Let's make this short

The stock market is a probability game and not a certainty. That being said, there is a high probability that stocks, and now also gold, silver, other commodities, have started the next leg down. This knowledge is a product of fairly diligent research, stats,Elliott, and conceptual interpretation of how markets really function.

The last post was saying this exactly, not including gold and silver, just in a less direct way. It seems a more direct approach is necessary.

The next leg down could devastate 401ks, wealth, and natural order of things. If we are in the next leg down, as the Rose believes is most probable, this is not something to be excited about. Many people have no idea how the market works at all yet their life savings are tied up in this game. Your 401ks are not necessarily safe... are not likely to reach this level in a long time if ever at all. Even those not involved in the market at all can be influenced by the social mood of a true stock collapse.

Don't take the word here as if it were the Word... do your own research... starting with Prechter's last Elliott Wave Theorist if you haven't already read this. It's very inexpensive and the information is pure gold. The last issue is of particular importance. Bob Prechter has oft been mentioned on this sight because he is one of the very few people out there who has both the ability and desire to provide a clear picture of what is going on. No more will be said except that again the Rose has no affiliation with EWI other than a paid subscription. This is true respect for the big picture overview that they have provided... in the way that things should always be conducted... with no strings attached.

Keep searching further until you find what makes sense to you and always realize that probabilities are just that... in this case probable cause for due diligence.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Let's hope we don't get 'caught napping'... the long view can be short-sighted...... (Bulls on Parade)

Support our Troops...

Just because we peer over a flat horizon does not mean that the world is flat. Just because stocks have generally gone up over time in the US markets since the 1940s does not mean that it will continue to do so. Is the long view really as long as we perceive it to be?

We have not reached a preliminary target of 1150 on the SP. Please understand that this is just one line in the sand. Much more subtle markers are needed to examine the exchange of millions upon millions of dollars.

The Heisenburg Uncertainty Principle, Type I vs Type II error, sensitivity vs. specificity... they are all saying the same thing... the more you know one thing the less you know its counterpart. Therefore, there is no argument whatsoever that trying to be too fine in the market is a big mistake. My belief is that a systematic method can be employed to get you in the ballpark. From there, once the probability is stacked in your favor, it is important to stick to the system and realize that trying to be too fine can mean opportunity lost. At last week's high we were within 5% of my target... and more importantly... statistics imply that that the weather MAY be transforming. Just realize that the stock market is a multi-layered pyramid scheme... and then you will understand that the further we go up the more bearish we should become.

For the more subtle details of this understanding, one that is translatable into quantified methods, Elliott Wave Theory and statistical analysis can help. I won't discuss statistical data but I can say that, though I emphasize while I don't always agree with him, though I do greatly respect his analysis, I think that Bob Prechter provides one of the freshest perpectives in the market and is on the money here. I also want to make it clear that it can take years, decades, or lifetimes, to become a masterful Elliott Wave Technician and since I don't have that kind of time I have chosen to look further for methods that expand upon that knowledge. For individuals who really are masters in the art of Elliott Wave Theory that may be all that is needed. Statistics layered upon Elliott Wave Theory may provide even greater insight. I did see that Mr. Prechter was at one point looking for a statistician so if this interests you perhaps investigate further. Overall, each individual is different, of course, and must do what he or she thinks is best.

All of that being said... nothing in trading is a certainty, and risk management is of paramount importance.

It is also interesting that while my stats are showing potential weakness in stocks I have not encountered that as of yet in the corresponding data points for gold and silver. It would seem logical that a strengthening dollar, decline in stocks, and decline in commodities priced in dollars would all go hand in hand. Yet I am not seeing the smart guys in any way indicating that the rise in gold/silver is over... this could change and probably will but it does make me wonder if a fall in stocks could be accompanied with a continued rise, or at least modest drop, in precious metals. Just something to watch at this time.

One other thing that needs to be emphasized... on a more general level, including but not limited to the stock market... is that dogma can be one of the most limiting elements of this planet... it hinders people from realizing, among other things, that Black Swan events are, in fact, quite common, provided that you take a long enough view... At this transitory moment in time in the market the 'Bulls are on Parade'. An inflection point....?




"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Taking Stock

Hey boys and girls... it's a great time to take stock, so to speak...

It's been awhile since the 'Rose' has examined the stock market prices, largely because the conditions and circumstances laid out in previous posts are still playing themselves out. This post gave potential scenarios for, the long-term, intermediate-term and short-term. This was based primarily on Elliott Wave patterns and market psychology. In the short-term, the idea of selling was premature, though to be fair, it was indicated that the short-term scenario held the least clarity of the three and I was therefore quite careful in this regard.

Since that time I have come to understand that, for me at least, stats and back-testing with the proper think-outside-of the box indicators add layers of understanding with a superior precision. In this casino, the smart money, like the casino bosses, don't like to gamble unless the odds are heavily in their favor. The smart money 'gets theirs.' Quantitatively assessing what the smart money is doing and is likely to do next is of tremendous value... and... in accordance with anything of value... requires hard-work, skill, perseverance, and luck.

If you can figure out what they are doing and surf the waves that they generate then you are on the winning team. If you've ever, surfed, or even if you haven't, you can imagine that you can never decide what the ocean is going to do next... you can only gauge where the waves are likely to be and then make sure you are on the right side of things. If I had more time to do so I would spend a lot more time time with historical price data software to incorporate the stats, my understanding of how the market works, and other factors to quantitatively describe probabilities and then only trade when the probability was favorable.

I don't have the time to be that thorough but I can share a few salient points from what I have learned that may be of help...

First, the longer term picture has not changed... data suggests strongly that we remain in a bear-market rally and nothing more. There is no 'new bull market', though if we begin to hear that persistently the rally will likely be about done. This may suggest that if you are not a trader but a long-term investor with 401ks this could be an opportunity to start cashing out... you can read what Bob Prechter and some others have to say about this... its a delicate topic and no one should take anyone else's advice alone... certainly I am not here to offer advice... just something to seriously consider...

Second, despite the large rise in the market, there is nothing to suggest that bears will not continue to be squeezed in the near to intermediate future. The smart money has been buying, or at least not heavily distributing, ... and will have to sell at some point... but it remains dangerous to short as of this moment... though we are certainly in a range in the market where that could begin to change... However... it is important to realize the third point...

Third... While we have taken out many expected upside targets, and certainly have gone up enough to begin a sharp decline, it is always pure speculation to try to determine where exactly the market will turn. The best traders can do, in my opinion, is to look for potential turning points... and then wait for evidence that the smart money has changed focus to confirm the change price action. That being said, the smart money is likely to start selling when it 'feels' almost impossible to short... just like the market bottomed with 2% bulls in March... when it 'felt' impossible to buy stocks because 'they always go down'. At this point I do not believe we are there yet. It is also true that certain targets have likely been tentatively ascribed by the smart money... just as the 670 region was probably agreed upon for the downside... though these numbers change depending on what the smart money and everyday investor feel, and do, as time progresses.

Obviously, it is a bit frustrating to talk without numbers and patterns to back things up... but I can't divulge that, and each person must use their own methods... I do think Elliott Wave Theory provides some solid probabilistic means, particularly when it comes to 'impulse waves'. I would further recommend that those interested check out the work of the Turtle Traders and the like... for a different perspective, though I neither endorse nor have any personal affiliation with anyone.

Having said that there is no way, without being on the inside, to know where this market is likely to top, I can give one point where I am at least looking at and would await confirmation for... that is the 1150 region on the SP... I like to look at the weekly charts, as it seems many look at these less often than the daily ones. I also think point and figure charts are quite nice because they break down price action into a simpler format. One thing I have learned is that the more 'traditional' and indicator is, in the sense that many people are looking at it for a turning point, the less likely it is to work... though I don't have numbers to back that up quantitatively. Hence... if everyone is NOT looking at it, it may be worth looking into. Also... the 1150 region represents an approximate 61.8% retracement of the top region of the bear rally in 08 and the market low in March of this year.

(1440-670)= 770... 770*.618= 476... 670+476=1146... perhaps a point of awareness...

Also note that we just bounced off of the downtrend line... which very often at least creates a temporary pullback (which it did right here), and may indicate that, since we are in a bear market, we may soon be headed back down, either from this region or after a false and temporary break of this trendline. Again, it is time to start looking for turning points... but such turnings points, until confirmed, can only be fairly described as speculative in nature...





Lastly, to emphasize the weekly chart, take a look at the price action that drew in quite a few bears in June/July... a healthy correction... on this chart you can see that it bounced smartly off of the middle of the weekly Bollinger Band... 20 week MA......



Happy investing and trading...







"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

It's Time to Revisit the Inflation/Deflation Debate

It was the summer of 2008, oil prices were through the roof, the government was creating money like it was candy, gold was ‘going to $2000’, and the dollar was ‘on its way out’. Ahhh yes… I remember it…… as if it were only a year ago…

At that time you could find articles about inflation everywhere (especially in the mainstream media) and almost no one was talking about deflation. For me, something didn’t click, and I decided it was worth serious investigation. I wanted to understand what was going on, I realized the importance of such an understanding, and I wanted to share my finding on here when I was done.

Early in the fall of 2008 I created a post each on inflation and on deflation. In the search for the truth I remember at that time typing in ‘deflation’ into you tube and finding that only a few videos came up. One of them showed some maniacal guy talking about deflation and the book Conquer the Crash. I don’t know who he is but he certainly offered a fresh perspective at the time, and I couldn't get him out of my mind (I dare anyone to try). He also, by the way, lead me (indirectly) to Elliott Wave Principle and the great work of Leonardo Fibonacci... (As a side note, for those interested in math/science/nature or even history, he is one of the most interesting figures you will ever come across. In addition to discovering mathematical ratios that underpin everything from the spirals of the galaxy to the human figure to the stock market, he also brought the Arabic numeral system the Western World. If you ever thought algebra, calculus, or economics was boring/confusing, imagine what it would be like if you had to learn them by using Roman numerals!)

Anyway, the question at the time was... are we going to face inflation or deflation in this economic crisis? On the one hand, if the dollar was a measure of the strength of the country, certainly as compared to creditor countries such as China and Japan, then certainly it looked like inflation would rule the roost. This looked to be especially true with the way the 'Fed' was printing money, via 'quantitative easing.' Yet, on the other hand, it seemed to make sense that the implosion of housing bubbles and credit bubbles should lead to deflation, not inflation, as money would be less available (less credit) and prices would have to fall to accommodate this...

Ultimately my conclusion was that there was a tug of war between the deflationary credit collapse (reminiscent of the 1930s style depression) and the Fed's inflationary plan to continue creating money, despite the poor balance sheets of the government and many of its citizens. Given the size of the credit collapse, it seemed apparent that we would get significant deflation first, especially as the global economy contracted, followed a number of years later by some serious inflation. I offered these conclusions to a former professor of mine at UCLA... the one, by the way, who first really turned my attention to the stock market with the company Cameco (CCJ).

For over a year I have held that this conclusion was the most likely to transpire. The dollar is the current global reserve currency. Hence, the contraction of the credit expansion would be expected to cause deleveraging and the need to raise dollars. Additionally, strapped US consumers would have less access to dollars, and the combined effect would strengthen the dollar until the credit implosion started to ease, causing prices to decline in dollars. The contraction of the global economy would further fuel deflation, as Europe and emerging markets would not have as much money to buy products either. All good,(well in terms of a cogent argument at least), so far.

However, there was always one factor that could potentially change things: an accelerated collapse in the dollar from international policy. I am writing this post now because recent news offers a warning in this regard. What if, for some crazy reason (well maybe not so crazy), China decided to stop buying treasuries or to stop taking dollars? What if the middle east stopped accepting dollars for oil? What if these countries decided that, even with the immediate term strengthening of the dollar, the long-term picture looked so bleak for the dollar that it was not worth the risk of taking on more now? What if the deflationary process caused a return to a different currency than the dollar? What would that do?

I am not in any way certain of the outcome, but the logical conclusion is that such an event would accelerate the inflationary process for those holding dollars. That is to say, the inflationary process would kick in sooner. I would expect, further, that we might see continued deflation in US domestic services and products, such as US housing prices, commercial real estate, haircuts, house cleaning, etc., but less deflation and even inflation (perhaps significant) in items that are purchased globally, such as oil and other commodities. In fact, I would not be at all surprised if the recent moves up in gold and foreign currency, against the dollar, were due to speculation of a news release regarding this matter.

The Wall Street Journal recently published an article titled "Dollar Sinks to Low for the Year... Investors Switch to Riskier Foreign Assets in Gamble on Global Economic Recovery. " The article primarily focused on the reason for the dollars' decline on a 'carry trade' where investors could borrow dollars cheaply and get higher interest rates in other currencies, albeit at a higher risk. On the other hand the article only gave lip service to their findings that the UN had announced that the dollar should be replaced as the primary reserve currency and that 'China would be the first investor in a new IMF series of notes'.

What I saw, in between the lines, was that the exact opposite focus should have been given. The creation of a new global currency, or basket of currencies, could drive a stake through the heart of the dollar. I mean... $5 a gallon gasoline may look like child's play in comparison to what could occur should the dollar no longer be favored or even accepted throughout the world. In my opinion, this labor day article should have made headlines throughout the world, rather than being casually mentioned on a one page news blip on Bloomberg dot com.

All of this being said, in the short-term to medium-term, dollar and commodities (and stocks too for that matter) tend to be largely influenced by trading phenomenon. That is to say, by the time the newspapers are headlining stories on dollar lows it probably (hopefully?) means we are getting near the short-term bottom. What these stories do mean, in my opinion, is that the dollar's short to intermediate -term revival could be muted (well... likely not completely but certainly mitigated) and its ultimate weakness exacerbated by the implementation of this policy. Perhaps dollar strength in the future should be looked upon as an opportunity to exchange at least some of your greenbacks for something more substantive, including but not limited to other paper currencies, such as the Swiss Franc. Consider it, at the very least, and insurance policy.


I want to close this discussion with a very interesting essay, Gold and Economic Freedom, which was written by Alan Greenspan in 1966. In it, he argues that to maintain economic freedom you must have currency backed by gold, or at least by some other hard asset. The idea is that free market economics work just fine, and markets regulate themselves beautifully, provided, that is, that the lenders have real money (gold, silver, etc.) at stake when they lend and, essentially, are fully accountable for their actions. It's something to ponder, especially in the the light of who wrote this article and when it was written.


As Linda Richman (Mike Meyers) used to say on Saturday Night Live's Coffee Talk, "Rhode Island is neither a road nor an island... Discuss."






"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Knowing is worth Knowing

Material Added at end
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I know I know... no posts have come along in a long time. But... my friends... that is only because it has been a ripe time to dig deep, experiment, and really figure out how the market works... if that is possible... and never to post if I don't have anything meaningful to say or if, as is often the case, my non stock market life must come first. I am not a professional trader, as you know, and I hope you understand that in this economic environment the first priority is life itself. In fact, I would argue that the meaning of life is.... life!

But, I digress. Let me add some pieces now to the puzzle if you will... the puzzle in the making which in the end hopefully benefits us all.

I have learned that the way the market really works is entirely different, in fact intentionally so, from everything one learns in the media or in economics classes or just about anywhere else. The market is a business in which one group takes from the other... the educated/informed and skilled from the crowd. In order for the true pros to make their huge livings somebody has to pay their bills. Only in times of expanding economic growth or expanding credit can more money flow in from the sky in such a way that everyone can just put money in the market and watch it go up over time.

I believe that those days are over and that, in the same way that one who stares over the ocean's horizon comes to the conclusion that the world is flat so, too, would someone who has been involved in the markets since the 1940s or later think that the stock market has its ups and downs but generally goes up over time. No... the market is in fact a huge pyramid scheme and I have written a whole post on this which at some point deserves to be posted (I know it sounds like Yogi Berra)... but I am feeling a bit playfully enigmatic at the moment.

I can say that the multi-month rally in the early part of the year, mentioned/predicted several times on this blog from no genius of my own but from my increased learning and understanding, at least attempt of understanding, of the smart money in the market, has come to pass. Some of the potential gains since March have been staggering. And it caught most people by surprise... not that it went up, but how quickly and how persistently it has risen. That is by design.

So where do we go next? Well, I am no bearer of a crystal ball or a Philadelphia Experiment time machine but I can say that the market is a bit like science in that if one learns how to read the right tea leaves evidence of the most probable events can be at least hinted at. I like Elliott Wave Theory in this regard but it is only one piece of the puzzle. There are many many other components that are important to watch and try to understand. The more components that point in the same direction the more likely the move. I cannot say that I have hit the 'promised land' or if I ever will in the markets but I am hoping for incremental gains in understanding. Right now, I want to say that I personally believe the market is due for a fairly serious correction, after we get the bounce off of the 880 region on the SP (resistance turned support) that started today. I have no idea where that bounce will end, of course, but I can say that we should see some serious selling once we break the 880 region with conviction.

However, based on the sentiment of the crowd, based on the Elliott Wave patterns and other sentiment indicators, it is unlikely that the rally that started in March will end on the next major sell-off... no in fact there is still too much hesitation among the masses after the brutal sell-0ff since Oct 07. Remember the rally last March through May? In the beginning everybody and their pet iguana was short the market, they got relentlessly squeezed, and then by May some people started talking about the next bull market... right before the market began to tank in the summer and then REALLY tank in the fall?

People were shocked by the fall just as many have been surprised by the sharp upturn after the 800 on the SP was breached on the downside and the market was going to 500 or whatever. No... I read a investment broker guy (name not released)several months ago talk about 680 as the bottom weeks before the market bottomed at... a daily closing price of 676. Coincidence?

I believe that the market has much much further to fall but that we are very likely to, after certain pullbacks and sideways action, eventually see at least 950, more likely 1000 (the Obama Nov 4 rally... this is a very important line so please note this), and perhaps even higher in a rally that still has legs in the intermediate term and may last all year.

Why do I say this? Based on Elliott Wave patterns, historical price moves after the kind of selling we saw, and most importantly perhaps the continued pessimism in the markets among the masses. Ideally, we would see the markets peak and go back into the next leg of the bear market when the media starts talking about the 'new bull market' or the 'resumption of a normal market' or 'time to invest for retirement once again;... that kind of jargon. It will take a lot to shake the sell psychology after the brutal downturn since the market peaks but in all likelihood it will happen. Why do I say that this will not, in fact, be a return to a normal market? Well, we have baby boomers retiring, a country that has borrowed to the hilt and must pay back, and a society that is going to have to live with less money and less money to spend in the economy and in the markets.

People may want to buy stocks but if they don't have the means or the credit to do so, and if the enormous baby boom generation that pushed up the market for so many years starts making their huge withdrawals... you have to wonder how stock markets can 'just go up over time'.

That is not to say that one cannot be successful in the markets. It just won't likely be via buy and hold any time soon in my opinion. It will take a new set of tools... well... the tools that the smart money has always had to be honest, but tools that the ordinary 'beat inflation with your 401ks and let it sit over time' folks will have a hard time doing without.

Enough for now. I gotta go to bed. By the way... I have no affiliation with Stockcharts.com but more and more I begin to appreciate the services that they provide. I recently bought a financial book on their site, instead of on Amazon, to support them and encourage others to do the same, or get a subscription if you think it is worth it to you. This is just one of the many gold mines that they offer every day:



It is clear that to succeed, should one be one of the lucky ones, one has to learn to ignore 90% of what people think is important and examine indicators that really matter. What are these? Well... I am trying to figure that out. One of the indicators you just don't hear your friends talk about (unless they are in the biz) is the Mclellan Summation Index. There is one for the Naz and for the NYSE. It is not full proof but I can tell you one thing... take a look at the RSI moving up from below 30 and the RSI moving from above 70 down... take a look on longer time frames as well...

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Added:

I wanted to fill in some points that may be helpful.
First, on the direction of the markets from here:

Long Term (years)
Longer-term we are still in a bear market and what we are seeing now is almost certainly a counter-trend rally. Credit implosions are serious and, combined with other factors such as retiring baby boomers and government debt, as well as how quickly the stock markets have risen since 1982, there is the potential for considerably more downside in the markets. I mean... some smart people like Bob Prechter and EWI suggest we end in the low 1,000s (I can't be more specific than that)... or lower over several years. Brutal... and they have been wrong before (everyone has except J.C.... not talking about Cramer here ;))... but they have also been very right and are not the only ones to say this. That is the the big picture overview... and it certainly represents the worst case scenario for the market bulls. Regardless of where it ends it cannot be denied that we are in a long-term downtrend right now and that any reversal of this is guilty until proven innocent. However stock markets do not go down in a line and we have seen this since March. Below talks about what is almost certainly a counter-trend rally based on the fundamentals and technicals of the market right now.

Intermediate Term (months to year)
The highest probability outcome is that over the next few weeks/months we should at least see 950 on the SP, probably 1,000 ball bark, and perhaps higher. However it may go down significantly before that. This is based upon several factors. First, Elliott Wave Theory has typically been particularly accurate when it comes to 'impulse waves' such as the one we have been in since the market peaks. Withing such patterns we see a corrective '2nd' wave that retraces the first wave... typically, though not always , it retraces at least 33% or so of that move (according to Elliott Wave International... I believe I read that there but please don't quote me!) which it has not yet done (1576-666)*.33 = approx 300. 666 + 300 = 966. Note also the Fibonacci 38.2% and 50% levels from this move... these are areas I am certainly watching... in conjunction with the Nov 4 level... the smart money, I assure you, has a target on the upside just as they did on the downside. It is a good idea now to at least look for potential areas that these could be.

Of course retracement numbers are not exact but the ballpark of 950 at a minimum seems reasonable. Additionally, the length of the downturn, time wise, suggests a fairly extensive rally in time as well, even if this rally has quite a bit of sideways action in it. Thrildy, and importantly, the sentiment of the crowd, as measured on sentiment trader.com (great site) demonstrates that we are far from the optimism among the crowd that would give the big houses incentive to sell into the next wave down. Remember, positive sentiment means not only more retail players on the long side but also more people putting money back into mutual funds, etc.... so the amount of money involved with a return of sideline cash into stocks should sentiment among the masses really pick up is huge.

Short Term
Here is where the greatest uncertainly of the three lies, however there are some strong signs that the market is getting close to a serious downturn. In addition to the Mclellan Summation Index Chart, shown above, (also check out the one for the SP... they can both be found in the market summary link on stockcharts.com). is moving below RSI 70 at the moment, we also had the 'rabbit ears' RSI bounce at 70 (see chart below)... rabbit ears in stock price and RSI/other oscillators is one of the more reliable indicators from what I have seen... it is a quick double top that fails... essentially. We also had a clear breaking of the trendline in the markets from the beginning of the rally. Additionally the 20 Day MA, which is the middle of the Bollinger Band, was breached, as was the uptrending parabolic SAR, and the MACD turned bearish as well. Further... we have seasonality... sell in May and etc... it certainly happened last year... as did the rally occur in early Spring... just like last year. We also have the Chaikin Money Flow Index going from way above to around the zero line. Finally, sentiment indicators show that more and more come-lately's have been piling back into stocks.

The one thing that has not yet turned bearish is the overall RSI reading, which remains above 50 for the moment...

So... this is either a serious fake... which it could be... or we are on the brink of some serious selling in the near term. I personally am looking for a bit more of a rise off of the bounce from 880 up... and I am a bit concerned about the crowd's still fairly pessimistic view towards stocks right now (though more bullish than have been for a while... bullish enough for selling fo sho). Also, I am a bit concerned about a potential fake-out if/when we break 880 to the downside... we have seen many such events in which the smart money intentionally sells to draw in shorts and then reverses quickly for a squeeze. This happened most clearly when we broke 800 for the first time and then quickly shot up to 950... So... my actions right now have been to liquidate my long positions and initiate some small shorts... though I am certainly wary since we are in an intermediate term up trend at the moment. Beyond that I have to see what plays out... the set ups are there for sure...




A bit more on what I believe I have learned about how the markets work... which may be of benefit to you perhaps...

I believe that the smart money... that is to say the big investment houses and well trained groups that take very little chances with their money and have the best and the brightest working for them. The kinds that have every statistic in the book to see where the market has gone historically and where it is likely to go next. This group also has the money to move the markets in the short term. Even Dow, he of Dow theory, admitted that markets can be manipulated in short to intermediate time frames. And so it is. However, Dow also state that markets cannot manipulated in the longer time frame. Also true... there is a tremendous amount of selling pressure that had to be squeezed out of the market thus far to account for all of the inflation of stock prices due to credit expansion, economic growth that is severely correcting, withdrawals from baby boomers, and many other factors. There is likely more selling that needs to be done in my opinion. The big houses cannot undo the underlying fundamentals for the long time frame. What they do want to do is time the market so that they have someone to sell to, someone to buy from when markets get oversold, etc.... they spend a lot of money, (I can't prove this but I find it highly likely) on statisticians, economists, mathematicians, etc. to determined what the sentiment of the crowd is and when, based on historical data and current feeling, is the best time to buy/sell.

This is not a game... it is a carefully orchestrated science with billions of dollars at stake and hence billions of dollars involved in protecting that business. They probably look for probability of highest and most opportune times to make moves just like we should be doing. The difference is that their moves can Make the Market, at least for the short to intermediate term. (We can't do that... hmmm I guess if you are going to go surfing you have to understand that you ride the wave... it doesn't ride you... well sometimes it does and BELIEVE ME that is not a good thing). Put another way... it is imperative to try to understand what these big guys are doing and make sure we are on the right team. This is easier said than done... but in every trade someone is right and someone is wrong... just something to think about...

Finally, I want to mention that the bullish percent indicators and other material on sectors an more in the market summary page of Stockcharts.com offers a lot of insight that can be very useful. I am still learning about this and am by no means an expert but there is a lot of potential here as well. Ultimately, it is the demand and supply of stocks that always matters... all other factors, such as fundamentals, news, FOMC meetings, etc... are contributors to this but the bottom line is always price.


Enjoy the rest of the weekend...











"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Many thoughts to share

I was gone until recently on a work related trip and have been quite busy.

Right now I just want to mention that in all likelihood, based on Elliott wave patterns, and technicals, and history, the next bear market rally has begun. That information is derived from the insights of the professionals at Elliott Wave International. I cannot give more detail as, mentioned before, this is a paid service. That being said we are short term oversold in a bear market. Either the pullback we saw at the end of the week was a healthy retrench and we go higher or, more likely, we get a major sell-off but do not hit new lows... and the major sell-off, when it comes to an end, will provide the largest buying opportunity we have seen since 07. If the markets rally above last weeks highs I personally may look to buy QLD conservatively with tight stops. Preferably, we go down hard and then I may examine the opportunity to start phasing in more aggressively on the long side, depending on conditions. I do not have time to add detail but at the very least right now it should be said that the bear market is due for a significant bear market rally, one that lasts for quite a while, and that ideally this would begin after a significant pullback from the recent rally from market lows.

The market tips its hand often as to where it will go next and the recent rally is the first major, consecutive day rally, in a long time... this bullishness should be considered as a potential sign of things to come... even if, and perhaps especially, the market sells off heavily from here.

With the charts below I would like to demonstrate the significance of technicals in demonstrating potential price movement and the potential for big gains. There are still people who don't believe in technical analysis... I don't know what cave they live in but I operate on the basis of scientific evidence... note that technical analysis is just one indicator to use... but a powerful one at that...


Trading is about probability... that is to say putting probability in your favor. The more indicators that favor a given move the more probable it is to occur. Let's look at Feb 9. According to Elliott Wave Theory the most probable move around February was a move to lower lows. One probability in our favor. Elliott wave does not predict exact time probabilities for moves with the kind of accuracy that it does actual price movements... that is to say that although it can give hints as to when a price movement may occur it is more accurate at indicating that the price movement itself is going to occur... which is big in itself and provides a framework... this allows for us to look for behavior consistent with this by using other indicators. On Feb 9 we had:

1. a candlestick doji after a big move (doji's that make price extreme's are reliable reversal patterns)
2. a price that was at/above the upper Bollinger Band (also reliable as prices tend to move towards their mean and hitting the Bollinger Band indicates that prices have gone two standard deviations from the 20 day moving average),
3. An overbought slow stochastic that was ripe for a turn back down
4. An overbought CCI which was also ripe for a turn back down... also the combination of an overbought CCI and a price extreme is a highly reliable indicator of a potential reversal pattern

Combining this with Elliott Wave Theory, or using it by itself if you are not a fan of Elliott Wave, either way this showed a powerful combination for a downside reversal of magnitude... especially in a primary bear market. Notice that in early January we had a very similar pattern... and also a big price move down... though we first had a gap up (which formed a beatiful island reversal pattern). In this case the Elliott wave pattern did not yet call for new lows as the highest probable event and we did not get them, instead bouncing off the lower Bollinger Band and moving back up... actually a nice trade on the long side if tight stops were used.

On March 10 we had the opposite synergy of technical indicators and had reached the new lows in the markets as predicted by Elliott Wave Theory. The result was a powerful move up to current levels in the markets.

In both cases, by looking at the combination of technical indicators, using predefined stop loss limits, and then using trailing stops when the price action went in the favorable direction, would all have provided the opportunity for nice gains with calculated risk.

That is the name of the game. Additionally, the follow through of such moves helped confirm big picture concepts of where the market might go next. I am a big picture person and for me, at least, I really like to see the forest from the trees and these kind of tools really help.


The SP shows very similar patterns. As has been the case throughout the market the Nasdaq has been the stongest market, followed by the SP, and then the Dow. As a kid I went to high school wrote in the school newspaper during my high school days: "I'll take my coffe de-Kafka"... I say I'll take my market "de-'mark to market'." Investors agree and hence the differences in the relative strengths of the indices.

Right now I want to point out that we again appear to have a similar synergy of technical indicators on both charts... again towards the downside. This could create a nice shorting opportunity as long as tight stops are used. Please note, though, that on a big picture basis, the recent rally is likely to be the beginning of a bigger move up... again as indicated by Elliott Waves... not 'the bottom' but the potential (based on probability) beginning of a bear market rally. There are many people who have become convinced now that to make money in this market going short is always the way to go... that is DANGEROUS after the kind of selling we have had and therefore, while I may short the market if it turns down and use tight stops... I am much LESS BEARISH than I have been in a long time for the intermediate term and mostly want to look to go long when the markets pull back and start to turn... nobody said this was easy... but it is what it is and if you know this you and I probably know more than most retail investors and have begun the move from 'dumb money' to 'smart money'?

On a closing note I recommend that you check out alphatrends.net (I have no affiliation). Brian is doing a market analysis for free tomorrow if you sign up on time. Also, check out 'The Technical Take"... the author has some very nice discussions about sentiment and 'smart' money and other meaninful topics... finally at a later point I would like, if possible, to revisit SIRI, HGSI, and some other individual stocks that were mentioned.


"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Weekend Update

Update
This site is a written account of my personal journey in learning the markets. If you gain from it all the better. I did want to say that, upon re-reading this post, it occured to me that it may have been construed as a bit offensive regarding terms such as 'novice' and 'good traders'.... I must have been a bit stressed out when I wrote that and apologize to anyone who was offended... many of the readers of this site have many years of experience in the markets... much more than I do as my background comes from chemistry, not from economics or the markets, though sometimes such a fresh perspective can be helpful. At any rate, have a great week.
------------------------------------

I wanted to clarify the market notes a bit for your benefit and also I cleaned up the last post as I did not have time to proofread it. Take a look again if interested. The important part is this:

As mentioned on the 'bull case' post when the markets were in a trading range we were either going to break 950 on the upside, with 880 a good stop point for bears, or break 800 on the downside and THEN reach new lows on all the major indices. This was according to the market patterns of Elliott Wave as described by Elliott Wave International. The more probable scenario unfolded and we have now seen new lows on the Dow and SP but not yet on the Naz. We are most likely to see the Naz too reach new lows. However, that being said, a major rally in the not too distant future is the highest probability event according to this theory. I cannot expound further as they offer a paid service for this information. What I do want to point to is the Vix, which everyone should check now and again, and daily sentiment indicators, which also requires a paid service but indicates a very low bull/bear ratio right now... and is a contraindicator. The Vix has bounced off of support at 40 and continues to rise. It is a good idea to watch this for a topping pattern and a move back down. This is a possible indicator for a market bottom... not the bottom... but a potential start to the next bear market rally.

Technical indicators such as a flattening of the five and ten day moving averages, a move above the 20 day moving average, as well as oscillators such as RSI, can also gleam very strong light into what may transpire. In this market I have learned that the toolbox needs to effective and efficient... the smart money knows what is going on and if we don't attempt to pay attention to broad indicators we don't have a chance.

I highly recommend that everyone check out alphatrends.net. This is a free blog with videos every day on the market action and is very insightful. The blog is at the bottom of 'blog sites'. I try to combine this with technical indicators and other tools mentioned... there are many more though I am not going to get into that at this time.

Right now I want to say the following concise points:
I am looking heavily to buy strong stocks on market selloffs. I covered my hedge on MOS on the its last major sell off last week and went net long MOS on the day of this post and would have covered the POT hedge as well but didn't want to be too aggressive. I am looking to cover it on the next sell off in this name, should it occur. Because there is still the potential for a big move down in the overall market my plan is to hedge the purchase of strong stocks with a little short exposure to the overall market... Strong stocks in this environment should outperform the overall market... especially after sell offs, going long these stocks and short the market is a hedge that takes advantage of this.

Support lines... it is almost never a bad idea to buy at or near support in a market that is this oversold and sell at resistance... if it goes against you the loss is minimal and the upside is large. When the market was complacent on the long side and the Vix was low buying didn't make much sense except for very short trades... however we are now approaching a fearful market that is much cheaper than it was last summer and ironically has more shorts now than it did when the prices were higher and people should have gone short (remember this post from May... Did you forget about the shorts?). Now perhaps we are getting close to... Did you forget about the longs? ;)? )... Good traders know that it is wise to go counter to popular sentiment... however not to be too aggressive until the momentum starts to shift because the last pop down or up can be a doozy...

Where will this support be? Since we are at lows on the SP and Dow it makes a lot of sense to check out the historical charts on Stockcharts.com for potential areas of support. We should all be aware of this right now. Good traders know their long-term support while novices often don't... again an edge that we need to have or to learn.

I also recommend that you at least become familiar with:
RSI
Bollinger Bands
Parabolic SAR
Stochastics (I like slow stochastics best myself)

There are many other great tools out there and like these are free at stockcharts.com.



Right now this is VERY important... please read... just as a test to share ideas and to take advantage of the online trading community that we are a part of I recently started a subsidiary site called 'Yellow Rose Ninja Trades'. The link can be found just above the Yahoo! search box on the right. The goal is to share ideas on possible trades and set-ups... Now is the time, as I mentioned a few posts ago, to really come up with good buys for when the market potentially takes off to the upside... and this is an opportunity for us all to share such ideas now.......

I will post there for myself for ideas to check out and would love for you ladies and guys (mostly guys... I know... I'm not trying to kid anybody here ;)) to post names or ideas that you really like for everyone to read. Unlike the 'Rose' it is unlikely for there to be much written explanation and in depth analysis... this is really just about quick ideas... it is still experimental at this time and I am not sure where it will go but lets check it out and see. Please take a look after reading this post.

On another note I will be very busy again and probably will not be able to post much on here for the next couple of weeks. I may but only if something is really worth noting. I will check 'Ninja Trades' a bit more for quick ideas... again I am interested to see where that goes... but I will be out of town next weekend and have a lot of preparation to do for that this week so that constrains my schedule... just a heads up and have a great week...



"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Biotech Corner HGSI CMED MYGN ALXN... plus market notes...

First a note on the markets: I want to be clear that the markets need to stabilize first but that once we rise up in the markets, we could easily get the opposite market reaction that we have now... that is to say that fear of losing on the long side could quickly turn to short-covering fear and fear of 'missing the rally'. While bull markets are often accompanied with greed and complacency bear markets are driven by fear BOTH when the market declines and when it goes up. Right now bulls are certainly scared and bears, while always worrying about a short-squeeze, may be getting complacent.

I used to try to fit the stock market into some kind of a scientific context based on fundamentals but I have learned in this market especially that you cannot underestimate sentiment. It is HUGE.

A stock may be cheap at 100 one day and expensive at 100 shortly thereafter. How does this work? The reason for this is that, as mentioned before, stocks value is comprised of two factors: intrinsic value and extrinsic value. Intrinsic value comprises of the dividend and recoverable book value. For most stocks this is close to zero. Extrinsic value is the value people are willing to pay because they think the stock will go up. This portion makes up the majority of stock price and is largely determined by sentiment. It is also determined by availability of money or in this case credit. I would really like to go into a very concise analogy of this on another post.

The point here is that once sentiment gets low enough and investors/traders keep taking long positions and getting stopped out people begin to believe that stocks won't appreciate. The extrinsic value drops... as does stock price...... until at one point the price drops so low that the extrinsic value, at least in the short-term, has nowhere to go but up. At that point any good news and reverse in sentiment drives up stocks because the extrinsic value has nowhere to go but up.

The way people feel right now I believe that we are nearing this situation. It is time to be on the lookout, in my opinion, for a turning point, for the market to rally on no news or poor news and sustain this for a bit, and to be ready to go with quality names and ideas for when a rally occurs. This is not to advocate buying early... but mostly staying neutral with ideas and cash ammo ready to go for when sentiment turns...

--------------------------

Now for the original post..... HGSI CMED MYGN ALXN
HGSI
Just Reported earnings that beat expectations guided higher.
Upgraded by analysts
Yet the stock sold off with the medical names... overall market sentiment the key here

More on HGSI
Positives:
Gov contract for Abthrax
Exciting pipeline with phase III trials due this year for several of them
Partnerships with major Pharma
Reduction of Debt and increase in revenue
Low market cap for revenue potential

Negatives: Still has debt... normal for biotechs but an issue in this credit negative earnings but narrowing losses
High institutional ownership
Low inside ownership

Drugs:
Abthrax is better than a vaccine, which must be taken before exposure and requires booster shots or it will not protect. Better than antibiotics because antibiotics destroy the bacteria but once the toxin is in the blood it does no good. This is the first and only drug on the market that can defeat anthrax after the toxin is already in the body. Anthrax is lethal and a terrorist threat via inhalation. This drug uses antibodies (a type of protein) to block anthrax toxin's ability to destroy cells... hence saving lives... vaccines will also be used to prevent anthrax infection but only this drug can provide protection after exposure. Government contracts already signed.... helps with cash flow


Albuferon------- Hep C drug Albumin (protein) plus interferon (antiviral agent) combined . Goal is to attack chronic disease... HUGE global market for this. However, there is already a drug on the market that works differently and this may work better but the disadvantage is that interferon makes people feel terrible... is the drug more effective than current treatment and will it be adopted if it is? These are big questions but if the clinical trials prove very positive the drug could have a revenue base in the 750 to 800 million region according to analysts. Anticipation for the trials could be a catalyst in the proper market. Clinical phase III trial results due in March

Lymphostat B--------- Lupus drug Lupus is an autoimmune disorder. There is no viable treatment at the moment and the drug HGSI is presenting 'stops' -'stat' B lymphocytes (B cells). These produce antibodies (immune response). This drug specifically reduces the activity of B cells that create antibodies that attack the body (autoantibodies)... hence potentially reducing autoimmunity. Clinical Phase III trials are due in May and July (2 trials). Collaboration with Glaxosmithkline in place for distribution/marketing. 5 million people worldwide and 1.5 million in US could benefit if drug is safe/works Lymphostat B also being researched for other autoimmune disorders including Rheumatoid Arthritis Multiple Schlerosis
These trials are not as far along but have gone through phase 2... huge market

HGSETR1----------------------------- Apoptosis inducing anticancer drug HGSETR2----------------------------- Apoptosis inducing anticancer drug
Very exciting science... first one is in phase II clinical trials and second one in phase I ... uses the TRAIL antibody receptor pathway... Enormous potential... if work

Royalty payments from Glaxosmithkline Two drugs in Phase 3 clinical trials... if effective, royalty paid to HGSI

Darapladib---------------- Lipoprotein Associated Phospholipase 2 inhib... heart dz

Syncria------------------ Diabetes drug to control blood sugar and appetite. If effective reduces number of injections needed but would have to be substituted for current leader in the field (Byetta? )... not certain if this will happen but again clinical 3 trial data can always shake things up with stocks.

They have more drugs also under Glaxo but these are not at late stage clinical trials

Summary: We have a company with a market cap of 250 million with late stage clinical trial products that could yield revenue in the billions, or at least a billion, in the coming years if trials go well. The Abthrax provides guaranteed government spending. The company still has significant debt, though the numbers on yahoo are outdated, and is not generating positive cash flow at this time. Additionally, it is unclear whether the drugs in clinical trial will be effective and in some cases even if they are effective if they will supplant competitor's products. Still, with the kind of potential catalysts in place and the better balance sheet it has to be thought that the sell off to these levels was at least partly due to fear of insolvency (much less of a threat now than 6 months ago) and the overall market conditions. At these prices, an upturn in the market and/or any kind of positive news from the drugs could send these shares soaring.

Of course, any further talk of debt burden or major failure in clinical trials could hit this name... which is why it would be wise to book profits and use stop losses should you be in this stock and this name rise. Exciting co... and quite liquid... remember that this company has been around for a while by biotech standards and traded as high as 7 earlier this year and over 100 during the tech boom... biotech companies are probably the only ones that can have their stocks fall from 100 to 2 and still have tremendous prospects... please do your own DD if you are interested. I also want to disclose that I have a very small position long at this time and look to add more potentially

Additional Articles of Value
HGSI sees revenue surge and reduces cash burn
How Abthrax works video
Minyanv on the convertible bonds and the company
Syncria milestone pmnt
Novartis Hep C drug (designed by HGS) clears phase II clinical trials

CMED
I have been following this company for a long time. They sold HIFU and are now a pure diagnostics company. This is a very well run company with major ties to the best universities in China. They have always beat or matched earnings in the past and have had ridiculously good margins. The PEG is also unbelievable. Still the stock keeps getting sold off. Part of this is that many Chinese stocks have been sold. Another part may be that unlike medical care in the US many people pay out of pocket for care in China. Although the government is in the process of implementing broader health coverage it remains to be seen if the downturn in China will affect earnings of this company.

Long term this company, aong with Potash, Petrobras, Mastercard, and others remain among my favorites for secular growth. However, stocks are not companies and I do not advocate any long-term holds in this market... however... there may be some great short-term plays as long as earnings hold up and the market sentiment turns up... with CMED there may be a gem here but it may be a good idea to see how earnings look first.
Earnings are this Monday at 8am Eastern

MYGN
This Salt Lake City biotech company is acting like there is no recession. It keeps blowing away its earnings estimates and its stock has doubled over the past year. Like CMED it is a diagnostics company. It has some very important diagnostic tests and also has drugs in late stage clinical trials. The chart is starting to turn down from RSI 70 and may fill a gap... so it may be a good idea to wait for a better technical set up to go long here... actually from a purely technical standpoint it looks like a good short... though it is always risky and the best method may be to buy after pull back

ALXN
Nice revenue growth... worth a look... has only one major drug, Soliris, but that drug is the only one that is patented for PNH (as far as could be determined). I am not overly familiar with this company but I know a little bit about it. Good for future research.



"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Time to make a shopping list

The time for the market to rise significantly is near. We still probably have some more downside to go but we have seen significant price depreciation and markets do not go down in a straight line. It is high time to be ready with a shopping list of great stock buys. When the market makes its next move up I am currently watching in no particular order...

• ETFs

Double long ETFs or shorting double short ETFs. QLD, SSO, UWM, etc. These are for trades only (even if those trades last a while). For more on this check out the post on the ETFs as double edged samurai's to insure you understand some of the risks. Note that long ETFs do not have the 'price asymmetry' that I discuss on that post that occurs with inverse ones but the double ETFs still have the rebalancing issue so this is something to be aware of. That makes them great trading vehicles but some profits should be taken if they run too much.

• Commodities

Commodities and commodity stocks typically go up this time of year... there has been recent signs of fertilizers, coal (ANR), and some others doing well. Also we could look at sector ETFs like DIG and UYM and XLB

• Short Squeezes

Some sectors, like financials and real estate, may be good for some high risk, high reward squeezes. A short of SKF, for example, could yield nice results if there is strong risk management
Also... the dry bulks, they do have big problems but some of them like DSX are better than others and even the ones in the mire like DRYS may get a nice squeeze at these prices

• Strong Stocks with good earnings that have been held back by the market

This may be my favorite category. Stocks that have gapped up on a good earnings or have moved nicely when the market didn't sell off, have strong balance sheets, and generally look good but have sold off due to the market are likely to be some of the strongest performers in an extended rally in the markets.

• Cheap stocks with strong balance sheets.

Buy low and sell high. Hey this does work when everything's been sold off... as long as the company isn't in danger of bankruptcy or nationalization. I like to screen stocks in the $1 to $15 range with good fundamentals and a reason to move. We will get some doublings and even triplings in some names in a strong bear market rally. This is OPPORTUNITY with a capital O.

• Lottery picks

I generally stay away from these but every once in a while you get a penny stock that will either go bankrupt or double/triple and is worth a look. With the recent offer from Liberty SIRI is definitely worth a look for amounts that you can afford to lose... at .14 this may be appealing...

If you have anything you may like in these categories or other please post.
More on this another time perhaps. There are many smart and free-thinking individuals that read this blog and this a time where we can leverage that for everyone... Getting in early is a key to success... as I mentioned recently.......


"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Palpable Fear

... it was thick and heavy, permeating, and deep... omnipresent... like the unrelenting discomfort that fills the air on a humid New York summer's night.

This was not the selling of weak company stocks and the buying of good company stocks like we saw the last few months... this was indiscriminate selling... reminiscent of the fear among hedge funds and big boys that I have only seen a few times prior this bear market...

This is what I was looking for. We are not there yet but this is the kind of action it will take in my opinion. When it looks like October all over again, when it looks like the stock market will never go up again... that's when the smart money that runs the market shall swoop down on their prey like lions tearing into the flesh of the weakest prey on the plains of the Serengeti. That's when we go up again... that's when the next pyramid scheme on the long side shall rise up... until it too washes into the sea...

We did not push back up to over 800... though it is always important to be prepared for the lower probability unexpected events and have a plan in place. We moved the way we 'should' have and if this path continues the flushing of the last optimists could be steep and fast...

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Stocks and Notes

I don't have much time to post this weekend but I wanted to add a few very quick notes. First, the buyers would love to break 800 on the SP to produce an enormous squeeze. If that happens, which I deem unlikely but possible, the resulting move could be a great shorting opportunity and should not be immediately looked at as evidence that the market has bottomed. This market can go a long ways up before it would be considered anywhere near overbought.

Second.... I again want to emphasize some biotech names I really like on an upward move in the markets. HGSI has debt but also has many catalysts. I really like this name and maintain that I would like to do a post on this. MYGN is a very strong stock... though I have not looked at it very recently. CMED represents a stellar company and is on the 'sell China' discount rack. It showed relative strenth earlier on the bounce from below 15 up. A move up in the FXI may be very good to CMED. APWR is not a biotech name but I also like this at current valuations if the market and FXI start to rebound... and I would also throw SOHU into this mix.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Citibank and Bank of America shares downgraded to ‘Yo Mama’ status

News Brief
Rudders News
New York, New York
2/20

UBS analysts downgraded Citibank and Bank of America shares on Friday from ‘hell no’ to ‘yo mama’, citing nationalization concerns. “Normally we try to be as opaque as possible”, the analyst said, “using terminology like ‘hold’, which means ‘sell’, ‘underweight’, ‘market underperform’, and other completely inconsistent and indefinable terminology. Since, fortunately, there is no third party impartiality requirement, we often provide recommendations for a given stock only after our bank or a related source has heavily accumulated or sold shares. In this case, we decided that no one would take our ‘strong buy’ recommendation seriously, and that ‘Yo mama’ was the only recommendation we could feel good about. In the future we may use various permutations such as ‘Yo mama so fat’, and ‘Yo mama so ugly’.

Sounding a slightly more positive tone, Citibank and Bank of America analysts maintained a ‘sector perform’ rating on the stocks, adding that the whole sector is worth about as much as Mozilo's and Lewis' reputation. "Ain't worth sh*t".

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.

Brief Thoughts on Market Action and More

Edit-
"However, I did cover a good amount of my shorts around 800 to reduce risk."
This is a generalization... to be more specific and to demonstrate integrity, the shorts were covered between the the 815 and 825 region at the end of the prior week... I apologize for any confusion on this and should have been more specific.
----------------------------

A. The market overall
As we all know the market exited the trading range on the SP from 800 to 950 and did so in the manner most probable- by following the longer-term trend and moving towards potentially lower lows (already experienced on the Dow). Previously I mentioned the bear case but I also wanted to point out that the bull case could not be entirely discounted short-term and that, from my perspective at least, an defined exit strategy needed to be in place in case the bear bias was refuted. The 880 region on the SP held its ground, as did the corresponding levels on the SSO and QLD that I had mentioned as stop points. As a result my positions were never stopped out. Clearly, short exposure from those levels was beneficial. However, I did cover a good amount of my shorts around 800 to reduce risk. This conservative approach was the right one even though it translated into smaller gains than would have been achieved otherwise. I bring this up because it is relevant to what is important: where we may be likely to go next.

The break of major support levels on the indexes is consistent with the assertion that we have not yet seen the completion of Elliott Wave 5 down and that we are likely to see new lows in all of the indexes in the next few weeks or much sooner. Also, the support areas have become resistance and have been tested several times and failed. This also supports the bear. However, while it is most probable that we at least test lows, and probably break them, the sideways action we have seen recently after the major selling in the fall means that it is time to be much more bullish now than last May or October. That is to say, that while we may still go down considerably from here and I still hold short-exposure, it is time to more careful than on the bearish side than it was when the market seemed like it was just undergoing a minor correction or when it was in complete free-fall. My philosophy has been to short the market primarily when it has tested support turned resistance at the former support levels. This is the highest probability area for downward movement and allows for the smallest losses if the market is able to prove to us that it can overcome selling pressure. It is also important to be cognizant of the fact that the markets are short-term oversold and that at some point soon a squeeze is likely. That being said, once this market becomes less oversold short-term the bottom could really fall out in a 'flush out the remaining optimists' kind of way. In such a backdrop I personally do not yet feel comfortable gaining any significant long exposure.. though I may consider some small nibbling action on certain strong names.

This is just my take right now... we of course have to see how it plays out. As always please note that 'the Rose' provides one point of view only and that, while it tries to be informative, it must be always be integrated with multiple perspectives into your overall understanding of things.

B. Nationalize
I also wanted to mention that unlike the selling in the fall the action in the last few months has seen significant disparities between the fundamentally strong names and the weak ones. Financials, real estate, and regional banks in particular, have been hit while companies with strong balance sheets, like POT and MOS, and good earnings, have outperformed the market and in some cases shown considerable gains. One reason for the weakness in banks and other poor fundamental stories is the fear that the government will eventually nationalize banks to stabilize the system. A few posts ago it was mentioned that the 'bad bank' idea was probably a first step towards later doing what is more likely to work- nationalize. This may help the system but it wipes out shareholders and bondholders. Markets can be highly irrational and terrible fundamental stories can do quite well for long periods of time... that is until the word 'bankruptcy' or 'nationalize' comes into play. Traders have no control over the bottom falling out and in such cases must sell early if they perceive they could lose their entire investment.

This is where fundamentals do matter.... and likely always will.

Currently, while I remain short right now and have no net long positions, I am looking to go shopping for strong names for when the time is right. I still like POT, and to a lesser extent MOS, and also potentially MON, as well as CMED, MYGN and many others, especially tech names, that have proven with earnings and charts that they are as well positioned as any to weather this economy. Even if/when we do see a rally I continue to contend, as I did on the Christmas post, that it likely will be yet another bear market rally, even if lasts quite a long time in duration.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.