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.

Strength is the key

The HK market was down more than 300 pts today following the big sell-off in China. The government is requiring the banks to increase their capital requirements; thus, speculation arose that these companies would have to place shares at deep discounts. With that news, the Shanghai Composite crashed from up 20+ pts to down 110+ pts.

The good news is, I survived. Luckily, I was able to gain about 5% from my investment in Brilliance Auto. Plus, I didn't get hit much in the afternoon because I was holding a defensive stock (HK:371) which was unusually strong today. I'm hoping that its strength will persist until tomorrow.

For the past few weeks now, I've been making money in down days and losing money in up days. I thought it was kind of weird at first, but upon further reflection, I realized that the reason for this anomaly is very logical. During down days, right off the open, it's stark clear to everyone which stocks have innate strength that even a tumbling index could not dissipate. However, during up days, it's not so clear which issues are strong enough to climb further within the day.

Thus, the lesson of the day is: if you're long the market, always look for strength. The ADX indicator (measures momentum) is your cheating. The higher it is (preferably above 35), the higher your chances of surviving a weak market. For example, as you can see in the image below, the stock I held today has been very strong. Its ADX is 50 (the black line), and it's above all the moving averages (also a sign of strength).