New Lows Coming?

Recent movements in the financial markets suggest that we might possibly test the November lows if several important trendlines and support levels are broken. Again, I would like to reiterate that I do not incorporate any news or fundamental analysis in my analysis; it is strictly technical. However, I do not disregard them completely because news does tend to move markets (in an irrational and unpredictable fashion).

This week is the start of the (lack of) earnings season, options expiration Friday, January 16th and President-elect Barack Obama’s inauguration next Tuesday, January 20th. Expect an increase in volatility until then as the markets try and find support or completely breakdown.

I have several charts which show important trendlines and support levels which each indice must hold onto in order to prevent the same breadth of selling we saw in November.

A break below 8350-8400 will send the Dow Jones to at least the 8000-8100 level. If that 8000 level is broken, look out below! Relative strength turned bearish as it crossed the 50 level and stochastics show that this current weakness is not yet over. The Dow Jones [Big Cap/Blue Chips]  is the weakest index compared to the NASDAQ [Tech], S&P 500 [Mid Caps], and the Russell 2000 [Small Caps].

The Russell 2000 is one of the stronger indexes (mainly because of the January Effect). A bearish flag was confirmed as the uptrend line was broken and the 440-460 levels are the next short-term targets. MACD crossed over bearishly and will cross the 0 line while stochastics also show there is more room to the downside.

The reason why I (and many others)  look at the R2K is because of the TNA and TZA 3x leveraged ETFs. While risky, these exchange-traded funds can create or destroy wealth in almost a blink of an eye.

Oil’s longer-term trends are obviously down, but the recent conflict in Gaza has sent Oil up a good amount in the short-term (nearly 50%) but it has nearly given up all of those gains. Oil seems to be building a bottom for now. A break above $40.00 on the USO will put Oil into a short/intermediate uptrend while a break below $27.73 will confirm another leg down for Oil. Keep in mind that if oil goes down, it tends to drag XOM (Exxon-Mobil) and CVX (Chevron) down which will also drag down the Dow (points-wise). I definitely wouldn’t mind $1.75/gal premium for gasoline though!

The financials (and REITs) are the weakest sectors and has been crippling the markets. The XLF crossed below its important $11.50 support level within the first 10 minutes of trading and saw relentless selling until the end of the day. I participated by buying the FAZ (3x inverse financials ETF) which gained 17% (3x financials ETF) today while the FAS lost 17% today. C (Citigroup) and BAC (Bank of America) sold off extremely hard and on massive volume as it broke support and is almost flirting with its November lows.

Odds do not favor the bullish case at this moment as there is nothing I see other than “hoping” that the markets turn around. The path of least resistance is lower as price-action indicates and the news coming out do not support the bulls. The “Santa Claus” rally is quickly losing all of its gains, but keep in mind that on election-years, the markets have historically risen until the new president-elect’s inauguration day.

If one were to go long however (for a counter-trend/contrarian trade), I would suggest placing a stop order at or a little below the support levels I drew if your trade moves against you to limit your losses.

Market Clarity

The markets have been extremely volatile these last few sessions. Up and down, down and up. This almost reminds me of the Goliath roller coaster ride at Six Flags Magic Mountain and if you’ve been on that ride then you’ll know what I mean.

I put together a crude (MS paint) chart to give you guys a visual of exactly what I’m talking about. For the record, I am not, in anyway, your financial advisor or your big-shot fund manager and I know nothing about where the market is heading. I try to analyze the markets using technical analysis, which I have been using for the past 4 years to analyze and rationalize my trades.

These are some tools I use in order to RATIONALIZE my trades. I put emphasis on the word RATIONALIZE because in today’s environment, feelings and emotions can clouds one’s judgment and forces us to do crazy things which one will regret later on: panic selling, throwing in the towel, or buying low thinking it’s cheap to see it go even lower, etc.

The prevailing (longer-term) trend is lower and that’s quite apparent by the chart. The short, intermediate, and long-term moving averages ALL point lower and we will see some resistance around that 10,000 level, which is not only a psychological barrier but where the 13SMA (simple moving average) stands. The hardest game on Wall Street is picking bottoms and no one knows if this is the bottom we have all been looking for or just a short-term bottom, but my instinct tells me this is just a short-term relief rally we saw today.

The Dow Jones lost 2400 points last week and regained 900 points today, roughly 38%. For all of you Elliot Wave fanatics, this looks like an ABC down (Down, then up a little, then back down even lower) and I think we will see something of that nature within the next couple of weeks. Today’s impressive 11-12% gains across the major indices confirms that we were deeply oversold. For this “biggest point gain ever” day I would expect to see people rushing in buying all they can on massive volume, but instead we get a little over average volume, which shows that the buyers are buying, but they’re cautious about doing so. I do not see any conviction in today’s move. However, I’ll give the benefit of the doubt to the bulls as we see a “spinning top” on high volume, which usually represents a turning-point in trends as people are indecisive on where to go and the bullish engulfing today confirms that, for the moment and at the least, the very short-term trend is higher.

A likely scenario playing in my head is that I’m expecting the markets to open tomorrow higher and for the week, we’ll consolidate around those levels as we await for more (possibly bad) news to come. All the suckers (for lack of a better word) who believe that we have hit the bottom of this financial crisis will get sucked back in to the markets, only to see them get washed out later on. Today was just the market patching the wounds up and I see someone ripping off the bandage in the near future.

Then again, I could be all wrong.

Proceed with caution, brothers. Nothing is safe, not even your mattress. Cash is king and remember, there are always other opportunities to pursue!

Commentary: Bank of America & Merrill Lynch

When I first heard the story of Bank of America acquiring Merrill Lynch for $50 billion dollars, I was flabbergasted and shocked. “Merrill Lynch, the 5th largest investment bank, acquired by a consumer bank overnight?!” I thought. I was disgusted, to say the least. But after letting my emotions run wild for a night and going back to work the next morning, it hit me: the move was pure genius.

I was talking with Mr. Justin Shaw, who also interned at Merrill Lynch, before the weekend and he said that Merrill was going to be next dead fish in the sea and he hit the nail head on. I told him that Merrill already sold off a lot of its risk, which comes from the extremely risky CDOs (collateralized debt obligations) for pennies on the dollar to private equity, unloaded some of its asset/mortgage-backed holdings, and reduced its balance sheet to reduce the risk of depreciating assets. Merrill Lynch, who told its clients that it was still strong in this volatile environment, ended up selling itself as a last-ditch effort to save the clients, the company, the name, and the legacy, unlike its belly-up rival Lehman Brothers.

The move was pure genius, I must admit. I read over an internal presentation called “Creating the Premier Financial Services Company in the World” by Merrill Lynch Chairman John Thain and Bank of America Chairman Ken Lewis and the deal makes absolute sense. Although Mr. John Thain originally went to Goldman Sachs and Morgan Stanley first, I believe that the synergy with Bank of America is unmatched by any other company since there is little overlap. The deal makes sense financially because of Merrill Lynch’s large writedowns which are beneficial to Bank of America. After acquiring Countrywide Financial, Bank of America was able to take Countrywide’s writedowns and have it be tax-deductible (writedowns and some losses are tax deductible) meaning Bank of America saves billions of dollars a year from just Countrywide alone. Adding Merrill Lynch’s writedowns will allow Bank of America to keep more money to itself instead of paying it out to the taxpayers. Let’s just hope they increase their dividend because of this.

The acquisition, I believe, is beneficial to everyone: shareholders, clients, and employees. Shareholders receive a about a 70% premium to Friday’s close, clients get to keep their assets with Merrill Lynch and have more financial products available to them via Bank of America, and employees will get to keep their job, but most importantly, their stock options and compensation. Lehman Brothers employees who had stock options, were left with nearly nothing as Lehman croaked. Imagine if you were an investment banker working 70+ hours a week with hundreds of thousands or even millions in Lehman stock options and compensation, all of which you were unable to exercise.

You have Bank of America as one of the largest US consumer banks who deals with deposits and credit & debit cards, combined with their financing and lending power by recent acquisition of Countrywide Financial, the largest mortgage lender in the United States, and now Merrill Lynch, an investment bank and global wealth management firm, with 20,000 financial advisors and $2.5 trillion in client assets. This gives you a global bank that will have a tremendous amount of power and financial diversification.

Two of Wall Street’s Investment Banks Vanish Overnight – Who’s Next?

The financial markets kick off another week of volatile trading as two of Wall Street’s most storied firms vanish overnight. Lehman Brothers, an investment bank founded in 1850, files for Chapter 11 bankruptcy after meetings at the New York Fed failed to find a suitor for the Wall Street firm. Officials from the Treasury Department, Securities and Exchange Commission, and the New York Fed were present as well as top executives from Morgan Stanley, Citigroup, JP Morgan Chase, Goldman Sachs, and Merrill Lynch. British bank Barclays PLC has walked away from a possible deal and Bank of America, another candidate to acquire distressed Lehman Brothers, decided that Merrill Lynch would be a better acquisition instead of Lehman, who holds nearly $60 billion in depreciating real estate holdings. Potential buyers were frightened to pursue a deal after the US Treasury refused to provide any guaranteed aid as it had done in the past with Bear Sterns and when it seized Fannie Mae and Freddie Mac. Merrill Lynch, an investment bank and brokerage firm, ends a legacy that started out in 1914. They have agreed to be acquired for $29 dollars a share, or $50 billion dollars, which is a 70% premium to Friday’s closing price.

Now that the weak are being consumed by the stronger, more financially stable companies, who is next on the chopping block? The US Treasury and Fed are becoming more reluctant to bail out firms, credit and financing becomes increasingly harder to obtain, and as the decline of home prices continue to freefall, no institution is out of the water just yet. According to an AP story, former Federal Reserve Chairman, Alan Greenspan, said during an interview recently:

“Let’s recognize that this is a once-in- a-half-century, probably once-in-a-century type of event” — the worst “by far” in his career, Greenspan said. “There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go. And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. That will induce a series of events around the globe which will stabilize the system,” he added.

As stock prices drop, it becomes harder for troubled companies to raise the capital needed to stay afloat. This leaves companies such as: Washington Mutual, the nation’s biggest savings bank, American International Group, the world’s largest insurer, Wachovia, and Citigroup in a pickle as it will try to raise capital and sell off its assets and/or mortgage-backed exposures in a last ditch effort to stay afloat or ultimately be liquidated like Lehman Brothers or be acquired like Merrill Lynch. Lehman Brothers was the 4th largest investment bank and is the largest failure of an investment bank in 18 years.