ALERT: Bear Stearns Plunges 50% Today

Mar 14, 2008: 9:12 AM CST

Bear Stearns (BSC), one of the major US Financial companies, lost half its value intraday today on concerns that the Fed’s recent liquidity injection “might not work” for the company.

Instantly, the Federal Reserve voted unanimously today to provide cash to help this crisis, and stands ready to inject more as needed.

As reported by Yahoo News, the Federal Reserve issued a two-sentence statement, part of which said, “The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system.”

According to Yahoo, “The plan will provide secured funding to Bear Stearns for an initial period of 28 days, seeking to provide short-term relief for Bear Stearns.”

Furthermore, “The action by the Fed board in Washington represented an endorsement of a rescue effort for Bear Stearns that had already been arranged by JPMorgan and the Federal Reserve’s New York regional bank, [which was] seen as a last-ditch effort to save the investment bank, which on Friday acknowledged its serious financial problems after a week of denials.”

With that news, let’s look at what happened to the stock prior to the news (or let’s see what caused this announcement to happen so quickly):

On to the massive decline in the weekly chart:

Before you start thinking this is a normal decline, realize how large Bear Stearns is to the US Financial markets, and what this might mean for the broader sector.

This is an extremely important development, which shows that investors must always be on guard for catastrophic events (news/fundamentals) in their chosen investment, and also highlights that even long-term investors should use some sort of position liquidation plan (such as an 8% or 10% arbitrary stop-loss, or some other risk control management plan).

At any moment, the unthinkable can happen in the market.

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Sears – Bruised, Battered, and Short Squeezed

Mar 13, 2008: 5:49 PM CST

Sears Holding (SHLD) has taken a severe punishment from investors since 2007, falling from an all-time high above $190 to a recent three-year low beneath $90.

While the chart itself is educational from a trend and retracement perspective, I wanted to highlight a few points during the decline.

First, there were two significant events that occurred on the daily chart that are worth viewing:

As price crested lower, a major report in late November caused a $20 point overnight gap which resulted in a hammer-style candlestick on massive volume (thought to be selling volume, but it was actually short-term accumulation).

Retail traders and investors who sold here (after a depressing investment) were shocked to see the stock recover its full value prior to the overnight gap-down drop which forced many to sell. Savvy traders knew that the odds seem to favor that the gap would have closed, rather than not, and could have played price up (to close the gap) and down (due to the pullback to resistance via the 20 period moving average, combined with bearish candlesticks and overbought oscillator readings). There almost was a powerful evening star candle, and certainly a bearish engulfing pattern at key resistance.

Second, not to be outdone, yet another $10 gap occurs in mid-January, which also resulted in a fill. However, this time it was the short-sellers who got their accounts cleaned instead of the buyers. The fact that Sears was in a strong downtrend, and had deteriorating fundamentals due to weaker retail sales was clear to virtually everyone. Newer (and even experienced) traders and funds were certainly short this stock (or sector). I’m sure many of them were counting their profits following this overnight gap and subsequent price weakness, but they woke up the morning of January 22nd to find a massive short-squeeze and buying frenzy on their hands.

Those who held short into the next day experienced a two-day price move greater than $25. Traders who opted to be aggressive and buy to fill this gap similarly found their accounts higher than before.

The fact is that the market often acts to confuse the majority most of the time. In late November, the price gapped down beyond fair valuation and immediately corrected over the next week, shocking those who ‘got short’ due to the poor news.

Subsequently, price shocked the shorts with a massive squeeze, triggering all but the aggressive stops and pulling away those positions. When the dust settled, the market then turned around back to the downside and shocked the new buyers and ‘bottom fishers’ who thought they had found retail gold with this stock. While price has not yet made a new low, it does continue its downtrend, leaving buyers at the late January and early February levels quite underwater.

Let’s peek quickly at the weekly chart to gain the broader perspective on this move (red arrows indicate key resistance levels, and opportune short-selling trade entries):

Notice the massive momentum divergence which set up in the middle of the chart. The subsequent breakdown in price beneath the key moving averages and out of the channel trendline formation signaled that the impetus had shifted from the bulls to the bears. The large price decline in early June signaled the official end to the uptrend and birth of the new downtrend (and position trade short entry).

Other pullbacks (including one key massive short-squeeze week in October 07) served as further entry points to the short side.

Notice that the $20 point move in late January 2007 took price to the falling 20 week moving average, almost like “magic.” Price inflected against this level and has continued its descent lower.

There are many other lessons to be learned in the chart and technical picture of this stock. I recommend annotating it for yourself and seeing what insights you can glean from the fall of this massive retail giant.

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Market Fades an Incredible Gap

Mar 13, 2008: 12:10 PM CST

I wanted to post the amazing gap fade that took place earlier today:

The morning started with a large volatility (150 Dow point) gap as the economic news was very bearish this morning (oil and gold at new record highs, signaling inflation, and a larger than expected drop in retail sales).

The market, however, shook off this news and frustrated traders who exited, and punished those who got short this morning.

Although the first impulse is to fade an overnight gap, two factors prevented this classic play this morning:

  1. The gap was greater than a 100 point Dow gap, meaning odds favored continuation rather than a filling of the gap
  2. The market did continue in the direction of the gap almost 100 points down, which would have taken out virtually any stop you placed if you tried to fade this gap

A momentum divergence formed as price made a new swing low on the day (in fact, it was a significant momentum divergence – see green arrow). Price then began a massive upside move that actually formed the ‘pole’ of a developing flag-style pattern.

A 45 degree angle pullback into 1:00pm formed the actual flag portion, and set-up a long (buy) trade in the direction of the impulse (note the new momentum high just after 11:00am).

The “measured move” or price target of the flag is being reached currently, which would have resulted in a highly successful trade if you were ambitious enough to ‘fade the news’ and play the price pattern alone. Sometimes it is best to strive to be a technical purist, for that was where the money was made today.

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A Shooting Star at Resistance

Mar 13, 2008: 9:18 AM CST

Yesterday’s intraday action took prices to the falling 20 day moving average, and the resulting close formed a candlestick pattern known as the “shooting star” which happened to form at this key resistance zone.

What was the result? A powerful move to the downside this morning as the psychology represented by this pattern played out. The unfortunate side of this outcome was that, even if you perceived this pattern last night, the morning gap instantly reduced some of the profit potential you could have made to the short-side. It would have paid to have been aggressive and acted on this pattern prior to yesterday’s close, which I’m sure very few of us did.

I have magnified the chart to highlight the candle pattern that formed yesterday on the DIA (Dow Jones ETF).

Candlestick charting can provide trade set-ups on its own, but when you combine it with Western technical analysis, you can increase the odds of a successful trade.

One wonders how sustainable up moves in the market can be when both oil and gold continue to make new lifetime contract highs.

Oil breached $110 per barrel today while one ounce of gold tested $1,000 in the futures markets – both contracts making lifetime highs.

Combine these facts with the retail sales numbers declining sharply, and you have a recipe for strong weakness.  However, the market has currently pared all those losses and all three major US Markets (Dow, S&P, and NASDAQ) are higher on the day, after shaking off all this otherwise bearish economic news.

The US Dollar Index made new lifetime lows yesterday as well, closing at $72.33.

So, whenever one sees a rally in this downward trending market which stalls and forms some sort of bearish set-up (including candlestick patterns), odds seem to favor taking it and holding short and reaping profits more than trying to find a bottom or scour for potential bullish set-ups.

Visit INO.com TV for access to a plethora of educational video seminars to help you during this time, or for deeper education, check out a membership to Market Club.com, which provides far more tools including scanning, futures contract charting/analysis (including oil and gold), daily news, “trade school” education, daily market videos/commentary, and trading signals.

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Introducing Newsflashr, Headline News Tracker

Mar 12, 2008: 5:16 PM CST

Last week, I was introduced to a new site called NewsFlashr, which was developed by the creators of the amazing Instant Bull stock market news/information website.

NewsFlashr allows you to view headlines on selected topics quickly and easily, on such areas as World News, Politics (including the 2008 elections and primaries, which I follow daily), Business, Showbuisness, Technology, Sports, Science, and Medicine.  It gives you a convenient diversion if you’re tired of reading stock market stories all day long!

You can also follow larger blog entries on Business and Politics headlines.

Furthermore, each category has a ‘text cloud’ that shows you the most popular keywords in real time.

You can also view multiple feeds from top news sites in a simple to view page that’s even better than creating them yourself at their News Feed Page (I’m linking to the Business Feed page here).

The site also gives you headlines in each section based on the top 5 terms searched (keywords) up to the minute.

The site is updated in real time, so it will be helpful to check it often.  I can tell I will be using this site often, and may even make it my homepage!

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