My Technical Take on a Random Bank Stock

I thought I'd make a back of the envelope technical analysis on one of the beleaguered bank issues.

As could be expected, the daily chart (first chart above - click to enlarge) does not tell us much except the obvious, namely that this stock is in a sustained downtrend on all timeframes. All three simple moving averages, the 20, 50 and the 200-day are in a downtrend and the security itself is below each and every one of them. Even more distressing (to a long) is the fact that the downtrending has accelerated since 5/30/2008 after a sizable gap down from 112.17 (a level that should act as a formidable resistance if and when the stock rebounds).

The question is: "will it ever rebound?" And it's a legitimate question as the current situation looks very bleak. But as always in technical analysis, one can (indeed should) always find some kind of silver lining and build the contrarian view. The only potential non-bearish clue that can be gathered from the daily chart is that the stock is extremely oversold with a 14-day RSI along with its 5 and 20-day moving averages at rock bottom levels. So in theory, if (and that's a big if) there were a rebound here (some kind of monster recapitalization story, a takeover.... it has to be spectacular), the upside could be sizable. In that scenario, a quick (but probably short-lived) move to below resistance around 110 could (and we're dealing in pure hypotheticals here) materialize.

To feel a little better about this stock longer-term and to start visualizing support levels as opposed to resistance levels, one has to move up the timeframe arpeggio and take a look at the weekly chart, the second one above (click to enlarge). One remarkable thing here is again the extreme oversold character of this chart with an RSI that's as low as it's been in 5 years. That tells us that an intermediate-type rebound or at least a sideways move to relieve this oversold condition should be imminent (on a weekly chart this could mean in the next 2 months). The problem is that the stock could go down considerably more before that happens. The stock has obviously broken several support levels. The next support I see is the plateau around 76 reached during June and July 2005.

In conclusion, if I had to go out on a limb and give one potential scenario for this stock (which will probably look ridiculous in a few weeks but hey I don't care, I am not a professional analyst), it would be that the stock kind of drifts down from here to around 75 and then either moves sideways or slightly up from there. For a more forceful rebound, some kind of spectacular bank-specific announcement would be required. As far as having this in a long-term account.......If your long-term is 20 years then OK. Otherwise, I don't see anything at this point even hinting at a basing process let alone a bullish reversal.....at least as things stand at this very moment (tomorrow's another day).

The Long-Term View

An interesting intellectual exercise would be to try and figure out where the current bear move is headed to, level-wise. You will read in most books on technical analysis and in particular in the old classics that you should always keep all your trendlines on your charts, no matter how old they are. A trendline that may today appear totally irrelevant because the price has deviated a great deal from it just might become relevant again in the future, should a spectacular move occur.

The chart above (click to enlarge) is the weekly SPY going back to 1999. Before saying anything else I must point out the spectacular double top March 2000/October 2007. This particular double-top might one day be exhibit number one in any TA book dealing with the formation. Moving on, I traced a line connecting the lows that started the 2002-2007 bull market, lows that were reached in 10/02 and 03/03. The market took off from there and that line has never come into play again....yet. Note that 2 points make a line in geometry but you need 3 lines to make a TA trendline. So I was thinking it not a ridiculous idea to consider this line a potential intermediate support in the coming months (or weeks as we might find ourselves sitting on it sooner rather than later), which would take us somewhere around 115 (value to be updated, this goes without saying).

Now, the market could rebound off that line (a legitimate trendline at that point) and we might have a bullish resurgence from there (stranger things have happened) or the market could dead-cat-bounce on the trendline then resume its hellish descent and be on its way to go checking out those historic 2002 lows (the official intraday low is 76.72 reached on 10/10/2002). Again, much stranger things have happened since 05/17/1792 and the Buttonwood Agreement but that's taking the long-term view a little too far.

DBA, what else?

A long idea for a change. DBA, an agricultural ETF (a commodity play, what else?), has been in a sustained long-term uptrend as evidenced by its sharply rising 200-day simple moving average (blue line in the chart above-click to enlarge) but has been consolidating for the past few months.

It certainly looks like the consolidation is over after this week's explosive bull move. DBA decisively broke out above its now rising 20-day and 50-day moving averages and above resistance at 40. A new high above 43.50 should be in the cards soon with a workable protective sell stop right below 37 where both the 20-day and the 50-day are now residing. Keep in mind that the sell stop should be moved up every few days or so to follow either the 20-day moving average or the 50-day moving average if you feel as I do that this position needs more breathing room.

Relative Double Top

Isn't this chart a beauty? If you didn't know anything about anything, you would still spot an almost too perfect double top. It's actually the chart of QQQQ (the Nasdaq 100 ETF) relative to (divided by) SPY (the S&P 500 ETF) and it's interesting to note how the Nasdaq led the S&P during the entire spring rally. It then proceeded to reverse at the exact same spot (again we're talking relative values here) it was at in late October 2007, right before the market meltdown.

The Nasdaq was one of the rare bright spots of the last three months and it took the market higher with it. The fact that it's leading the market lower now can't be a good sign and adds to the weight of evidence in favor of a resurgent bear.

Without getting into much detail, it's safe to assume the much too much-anticipated next leg of this bear market is definitely under way. I still had some legitimate doubts because of the resilient Nasdaq and the low volume of the last couple of weeks but today's 400 point destruction on high volume (click on chart to enlarge) leaves none. A test of the January lows is now just a matter of time.
I can't resist relaying this gem from CNBC.com:
"Friday's wild selloff in stocks, which many analysts saw as an overreaction, could set up a perfect opportunity for investors to go bargain hunting."
What else did you expect from CNBC?

Currency Upmanship

If Ben Bernanke's goal with his remarks on last Tuesday was truly to strengthen the dollar, he should have made sure that his European counterpart Jean-Claude Trichet was not going to steal his thunder and mess it all up 3 days later.

In what seemed like an exercise in one-upmanship between the two central bankers, Bernanke's assured his audience on Tuesday that, "in collaboration with [his] colleagues at the Treasury, [he] continues to carefully monitor developments in foreign exchange markets" and that he will be "ensuring that the dollar remains a strong and stable currency".

This came as quite a shock to most market participants as that was the first time the Fed chief had ever mentioned the dollar. Talking up the dollar has traditionally been the job of the Treasury Secretary, most recently Hank Paulson with his robotic, repetitive, ineffective (and maybe a tad insincere) declarations that "we believe in a strong-dollar policy". The thinking went that, if Bernanke himself was saying it, it probably meant some kind of shift in Fed policy was in the making and a decent dollar rally ensued (see EURUSD chart above).

But then what do you know, a few days later, Trichet, not to be outdone and ditching his customary ECB-speak for once, all but telegraphed a July rate hike "to prevent [the dreaded] second-round effects and ensure that risks to price stability over the medium term do not materialise" (this part was ECB-speak). This, needless to say, sent the Euro flying and the dollar diving, reversing the Bernanke dollar rally as can be seen in the 30-minute chart above.