally, Dell (DELL) rose just over 1% today but I wouldn’t get overly excited, given the massive decline Dell has experienced this month – it’s been a culprit in dragging down the entire NASDAQ index until present.

Everything else was deep red.

Check out the MarketClub for support and education if need be, including their informational free daily blog.

Continue to use caution in this difficult and challenging market environment.


A Quick Look at Goldman Sachs GS

Sep 17, 2008: 10:29 AM CST

Goldman Sachs (GS) has held up remarkably well throughout the 2008 Financial sector decline, but even it is now not immune from sharply and rapidly declining prices, as the markdowns in the Financial sector continues.  Let’s look at the multi-time frame charts of Goldman (GS) to see if there’s any clues or to assess what’s happened.

Goldman Sachs (GS) Daily:

Goldman had entered a declining channel formation (not drawn) on the daily chart with the $150 level as key and major support.  Why was this price significant?  Beyond being round-number support (tested four times), it was also the 50.0% Fibonacci retracement of the 2002 low to the 2007 high (shown on the Monthly chart at $153.30).  When looking at stocks, it can be extremely beneficial to rise to the monthly chart and determine large-scale Fibonacci retracements.

That being said, Monday brought on the large price decline across the market and Goldman was quite volatile – gapping down to $142, rising to virtually fill the weekend gap at $150, and then closing down on the day at $135 (after testing $130) which all makes up roughly a $20.00 range.  Tuesday brought the earnings report for Goldman, which actually did well, and though Goldman opened sharply lower, it managed to fill the overnight gap, adding intense volatility and opportunity for intraday traders.

However, today’s action has GS gapping down to $120 and then plunging very rapidly to $100.00 per share (low so far on the day).  That’s a roughly $30 swing and – as of the time of the posting – the day is only half-complete.  That’s stunning.

Goldman Sachs (GS) Weekly:

Pulling the chart back to the Weekly chart exposes a symmetrical continuation triangle and a clear and confirmed down-trend in prices.  We’re registering a new momentum low on the weekly chart and a breakdown of the triangle formation, with a potential price target near $100 per share (the height of the triangle is roughly $60, and subtracting $60 from the breakout level around $155 actually gives a $95 target).  That target has roughly been achieved in less than one week – a nearly unprecedented technical resolution for such a large company.

The Monthly structure shows the amazing run-up and sell-off, and I’ve overlaid the large-scale Fibonacci retracements.

Goldman Sachs (GS) Monthly:

We draw the Grid from the 2002 price low to the 2007 price high and then calculate the Fibonacci retracements as shown on the chart.

The $153 level was able to provide initial support, but once broken, it sets up a test of the 61.8% retracement which actually came immediately after the violation.  Unfortunately, price is quite beneath the 61.8% level, and that is a significant development.  Notice also how the 50 week EMA contained price as support until broken (as did the 20 month EMA contain price as support).

Continue to watch this stock closely, as well as the implications for the broader market.  Things are happening so quickly.

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