Stock Market Technical Analysis 1/16/09

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Brian Shannon: Today is Friday the 16th of January 2009 and this is Brian Shannon from Alphatrends.net and we just finished another week here. And for the day the Nasdaq did finish with a gain of 32 cents but the week was controlled by the sellers once again. Although it was somewhat encouraging the way that we saw the action unfold here in the last two days. By that I mean we saw the move below that widely watched level of support at 2850. And typically when an important level breaks, you want to pay very close attention to the possibility that it might lead to a much larger break down.

But, typically, if the market broke... Let's say it did something like this. If we had seen lower highs coming into it the repeated tests of support there would be a lot more concern. But the fact that we were down more than 10% before the break, 10% quick before that break lower gave me reason for thinking yesterday that we wanted to be on alert for the potential for a trap below that level which is what we had happen.

So yesterday we saw the market rally just below that declining 5 day moving average and I was hoping that we would see a pull-back here today that created a higher low and held above the 2850 level. We did see that as well so now we've got 2 important levels to mark for trading early next week. We've got this low here at about $23.60 and of course we've got the low that we see here. But actually 2850 will continue to be... 2845 to 2860 is going to be important I think.

Next week begins earnings season really. We're going to see a lot more companies reporting earnings and of course we've got the change in administration. Speaking of that, you know here is a weekly chart of the S&P500 and George Bush was inaugurated on January 18, 2001. That week, the final week of his... I'm sorry the week close for the SP500 at that point at 135.88. Today it closed at 8506. Som in 8 years the SP500 has declined 37.5% under George Bush's watch. And on Tuesday we get a new administration so we've got... Bush came in at the beginning of the bear market and Obama is coming in here after a pretty spectacular, actually I shouldn't say that, after we've seen this spectacular decline. I don't think this is the end of it but clearly it's going to be easier for him to paint a, to look back in 4 years I think to say here's where the market was when I came into office. Maybe you'll have a chance to grow. We'll see. That's for 4 years down the road let's just keep taking it a couple days at a time.

So back to the 10 minute time frame. We have in here now a pattern of higher highs and we confirmed it today with this higher low right here. We're back above the 5 day moving average and we've got a little bit of resistance right up here obviously at 29 and a half. We've broken this downtrend here over the last few days. That downtrend did find support here twice, they call that live [inaudible], now we can start drawing the trend line out here to see if maybe that finds a little bit further support. But you know, overall we've got a very choppy market still. If they don't scare you out on the way down, they'll wear you out during this choppy action. But it obviously makes for some great trading opportunities and that's obviously going to continue to be my focus and it's probably why you tune in.

Anyways, it's going to continue to be very interesting. Oil was down 32 cents today, traded big volume again here today. For the week, it's the biggest volume the USO has ever traded. We're down close to the all time lows. As I said I was involved it in, I'm out now. It never got above that 5 day moving average of the 31 and a quarter level that I was talking about yesterday. We still have a downward slope to the 5 day moving average. The rate of decline is diminishing. That leads me to believe maybe we're running out of supply in here but it's just not quite convincing yet. Probably above this 31 dollars a share then maybe we can get a little bit of upward movement.

It's still obviously in a severe downtrend, so any rally that I talk about in here is going to be only short-term oriented and maybe good for a swing trade, like this rally back here, but still be very distrustful of strength in all these markets in down trends. The financials were down 31 cents again here today. They're still holding above the November, I think it was November 20 is that the day that was? The November 21st low, the inter-day low, [inaudible] I don't even remember closing low was 939 and the intra-day low was 867 so we didn't quite close at a new low but came down pretty close to that. News is getting real bad obviously and they usually don't release the bad news at tops. Bad news comes out near bottoms.

I'm not calling this a bottom because we're obviously still in a very severe downtrend. We've got these prior levels of support acting as resistance on the way up so it's stair stepping lower in a textbook fashion. but we're seeing again, a lower low today. And we did finish with a 3% loss today as well, so no signs of a bottom in the XLF. We're getting very extended to the downside. That doesn't mean it can't keep going lower but we've lost about 30% in here over the last, what is this 9 or 10 trading days. So you've got to be alert that if you're trading, shorting here then you've got to be quick with an exit strategy. Keep it short term oriented, especially as it gets more extended to the downside.

Semi-conductors were up 77 cents today. They got back above that 50 day moving average, not that that's really such a big deal. But we did see some nice volume in here and looking at a 30 minute time-frame, we are using the same pattern, we've got the higher lows in here and the higher high. We look at this as maybe we're getting up into some resistance here and forming an inverted head and shoulders pattern here. If it breaks past it, we can come up with a box and an upside objective of $19 a share. So, the semi-conductors may be some further upside in here but I would wait for probably another higher low to test that 5 day moving average, here in this 10 minute time frame.

Also the double levered long fund for the semi-conductors is the USD. So for instance, USD was up, the numbers didn't work very good today and I'm going to post an article about that today. But the semiconductors were up 4.57% and the USD was up 5.18%. So these levered funds don't always work the way they are supposed too. But they are great trading vehicles. Here's where we've got some resistance, about 1775. So hopefully we can get a little bit of a pullback once again, maybe we hold above the 5 day moving average, would be nice to see continued strength. It's obviously within the context of a larger downtrend but something that might be worth a trade opportunity.

The Russell 2000 was up 1.1% today, we had seen yesterday that the market had come down and tested that $44 level, let's back that up to an hourly time-frame. So we can see here that the 44 level and we also got back above this level on a closing basis which basically about where we closed yesterday, right at that 46 level. Same thing in all these markets today, we saw that gap higher failure, came down close to that 2 days VWAP. Later on in the afternoon we were able to push back above it.

Got really choppy in there though. I wasn't trading this afternoon. But you do have a higher low in here, we've got a little bit of resistance up here 4680 and 4725 and 4710 or so. This downtrend line was broken, we saw that also in the Nasdaq where this downtrend line, finding some buyers in there. So maybe we can start to see a rally emerge. If we get a little rally, maybe we'll pullback from that trend line again as it continues to form and then continue higher in here. It's the possibility that we get that little bit of a honeymoon period as people are talking about with Obama next week.

Don't trade the news, trade based on price reaction instead. You don't want to be making bets based on what's supposed to happen because a lot of times as we know, the market doesn't do what conventional wisdom expects it will do. The SP500 is probably the biggest reason for concern here. It was unable to recapture that 5 day moving average. It's also stuck below this prior level of support in here between basically between 8550 and 8660. It's really going to have to near that level and I'd say on a closing basis before we can have confidence that this might emerge into something bigger.

Positively though, we do have the higher low here on a 30 minute time frame so this level at about 8275 is going to continue to be important next week. And you can see in here, maybe we're forming this little head and shoulders in here too, inverted head and shoulders pattern. Right up to the 5 day moving average. So maybe we come up and test 86, pull back down again into 85. Create a higher low and then that 5 day moving average flattens out. Could be a good scenario that leads us higher. If we take the height of this pattern, add it to the point where we break out from that, it gives us an upward objective of $90 a share. $90 a share seems like a reasonable place where you would expect to find some supply but of course we're going to have all those little areas either way as well.

It's a trader's market. This level here will be important at about 83. Failure to hold that early next week then we could be in for just a continued break-down here. Continues to be a very dangerous environment.
AAATT
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