Volatile Market

We would like to say that the market makes some sense this evening but all we can say is that the market is suddenly a treacherous place to be. Just looking at Thursday’s trading you can see 50 and 100 point prices swings in the Dow in very short periods of time, up and down.

Looking over the past five days the major highs and lows are 13,500 last Friday going down to a low around 13,250 on Monday morning, then rallying to 13,500 on Tuesday morning with another pullback, this time down to 13,150 on Wednesday. Then there was a quick rally taking the Dow up to 13,300 and another fall to 13,150 before a major rally to end the day on Wednesday, up to 13,350. Then on Thursday, the Dow was up and down 50 to 100 points a crack all day long until the end of the day when it popped up to 13,500 again before closing just over 13,450. What a ride! All that craziness and after five days the market is about the same place it was when it started.

In case you are wondering, this type of action usually means the market is trying to change directions, at least temporarily. But, we can’t recommend long positions in this volatility. Well, we probably can’t really recommend short positions either for the same reason but for the next few weeks the market should be trying to recover some of the ground it lost over the past few weeks. Normal retracement levels are, according to Fibonacci, about 61.8% so let’s take a look at where that would put us.

By just taking a general point of reference we can make some pretty good assumptions about the next move up based on the partial retracement of the down move. That move started with the Dow right around 14,000 back on July 19th and found a low around 13,150 over the past few days for a total move of about 850 points. A natural level to move up to would be 61.8% of 850, or 525 points, taking us back up to right around 13,675. This seems like a reasonable place for us to look for a near term high.

While that analysis is ok, it only gets at a couple of issues and leaves several unanswered questions. Was the low the 13,150 number we have already seen or will there be a new lower low in the coming few days? Does the retracement have to be 61.8% or is 50% more likely? When is a good time to be looking for this high? As this is the first leg of the down move, is it likely that the second wave will move higher than the 61.8% level? Are other indicators showing different signs or confirming that a second wave is starting?

All of these questions have merit but we must take the time to set our boundaries for trading. So, tonight, we begin with the premise that the market is in a “corrective” up move that should take us up not too far from where we are tonight. While specifics are far and few between at the moment, we at least have the groundwork for possibilities. We think the fall off from the next move up will be dramatic as most third waves usually are. A small third wave looks like Tuesday’s trading when the Dow lost over 300 points in one day. The next third wave will last more than a few days and probably give the traders a mighty shock of reality.

A couple of our favorite indicators are giving us headaches. The first is the five day volume indicator which is now showing nearly 1 billion shares traded which normally would be an overbought signal; but, with the volume on the NYSE so high, this number is remarkably large which can be a bad signal. The other is our momentum indicator which can’t seem to get out of the negative. These two indicators are definitely Different.

We do not believe this move should be played and we will advise you when we think the third wave is going to get underway. Right now, we can only speculate and it’s too early to guess anyway.

In the news, our main monthly event occurs on Friday morning when the jobs’ report is released. We thought it might have carried more weight but tonight we don’t think there will be much action based on the number.

In other news, we are not shocked by the American Home Mortgage (AHM) that announced that it would be closing its doors on Friday. The stock lost about half of its remaining value in afterhours trading. This news should be a harsh reminder that the mortgage industry is in serious trouble but the world is telling us that the subprime issue is contained. Well, guess what, AHM does do subprime, it does Alt-A. Alt-A is mostly the jumbo loan market, those loans too large to qualify for most Mortgage Insurance. One of the problems for AHM was the undocumented loan apps but don’t forget this is Not subprime. Prime is going to be next.

We want to conclude this Update by mentioning all the people who were concerned about our family. We appreciate your thoughts of us last night after the incredible disaster that occurred here. The problem is that there are so few ways to get this thing out of your head especially as we look out the office window and see the collapsed bridge. Continue to pray for the families who have lost loved ones or who have loved ones in the hospital. And, again, thank you for your concern for us.