December 28, 2008

Head and Shoulder Bottom?

A lot of people have been mentioning a potential Head and Shoulder bottom forming on most of the stock indices so I thought I'd throw in my two cents on the subject.

Shown above (click to enlarge) is the daily chart of SPY, the S&P 500 Index ETF. I have marked the potential locations of the Head and the two shoulders. It should be understood that, as long as no break of the neckline has occurred, which is to say as long as we don't have a decisive break above 90, the formation is not yet a Head and Shoulder. What makes this an interesting potential H & S is the fact that we're about to enter a new year and any move that takes place in the next few weeks will be scrutinized, analysed to death and thus could be very significant. Also, the 14-day RSI has been trapped in a bearish [20,60] range for the last 6 months during which SPY went down some 40%. The RSI is now hovering near 50 and any breakout in the SPY accompanied by a breakout in the RSI could launch a serious rally.

As far as a potential target, the vertical distance from the head to the neckline is about 23 which, projected from a breakout point of 90 gives us 113. A more conservative target would be 109, the top of the window (or gap) formed on 10/06.

December 14, 2008

We're Not Day Traders

You know day traders have finally achieved legitimacy when a Treasury official answers a question with: "We're not day traders".

The question was about the warrants Treasury has extracted from the banks it bailed out, which have already lost a third of their value, something of the order of 9 billion dollars. The complete answer of Neel Kashkari, the director of Treasury's Office of Financial Stability (otherwise known as the TARP Czar) was:
"We're not day traders, and we're not looking for a return tomorrow. Over time, we believe the taxpayers will be protected and have a return on their investment."

OK, first of all, day traders aren't usually looking for a return tomorrow, they're looking for a return today. Second, trying to turn a losing day trade into a winning swing trade is such typical day trader behavior. The next step is either trying to turn it into a long-term tax-deductible loss or, alternatively, ruin.