Saturday, December 22, 2007 Weekly review

The week ended on a flourish with a solid volume close - likely the last of the action until the New Year rolls in.

Joe Reed is looking at Friday with more hope than substance.

His housing index chart shows next support down at 90-100. His comparison with the retail index is excellent as it shows clear potential for a shorting opportunity in the sector.

Friday's gains may not all be good news. Ted Burge has marked in a couple of resistance levels for the Nasdaq 100:

With an additional resistance level from October lows for the Nasdaq (on a second look there is a similar resistance level in the Nasdaq 100 - except Ted hasn't marked it in):

The semiconductor index was also tagged by resistance at 417.32 and the 20-day MA - future action in this index will be critical for the continued health of the Nasdaq and Nasdaq 100:

Leadership could emerge from small caps which cleared dual resistance of the declining resistance line and 50-day MA.

Robert New
sees a further upside for Small caps:

Maurice Walker leads with a Morgan Stanley chart showing a clear resistance break on volume (and is very close to confirming a double bottom with neckline resistance at $54)

Maurice had this to say:

We have seen the CEO's of Citigroup, Charles Prince and of Merrill Lynch, Stan O'Neal ousted after their companies posted massive subprime writedowns.

Now under Merrill Lynch's new CEO John Thain, things are looking better as it was reported today that Merrill Lynch is in negotiations to secure a capital infusion of approximately $5 billion, from a Singapore state-owned investment agency.

Morgan Stanley (1st chart below) reported a 9.4 billion writedown last Wednesday, due to mortgage related debt. But shares skyrocketed after investors were encouraged by Chinese investment of 5 billion. So there is a light at the end of the tunnel for Merrill Lynch and Morgan Stanley.

Bear Stearns who reported Thursday, took a 1.9 billion writedown. You may recall that they were the ones who had reported massive losses from their 2 hedge funds several months ago. Their CEO, Jimmy Cayne has been spared from the chopping block so far, because he fired his co-president, Warren Spector, letting him be the fall guy.

These guys are paid big bucks to manage risk! They have miserably failed in assessing risk. And you have to ask yourself, how in the world could these guys made such a huge error in evaluating subprime investment packages?

Now that we are nearing a general election some political pundits were attempting to pin the subprime debacle on President Bush. Mrs. Clinton had called for Bush to intervene and take decisive action concerning the matter several weeks ago, in hopes of making this a political football. But to Mrs. Clinton's chagrin, Bush did do something about it. The Bush Administration announced a 5 year freeze on subprime loans the week before last.

I don't think this subprime mortgage problem is President Bush's fault, and I don't think its Senator Clinton's fault. It is the fault of the investment bankers. These investment bankers who packaged up these loans for investment purposes, failed to properly assign risk to the package.

Commentary Continued: It is an investment bankers job to assess risk, and in my book, these guys are a bunch of crooks, who should be tried for fraud.

Politicians often do helpful economic things in order to score political points, as president Bush just did. President Bush and President Clinton have both intervened via economic policy through their Administrations. Now that the President put a band-aid on the subprime problem for political expediency as well.. Because if the Republican's didn't resolve the subprime mortgage mess, the Republican presidential nominee would be campaigning next year while massive foreclosures were taking place and he would have to run on the incumbent's economic record. So if Bush failed to act, Rudy Giuliani, Mitt Romney, or who ever their nominee is would have had no chance to be elected. Because right now Hillary Clinton and Barack Obama are both beating all of the Republicans in the poles. By the President's actions, his party now stands a chance of getting in. Now whether you are a Democrat or a Republican, keep in mind that both parties attempt to pump up the economy around election time.

I do not agree with this bail-out plan, because it doesn't hold those responsible accountable for their actions, but I do admit it is a positive thing for the market. So now we have the Bush bail-out plan in place, which could help many of the 6.5 million subprime loan holders.

There still may be some fallout to the bail-out plan if the investors who invested in subprime packages go to court over the change in terms regarding the contracts. We may not be out of woods yet on the subprime problem, but we are seeing some stability come back into the financial sector. The XLF now has positive divergence on the it's oscillators in the weekly timeframe (4th chart down).

Here is his XLF chart:

With a bullish outlook on the S&P:

Has S&P Volatility lost rising support? Next levels to watch are at 16, 13, then 10.

Richard Lehman hadn't commented on Friday's action, but here are his prior day comments:

12/20 -- Unusual day. The Dow was up a mere .29% while the Naz was up 1.5% and the Qs were up 2%. Short term uptrends continue, but are still pretty narrow and not very steep. We're into the Santa Claus rally period now, and that may help, but this does not look like an uptrend that can last. I'm still cautiously long.

12/19 -- Today's action is NOT positive. Some things have not even broken to uptrends, and those that have are anemic. If this doesn't pick up some upward momentum soon, it could be in serious jeopardy of rekindling the downtrends. Santa Claus Rallies are not a given. If the short term charts turn down, I'd get out.

12/18 -- Some positive short term action today. A couple of indices (RUT and XAU) touched lower ST trend lines and bounced nicely. Very little action officially broke out to the upside on the bounce, but depending on how you draw channels, a few may have (like SPX). Tomorrow morning should tell us right away if we're breaking back upward in the short term or not. (Btw...according to my colleague, the Xmas rally doesn't officially begin until Friday for those who track it.)Now, the long term still has damage. We'll need a good Xmas rally to take us out of harm's way.

12/17 -- Things are getting worse fast. Several indices (like Naz) have accelerated their downtrends. Others (like QQQQ) have broken upchannels. The small caps look terrible. Gold and oil and tech stocks are all now in ST downtrends.

The bigger picture is coming more into focus. The tentative long term break I described on the SPX daily three-year may be happening. The equity indices bounced of long term uptrends in August and again in November. But the November bounce has almost been completely undone now. That says the indices may have reversed and will soon break those multi-month and multi-year upchannels. That will signal a bear market reversal if it occurs.

Finally - as for trade signals, Jack Chan has a 'buy' in the United Sates Oil Fund:

With a likely 'buy' signal soon to follow for GLD:

Have a good Christmas - next post will likely be in the New Year.