ALMOST OVER (for the "A" wave down)

There was panic overnight in Asia and our markets have tested 7980 so far. Will the Dow punch under its lows of earlier in the month, or rally 2000-4000 points from here? That is the big question, but here is the risk/reward on both.

Punch lower: As I've been giving for a year now, the 7000 area +/- 800 in the Dow is the target for this initial wave "A" down. Earlier in the month, it touched 7800, or the high end of the target given when the Dow was 14,000 in October 2007. Today's lows retested it and have bounced, but there is nothing keeping it from getting deeper into the range. So let's say it tests 7000 in the next day or two. That is 10% more risk from here, after already falling 40% from the top. 10% is livable, so buying could be done from 8000-6500 Dow.

Move higher: If wave "A" is done, I've been talking about the wave "B" bounce into 11,000-12,000 into early 2009. If that happens, that would be a 35% - 45% move higher. We'd all like to join in on that, expecially since it'll eventually fail and roll over to make lows under those of the current lows. So, grabbing some while we can, and selling into it is a good plan.

Therefore, if we can risk 10% - 15% from here, we could participate in a 35% - 45% rally in the next 6 months. We call that a 3:1 winning proposition.

Good Luck.

For what it's worth,

Ken

IT AIN'T OVER UNTIL IT'S OVER...and it's not over!

I can feel the weight of the market every day...pundits trying to talk it up, and at times hailing "the bottom happened last week". Depending on your time frame, they may be right, but only if you are extremely short term biased.

There is AT LEAST another dramatic decline coming that breaks the lows of the past two weeks, and perhaps two more lows. This upcoming decline will punctuate the initial wave (call it wave "A DOWN") of the new Bear Market that began at 14,200 in Oct. 2007. Look for a Dow level of 7150-7350 for the target of this finishing move of this initial wave down. Then, a multi month wave "B UP" should last into early 2009. Unfortunately, following that rally, the remainder of 2009 and most of 2010, perhaps into 2011, will be where the big bang shows up. This will be wave "C Down", and will be a doosy! For now, let's focus on the new lows coming in the next week to three weeks near Dow 7000. That is not only the last buying opportunity for the next several years, but the set up for the last exit point in early 2009, before the big one...

See last post for a very clear picture of my halucination.

Get ready, and stay tuned.

For what it's worth,

Ken

CAVEAT EMPTOR...AGAIN !

(click on chart to enlarge)

CHART AU COURANT: With every pundit and TV station and newspaper asking if the markets have reached their lows, I remind everyone of some numbers I posted last week, which are still valid below in red. Use the chart for reference while reading. The area between the two red lines in the chart is the expected rally point, and exit area of the relief rally. Whether it comes before or after the possible test of the 6000's is of little consequence, because either way, it will be the last chance to avoid the following test of the 5000's. Don't get hooked on the Dow numbers, just look at the picture to see that compared to the 14,200 peak and move to the recent 7,800 (a 6,400 slaughter of your wealth), the move from the 10,000 to 11,000 area down to the 5,000's is completely reasonable to imagine. If you can imagine it, you can do the math on your wealth. If your portfolio is now 40% of what is was a year ago, and it recovers to be only down 20% by early 2009, take this early 2009 wealth number and cut it in half to see a value you will have to live with if this scenario plays out. The upward pointing white line that broke last June, is the 34 year trendline that began when the old bull market was born. The downward pointing white line is the new trendline that began last June. The blue vectors at the lower right are my "path of pain" the our forecasting model is suggesting. Yes, the same forecasting model that has been giving us the pinpoint bullseyes on entry and exit points captured in these postings.
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Last week, on Oct. 9, I said: With the Dow off 40% since its high a year ago, there should soon (days/weeks, not months) be a rally back up toward the underside of the break down level of 10,300-11,000. This rally should begin sometime around the election +/- 10 days. In the meantime, there is likely a sharp, failing rally that begins with the next few hours/days that might reach into the 9800 area +/- 300. Prior to the election however, there is still better than 50/50 odds of 7800-8100 being tested first though, with 7100-7600 a respectable possibility. Any panic under 7000 should be greeted with short term joy and bought strongly. Use the stretch of the rubberband to your advantage.

There is so much emotion in the market these days that the moves that I am forecasting in the next few days to weeks are happening in the following hours to days. Within a day of posting the section above in red, the Dow screamed 1800 points. This led to another two day fall of 1600 points. Finally, another rally into yesterday's close of 750 points. Over 4000 points of travel in a week. That alone used to take years, but just happened in a week. It is prima facie evidence that panic abounds. The good news about panic is that it doesn't last long, so we are nearing the end of the 1st of at least 2 great panics of this Bear Market. The levels above in red should be used to guage your near-term risk/reward into the election. In fact, the election could punctuate the panic and create the relief rally (in between the soon-ending 1st panic, and the upcoming, in 2009, much larger 2nd panic) that could pop Dow prices back up towards 10,300 to 11,000...maybe a bit higher. However, the piper hasn't been fully paid to the downside yet, as leverage, speculation, and greed are still rampant. The proof of this is the fact that the crowd is still looking for the rally to "break even" from year-a-go values, rather than looking for a prudent higher level to exit to protect their wealth. That distinction will be the bane of their existence in the coming years with only a fraction of their former net worths.

For what it's worth,

Ken

George Santayana ROLLS OVER IN HIS GRAVE AS HISTORY REPEATS...AGAIN !

Selecting the theme to these comments is always difficult. This issue was between Santayana's "Those who do not know history are destined to repeat it" or King Solomon's "There is nothing new under the sun". Perhaps I'll use both...let's see.

It's interesting that everyone on the planet, except those that know history, are asking if the Bear Market is over, when recent (the last 80 years) history tells us that the average Bear Market lasts 20 months, not the 12 months that this current one has growled. True, one can argue that if the average is 20, then there should be some shorter and some longer, so maybe this one is of the shorter variety. If that is the argument, then we must take an average of the worst Bear markets, since never in history have we been in the dire straits we currently find ourselves. If that measure is taken, the average would push 30 months. Global history demonstrates that government intervention doesn't work over the long term, regardless if it can create temporary trend changes. South American and Asian governmental currency devaluations, Japanese governmental bailouts of stock and real estate markets, US bailouts of Long Term Capital Management, Bear Stearns, AIG, Fannie, Freddie, and the ongoing attempt to save our raped and pillaged economy, among the few off the top of my head, didn't work over time. To blame our predicament on the government allowing Lehman to fail, or on Presidant Bush, or on any single event or person requires a level of denial and or halucination of the pathologic variety.

The only way to change the effect is to change or eliminate the cause. All the bailouts to date, stimulus packages, money market guarantees, money printing, global credit facilities, etc. (I can't even remember all the "too little, too late" fixes they've tried in the last year) have rallied stock markets for shorter and shorter time frames as the situation worsens, including the two-day wonder of a rally that ended in Tuesday's open hour. The global monied elite know how to sort the chaff from the wheat, and don't need CNBC or FoxNews to tell them what these manipulations mean to their capital. The fact that the monied elite continue to sell every rally on every new desperation tells us that none of the moves so far are worth believing in. By definition, if they were believable, the market would be rising rather than falling.

Investing is just that simple, usually, as evidenced by the well know market motto: "Buy low, sell high". Anyone that tells you they can actually do this, without showing you the audited statements to prove it, is lying. As we all know, it's hard to "buy low", because it's hard to tell how low is low. Even harder, "selling high" is something we are only told about after the time WAS right. Here's the psychological rule that has served me well over the years, which plays a large part in my decision support system. The crowd mentality or direction is the red light (sell) or green light (buy). When everyone is happily bragging about their genius and its results on their portfolio, I like to sell. When the same crowd is moping about their losses, I like to buy. As I always heard in the halls of the psych department, "moping ain't coping". Coping means taking action. Action is a cause that leads to an effect. If you aren't happy with the effect, change the cause. It's that simple.

The bottom line is that we must take responsibility for our actions in all facets of our lives. We cannot be masters of our domains if we rely on other for financial decisions. If we don't understand the game, we shouldn't be playing. If we can't afford the risk of loss, we can't afford the reward of gain. The sword had two edges. For every action, there is an equal and opposite reaction. When we attend the leverage party and stay too long, we can't be surprised at the consequences. They are typically as intensely painful as they were intensely pleasurable. Ying-Yang. Seven years of plenty are followed by seven years of famine.

Buy low, sell high! Are we low here or high? If neither, then find a level that is low to buy, or high to sell. Keep it simple...trust noone, but if you do trust, verify.

For what it's worth,

Ken

NEAR TERM, RISK/REWARD NOW FAVORS UPSIDE...FIRST TIME IN 12 MONTHS !

(click on chart to enlarge for details)
CHART AU COURANT: Here is the current, bloody picture of the decline I've been warning of for the past year. This is the exact chart I published on June 2 of this year, when the Dow was at 12,500. That was titled, "Dow 12,000 or BUST" and went on to say that any break of 12,000 was the warning bell and immediate sell signal for buy and holders. On July 14th of this year at Dow 11,055, I updated the original chart with new blue vectors showing the path to 8,000 or lower that I expected the markets to follow now that 12,000 had been broken. Look at the chart above to see how closely the market is living my halucination. As you can see, here at 8579, we're approaching the next "bounce" level around 8,000. In the overnight session Thursday night, the Dow futures touched 8274. Monthly (shown), and weekly, daily, and hourly (all not shown) stochastics are massively oversold and in position for a relief rally at the least. The Dow futures are testing the 5 standard deviation level below their 200 day moving average of price (not shown), which is statistically impossible to maintain for much longer (hours/days). Finally, the 40% decline in the past year by today's closing price is just below the Fibonacci 38.2% minimum retracement level; the next most common is the 50% level, which is 7,100, the low of 2002, and the uptrend line from the 1987 low. Ironically, there are many similarities to 1987. So, at the rate of loss of the last few days, we are almost certainly within a couple days of bottoming. Worst case from here would be a down and dirty test of 6,000 +/- 300 into mid next week.

Those of you that attended my "special warning" meeting in Seattle in Fall '07 and moved to the sidelines are the happiest campers in the world. What will be know as the slaughter of 2008 continues to destroy the "buy and hold" generation, which is most of public between age 30 and 80. In 1987, the Dow lost 22% in a day, and in 2008 it lost the same 22% in the last week. Unlike '87, when that plunge market the end of the entire correction that began two months early than the October crash, this time it marks the end of the "first part" of the correction that began in November 2007, and will likely continue through 2009, perhaps longer. But, certainly is NOT ending now.
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With the Dow off 40% since its high a year ago, there should soon (days/weeks, not months) be a rally back up toward the underside of the break down level of 10,300-11,000. This rally should begin sometime around the election +/- 10 days. In the meantime, there is likely a sharp, failing rally that begins with the next few hours/days that might reach into the 9800 area +/- 300. Prior to the election however, there is still better than 50/50 odds of 7800-8100 being tested first though, with 7100-7600 a respectable possibility. Any panic under 7000 should be greeted with short term joy and bought strongly. Use the stretch of the rubberband to your advantage.

The bottom line is that NOW IS TOO LATE TO SELL. Why? Well, at worst, there is another 10-20% risk from here, whereas from here, there is a 20-30% reward in the short term, and even better reward if you can hold for 5 years, the minimum anyone should be buying and holding for (10 years being ideal).

We must expect the Fed and Treasury departments to pull out all stops to float this sinking ship. They will try to convince companies to buy back their shares; get the monster mutual funds and hedge funds to get in there and buy stocks; and secretly jump into the futures markets to try to get a massive "short squeeze" rocketing higher. They are rumored to be looking at taking equity stakes in banks and brokerages in exchange for capital, in essence nationalizing our banking system. Who knows what they'll do, but at this point, they will try everything to save the boat. In addition, the Republicans know that there is no McCain if the markets are down in the toilet at election. So, the Fed and Treasury will be pressured to do something to "put lipstick on this pig" prior to voting day, including another EMERGENCY interest rate cut.

Markets like these are brutal and make it hard for bulls and bears alike to profit. Remember, historically, after a smash like this, the first 40 days of the recovery are the best days to be in the market, which is why it's too late to step out. If you leave the party at this point, you will be unlikely to jump back in for the juicy rally. Further, you'll be unlikely to exit after 3-6 weeks of bounce and avoid the retest of the lows. Either way, the question you need to ask at this point is: "if you had no money in the market currently, would you put it in right now?" If the answer is no, then exit. If the answer is yes, then stick around.

(closed trades are always in black type)
INTERESTING PLAYS TO LIGHTEN UP ON OR SHORT SELL: Currently, there are no open short positions, which usually happens close to market lows. But, stay tuned. We took amazing profits into the Freddie/Fannie failure and will re-short on a reasonable rally.

INTERESTING PLAYS TO ACCUMULATE OR BUY: GE under 20 (entered 19.99 on 10/9, breakeven stop placed on 10/13, exited 19.99 on 10/13 at breakeven) and adding under 12, BX under 10 (entered 9.99 on 10/9, placed breakeven stop 10/14, exited 9.99 on 10/14 at breakeven) adding under 5, GS under 75 (entered 74.99 on 10/10, exited 126.99 on 10/14, +52 a share or 69% in two days) buying again under 80 and adding under 50, MSFT under 21 (entered 20.99 on 10/10, exited 25.79 on 10/14, +4.80 or 22.8% in two days), YHOO under 20 or above 22 and adding under 13 (entered 19.82 on August 11 and 12.25 on 10/10, placed 10.25 stop on 10/14 on 2nd position only), GOOG under under 310 (entered 309.99 on 10/10, exited 388 on 10/14, +78.01 or 25% in two days) adding under 230, EBAY under 19 (entered 18.50 on 10/6, placed 17 stop 10/14, exited at 17 on 10/14 -1.50 or -8% ) and adding under 12, DELL under 17 (entered 16.50 9/16, placed 15.50 stop 10/14, exited 15.50 on 10/14, -1.00 or -6%) and adding under 10, SMH (entered @ 25 on 9/15 ) adding under 21 (entered 2nd position at 20 on 10/10, placed stop at 22.35 on 10/14 for both positions, exited 10/14 at 22.35, -2.65 or -10% on initial entry, +2.35 or +11.8% on second ) , SLV under 10 (entered 9.99 on 10/10) adding under 7, SBUX under 13 (entered 12.99 on 10/6) adding under 8, RIMM re-entering under 53 (entered 52.99 later on 10/6, exited 67.18 on 10/14, +14.19 or 26.7% in a week) and add under 45, AAPL under 135 (entered 134.99 9/16) adding under 90 (entered 2nd time 89.99 on 10/6, exited this position only at 113.78 on 10/14, +23.77 or 26.3% in a week) and under 65 , INTC under 19 (entered 18.99 9/16) adding under 13. CRM under 45 (entered 44.99 on 9/29) adding under 32 (entered 30.50 on 10/10, exited this position only at 40 on 10/14, +9.50 or 31% in two days) adding 2nd pos. back under 27, RIO under 18 (entered 16.88 on 9/29) adding under 8, and PCU under 19 entered 18.88 on 9/29) adding under 8 for 50% pops. SCHN under 28 (entered 27.99 on 10/6) adding under 20. UWM under 32 (entered 31.99 on 10/6, exited this pos. at 32 on 10/14, breakeven) and adding under 22 (entered 2nd at 22 on 10/10, exited at 32 on 10/14, +10 or 45% in two days) re-entering under 18. IBM under 90 (entered 89.99 on 10/8, exited at 97.86 on 10/14, +7.87 or 8.7% ) adding under 75, and HD under 19 (entered 18.99 on 10/10, placing breakeven stop on 10/14) adding under 12. Long the Euro around 1.3450 to 1.3350 (entered 1.3400 on 9/10, stop places at breakeven on 10/12...exited 1.3683 on 10/13, +2.83 handles or $3,537.5 per contract) and standing aside for now.

For what its worth,

Ken

One of the oldest Wall Street Adages know on Wall Street is: SELL ON ROSH HASHANNAH; BUY ON YOM KIPPUR !

Well, we'll see how it holds up this year (5769 of the Hebrew Calendar). But, there is a wonderful set up building for a dramatic slide on tomorrow's open, and an intra-day bottom, with a massive rally from around that low. I'd love to see the Dow test the low 8000's tomorrow, S&P test high 800's to low 900's, and the Nasdaq test 1500-1600, then reverse violently. If this scenario happens, a multi month low is a good bet.

The short selling ban ends tonight at midnight as well. Wouldn't it be interesting if as short selling becomes available again, it sparks a monster rally, thus ending the falacy that shorting causes markets to fall?

For what it's worth,

Ken

FED JOINS IN ON GLOBAL RATE CUT PROGRAM, but not enough...YET !

Here's a quick comment on the 1/2 point interest rate cut the Fed just joined in on, which is the first global interest rate move since the 9/11/2001 Terror Attacks.

Come on Ben, why only cut 1/2 point when that what was expected? You know you should have cut the whole point, and will before this is even close to being over? Your "slow to react" decisions are part of this problem, which we know you didn't create, but certainly haven't nipped in the bud.

The markets were setting up across the globe my midnight PST for a crushing decline, with Europe and Asia markets down 5%-10%, and US markets down another 5%. With this rate cut, the US markets have moved a couple percent higher in the overnight futures market at their best level, but while I'm writing this, have given it all back and are negative again now, about 6a PST, 30 minutes before the official market open. There may be a few hours to few days of rally, but again, a 1/2 point too little to do the job. The market knows they could have cut a full point, so will do its best to push whatever buttons needed to get what it wants.

For now, the losses of the overnight rally and turn negative on the day will scare the "you know what" out of Uncle Ben, and the potential for or actual crash that could happen next might finally cause the needed action by him and his FOMC buddies. A 1/2 point rate cut still doesn't fix the problem, which can be summarized in a few words now: lack of public confidence. Had our government decided to send each household $100,000, we'd likely have seen the bottom. True, that would cost about $3.5 trillion, but that is about half what the entire mess will likely take to fix, and they have known that for the last year. They know that if they play the "little at a time" game, they can get the public to "feel the pain" and take the medicine (paying the tax bill). They know that if they take the "right" medicine and hand out the $100k checks, they would get the response the country needs, but they'd all be unemployed. Too bad they aren't doing the fiduciary duty they signed up and were elected/hired to do: put the public interest in front of their own.

By the way, long time followers of these writings can check back to my July 30, 2008 comments titled: "SHOCK AND AWE SELLING IMMINENT...no stock will be spared!" I showed a picture of the S&P 500 that issue that had closed that day at 1265. It closed yesterday at 996, fully 21% lower in 70 days. Even worse, the Nasdaq is down 35% below its Summer high! More recently, the broad market indices are down 15% in the last week alone!

Hopefully, many took the warning and have been spared the pain of the last couple months, and those that follow.


For what it's worth,

Ken