DAILY REPORT (11/12/08)
Today was the inverse of yesterday, as the December Dow futures contract traded lower as the night wore on, fell even more once the day session opened for business, and then slowly began to rally around lunch time. At 2:45 pm EST the December Dow is down 100 points at 8,775 after trading as low as 8,535 earlier in the day session. This of course is a lower low and an indication of weakness. The Dow had rallied all the way back to 8,850 this afternoon, but seems to lack conviction. I know that is subjective, but the market does have a certain "feel" to it and you learn to pay attention to it. Folks had a chance to digest the new loans to AIG and it seems that few are in agreement, but I really don't think Paulson could care less. He'll be out of a job in two months and it will be someone else's mess to clean up. He just wants to bail out as many of his cronies as he can, while he still signs checks.
I am watching, carefully looking for signs that the Dow is about to crack and there is a key number, 8,799, and I will be anxious to see if the Dow can close below it or not. I say key, because the December Dow rallied from a closing low of 8,011 on October 27th to a closing high of 9,587 six days later, on November 4th. That is an increase of 1,576 points and slightly less than 25% of the bear market decline. Assuming that we had made a decent bottom, any good counter trend move would have retraced a minimum of 38.1% and yet the Dow fell shy of 25%. Now what I am looking for is a close below the 50% retracement of the rally, and that means a close below 8,799. I think of it as a line in the sand. If we can close below the 50% retracement, it increases substantially the likelihood
of a retest of strong support at 8,146. This will be the third such test and I have to believe that it will not hold. If that proves to be the case, then you can bet that we'll go on to test the Dow's 2002 closing low at 7,286 sometime this month, and that will catch a lot of people by surprise.
I don't know how the Dow will close today, but I continue to see weakness with RSI and the histogram pointing lower and the Dow scraping the bottom of its trading range earlier today. As you can see above, price is being compressed into a smaller range, and in a bear market the odds favor a break out to the down side. Most folks became quite optimistic when the Dow "bottomed" on October 27th but the back-to-back 90% down days last week are an ominous warning that the worse is yet to come. Personally, I don't think we've even scratched the surface yet. Finally, we initially saw some divergence between the Dow and the Transports last week, but the latter now seems headed down as well.
After a minor rally, the commodities are selling off again and look like they would like to go lower as well. There is no sign of help from overseas as the Baltic Dry Index may have bottomed, but shows no intention of rallying any time soon:
I'll have to admit that I have never seen such a horrible chart before! Today copper and oil are trying to make new lows for the entire move down, and gold has fallen back to the 735.00 support as it has done countless times over the past month or so. A lot of this weakness can be traced back to the strength in the dollar, and today we see that the December US Dollar futures contract is trading up 1.26 at 87.65 and that is
reasonably above strong resistance at 87.37. If it can close here, it would be above the October 27th closing high and quite a bullish move. On the other hand, we just gave US $150 billion to AIG and it now looks like we'll give a minimum of US $50 billion to the auto makers, and that is probably just for starters. The one question no one seems to want to tackle is how will this aid lead to increased sales? Deflationary pressure is increasing with each passing week and that means that Americans will consume less with each passing week. The average consumer is strapped with too much of
every kind of debt imaginable and he's worried if he'll even have a job tomorrow, so there is no incentive to spend. Americans are going to try and engage in a very strange behavior known as saving and that is the last thing the Fed wants to see. All of this serves to put short term upward pressure on the dollar, but eventually the oversupply will win the day and drive the value down towards zero.
ebo@dtanalysis.com
Dow Theory Analysis SAC
November 12, 2008
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