Sunday, October 12, 2008

The Casino Was Open on Friday. Now What?

On Thursday evening I wrote the following -

"I would not be surprised to see the tradable bottom show up tomorrow as the news of the Lehman CDS settlement evolves tomorrow. I will be looking for a capitulation tomorrow morning. If it shows up, then I may put some money to work."

Oh, where to begin…
On Wednesday, the S&P 500 took out 970 and tanked 130 points in about 90 minutes of trading. That’s like a point a minute or 13.4%! Brutal! That’s 53.6 years of returns in the current 3-month US Treasury…

Here’s a chart of the Dow Jones Industrial Average on Friday. Each red and black bar represents on minute of trading.
Down about 700 points in 8 minutes
Up 500 points in 8 minutes
Up about 850 points in 30 minutes
Down 450 points in 5 minutes

The casino is open! I am not interested in gambling, so I sat on my hands on Friday.

A tradable low may now be in. If it is, then I will wait for sound entry points to buy. I am not real keen on buying into this news-driven environment, especially ahead of a weekend.

The S&P 500 spiked down to the -35% level. I think it would be natural for the S&P to spike up into the last breakdown point (970), before rolling back down to retest Friday’s lows. Of course, that is on the assumption that 908 can be cleared. A successful retest is what I am interested in buying.
I am trying to carefully measure how I write the next sentence. If (IF) in the next few days, the S&P 500 takes out the lows of Friday (840) and cracks hard like it did from 970, then it is my opinion that the Fed will call a “Banking Holiday” and close the banks for a few days. During the time the banks are closed, I would expect the Fed to nationalize the banking system and offer existing shareholders of bank stocks warrants in these banks for some point in the future when they are sold back into the markets as public companies again.

I would also expect the Fed to guarantee all bank balances to convince individuals and institutions to not take their money out of the banks. We really are at that stage right now where the system is on the brink of breaking and that is why I am looking for opportunity.

On the 30-minute chart I show each 5% band (black dashed lines). The lows band (840) is -35%. The top band is -15% (1100).
For now, the S&P is merely trying to find a bottom in the 840 – 910 range. If this level holds, then I would expect the first real resistance to come in at 970 – 1020. If the 840 low holds, then we could see the rally in the S&P work its way up into the 1100 range over the next 8 weeks or so. The weaker the bounce, the worse the next leg down will be.

One thing I am always interested in is determining what is acting stronger than the overall market. Take a look at how Apple and Deere have traded the last week. Both were able to hold up rather well for the entire week, even while the S&P 500 was breaking to lower and lower lows. That is a potential positive for these two companies. I own neither and sold Apple at $184 on May 5, 2008.

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