Saturday, March 15, 2008

The end may be near, but for bears or bulls?

The battle for the dominance between bulls and bears turned bloody last week. The initial advance of the bears was thoroughly destroyed by the bulls who got a super shot of adrenaline when the Fed announced the 200 billion liquidity injection. But the bulls’ rising-from-the-ashes posture proved to be no more than an photo-op on the Friday when the market sold off on the Bear Stearns’ cliff-hanging news. The volatile week ended with little changes for the major indices.

On the weekly charts: for all major indices, the negative momentum little changed; volumes on the rise for the 3rd straight week to reach the multi-week high; candles formations are either doji or spinning candles, all featuring long up and low shadows, highlighting the impasse between bulls and bears; stochastic crossed over and headed down, not quite in oversold yet.
On the daily charts: for all major indices, the momentum mostly failed to turn to the positive side despite of one of the most spectacular rally on the Tuesday; overall candle formations bullish in the early part of the week but turned bearish at the end; the just-came-out-of-oversold stochastic once again poised to cross down and head down; moving averages in solid down-trend formation;
On the 60 min charts: nascent oversold-rebound signs, but most indicators stay bearish for all major indices.

Thoughts and observations about the current market conditions and near-term outlook:

1. There were two dramatic events occurred last week that could have profound impact on the market direction in coming weeks. First, Fed took a never-before-seen movement by inject a whopping 200 billion dollar liquidity into the market. The move made two things crystal clear: one, the Fed is willing and will continue to use whatever in its power to stop the market from further sliding, even if it comes at the cost of dying greenbacks, or the huge inflation ramification down the road, or the unknown risks from its ever deepening involvement into the credit mess; two, the credit crisis is worse than anyone thinks, AND it is still worsening.
2. Second, the collapse of Carlyle and Bear Stearns reveal for the first time the possibility of massive failure of this market.
3. For the first time in many weeks, the VIX spiked on the Friday, suggesting that the fear is finally arrived at the Wall Street. It is worth to point out that key international markets like Japan and China were breaking down last week, which could further stir up the fear.
4. The spectacular rally on the Tuesday once again warned the bears that fighting the determined Fed could be a self-destructive venture. With the FOMC meeting next week, I suspect that bears will be edgy more than ever.
5. The market now has fully priced in a 75 bp rate cut next week and many are hoping for a full 1% reduction, anything less than 75 bp could be a huge disappointment to bulls. Considering what Fed has acted lately, I myself would not be surprised at all if Fed cut the rate by 1%.
6. The market survived the initial test of the Jan’8 bottom last week, but another test could come as early as this coming Monday. Another successful testing could spell the end of the recent market decline, but a failure will mark the end of the first leg bear market movement and the beginning of the second legs down.
7. The way I see it, the market direction at this conjuncture will be decided by the battle between the FEAR of the raging credit crisis and dire macro-economic conditions and Confidence in Fed.

Will post the weekly trading calls late Sunday.


RazoR nursing hangover said...

lol...nice write-up, and thats the good news!

flyingwabbit said...

damn it, don't hold your tongue like that, so what's the bad news? :)