Bearish Confirmation

As I implied in my previous post, the simultaneous rallies of both the dollar and equities were quite suspect... and would need confirmation. Today may be the actual confirmation that the environment wherein both are inversely correlated is still intact - as the Dow is currently down triple digits. This is a very bad sign in the short-term, because despite the good employment numbers, the equity markets took a nose dive. It may mean that the economic numbers had already been priced in during the unusual rallies in October and November (both historically bad months), and now, people wise enough to buy during those months may just be selling into the news.

I guess Santa Claus isn't coming to town.

Anyway, despite my bearish feel for equities, there are still a lot of opportunities out there since the markets are still flush with cash. The key, again, is finding the strong issues (ADX > 30).

Dow 11,000?

October non-farm payroll jobs lost went down to -11,000 from -111,000 the previous month - an astonishing number given that the consensus estimated it to be at -125,000. The bullish data may be indicating that the Dow may reach 11,000 in the next few days/weeks. And we can go on even higher if the bearish traders on the sidelines walk their talk and start buying stocks (or covering shorts) now that employment numbers are improving.

What's quite surprising are the simultaneous rallies of both the dollar and equities, which the world hasn't seen in a while. What does this mean? Are we really at a crossroads wherein the inverse correlation between the dollar and equities will soon reverse? Or, is this unusual move telling us that the recent rally in equities is a mere head fake?

No one knows for sure. My stand is neutral. I did say a few days ago that I was already short-term bearish on the markets. But if all the significant indices (Hang Seng, Dow, Shanghai) break out of their patterns, along with a sustained move in the dollar, then I will change my view and be more bullish at least until the earnings season in January.

The Dow entered its current bull market when the dollar started its bear market last March:

Impending Doom?

The heat of the Dubai debacle is slowly fading away, as markets rallied massively the past few days. The central bank of the UAE soothed fears by saying that it would back up the deposits of local and foreign banks in the area. It also became public knowledge that the potential losses of global banks in the event of a default by Dubai are relatively small compared to the hundreds of billions lost during the bursting of the US real estate bubble. However, despite the brief and muted response of the markets, we should all be wary of how "fragile" and "panicky" investors and traders are right now. Using the Chinese market as a reference, these sudden and unexpected big down days may indicate an impending deep correction.

As you can see from the chart below, the Shanghai Composite (represented by HK:2823) also went down by as much as 10% (intraday) last August as people sold into the rumor that the Chinese government would start draining liquidity to prevent overheating the economy. After the big down day, the market then rallied for 3 days(bargain hunters), breached new highs, before correcting heavily for a whole month.

In my previous post, I already mentioned that the safest immediate buy for the Dow and the Hang Seng is at the 130 day SMA. But that doesn't mean that you shouldn't trade the bounce. As you can see below, the Hang Seng itself went up by a thousand points in just a couple of days. It filled the "Dubai gap" and is now right smack at resistance (trendline and 32 day SMA). Within the next few days, I expect it to retest the 23,000 barrier or hit the parabolic resistance at around 22,800 before going down.

The Dow, although seems resilient, is still the laggard. There is still nothing wrong with it technically as it hasn't broken any major support areas. But you have to be cautious of the multiple bearish divergences (upward price channel + weakening MACD) that are showing. The Hang Seng had similar bearish omens before it broke down.

So yes, I'm already short-term bearish on the markets. I will continue trading since the Santa Claus rally may still bring us to new highs, but I will not carry heavy positions overnight.

Blood in the Street

There was blood in the markets today, and unfortunately, mine was included. Dubai came out with a black swan report requesting to prolong its debt payments - causing markets to crash and credit defaults swaps to soar.

The Hang Seng Index went down by as much as 1,200 points - the largest one day drop I've seen in my trading career. As you can see in the chart below, the index broke down below its upward channel (confirming the MACD bearish divergence), the 32day SMA, and 65day SMA. The next support is at the 21,000 psychological level, but probably the safest buy would be the 130day SMA, which is around the 20,500 area. The Shanghai Composite also broke down last August, and it only bounced once it reached the 130day SMA. Thus, since China is the leader, my best bet for HSI and DJIA (Dow) would be to buy at the 130day SMA.


Man. I was all-in yesterday, so I got hit pretty bad. I got emotional during the day, so I kept buying up stocks hoping it would bounce right away. But the biggest rally it was able to sustain was a mere 100+ points. So yes, I dug a deeper hole for myself. I'm now down 54%.

I can't take this madness anymore. I'm going to make a trading plan this weekend and then consult my boss on Monday. I need to perform.

Happy Thanksgiving.

Lack of Discipline

HK MARKET:

I may have dodged a bullet this morning since all the shipping stocks were down big, but I think I just set myself up to catch one on Monday.

I was overly aggressive all day trading just one stock, HK:1114 (Brilliance Auto), due to the strength in the auto sector (both technicals and fundamentals look very promising). I was already correct in the afternoon, selling right before the market had turned, but 30 minutes before the close, I became greedy again and had the itch to trade. So, I ended up buying back the stock without a good set-up. Of course it went down, and I had to cut 2 flucs below my buying price (2.24). I wasn't done. 5 minutes before the close, I noticed that the stock found support at 2.21-2.22, so yes, I bought my whole position again at 2.23. Argh. Talk about the lack of discipline on my part.

The Dow Futures are down big again, and because there are no economic reports due today, the main market movers are the strengthening dollar and the bad Dell earnings/guidance, which came out earlier today. I believe (or more of hope?) that the expected drop tonight has already been priced in the Hong Kong market. Or else, I'll probably get killed on Monday. Sh*t.

PHIL MARKET:

I lost money today. I bought MER at 231 and sold it at 229. I also sold my whole position in CPM at cost. I'm all cash right now.

Funny. I'm very disciplined in the Phil. market, but in the HK market, I'm reckless. Why? The only reason I can think of is the fact that I'm down in HK, and I'm up in the Phils.

Lessons for today:
1. Avoid buying back a stock 30 minutes before the close. Limit buybacks in the morning, or right after lunch. Also, in these cases, position size must be lessened.
2. Plans are useless if you don't have the discipline to execute it properly. My original plan was to cease trading after I had locked in my profit. I didn't follow it. Again. So i lost money. Again. Greed and Hope are really my biggest enemies.

Dodged a Bullet

The US market experienced a mild correction and was down 94 points yesterday. Intraday, it went as low as 160+ points due to so-so economic data (initial claims, leading indicators), but it rallied because of the statement of Steve Ballmer that Windows 7 is performing well beyond expectations. The shipping stocks, which we have been following very closely the past few days, went down hard and formed 2 day reversals.

Thus, I'm actually feeling good right now given that I sold my shipping stock (HK:2866) at the close yesterday. Yes, I dodged a bullet - which easily could have killed my confidence. However, I don't expect the Hang Seng to go down too much today since it has already been down for 3 days. Nevertheless, I will be very cautious as this may just be start of a deep correction.