I don’t write about the stock market too much on this site anymore, unless  something big is about to happen.  And right now it is.  You can follow my updates on this unfolding market at http://www.darkpooltraders.com/vb/stock-tips/104-stock-market-breaks-trend-line-support.html (Great site by the way!  You can talk with me or other traders, post questions, have discussions in the chat rooms or in the forums.  Check it out!)

But I will give you the basic snapshot here:

We are resting right on the “savage support line.”  Why the “savage support line?”  Well, if there is a legitimate break of this level the fall likely take us down about 10% from current levels.  You can see the target area on the chart below.  How the market reacts off that target area will determine whether we bounce, in which case we have an amazing opportunity to buy into one of the lowest risk areas of a bull trend, or we realize the governments screwed the pouch and we are retesting March lows. But that is a bit down the road.

The pivotal level right now though is 880 on the s&p 500.  A break below will sends us towards our target.  This market is in a trading range so the breakout may not happen tomorrow, but it may.  This is a big level and we closed right on it, so I owed it to you to least make you aware of it.

S&P 500 Daily - Free Stock Charts

Cory Mitchell, CMT
Chief Market Strategist
Remember, failed breakouts are tradeable too!

Trade the most active foreign currency markets with a mechanical and proven trading strategy. Free two-week trial.
NetPicks E-Mini Futures and Forex Trading System

Day trade the S&P 500, Nasdaq QQQ, and S&P and Nasdaq E-Mini contracts and cash out at days’ end. All trades managed from entry to exit via live trading room. Two-week introductory special.

The following is a newsletter article from Larry Levin of www.secretsoftraders.com and it touches on the ice berg of a major issue.  Some of this is opinion, although opinion from a successful trader who understands the markets.  That said, always read between the lines as numbers can be made to look pretty much any way the person making the argument wants them to look.  Yet the numbers themselves are there pointing to where we are, and they can’t be ignored.

Good article, and I agree with it.  So here is the piece from Larry Levin’s Nightly Newsletter

Bond Market to Feds: Drop Dead!

Today’s bond market action reminded me of the famous 1975 Daily News headline, “Feds to New York: Drop Dead.” At the time the federal government decided to reject a request for a NY city bailout, which prompted the headline.

However, times are different today: nobody is allowed to fail. Chrysler was allowed to keep its $11.4 billion “bailout” (that’s right US taxpayer – you were robbed!) and GM is said to be on the docket to receive ANOTHER $50 billion bringing its total to $69,400,000,000.00. Do you think GM will repay this money? Do you think AIG will repay? What about Shitigroup and Bank of America?

By the way, as of yesterday GM was worth about $800 million. Uh-huh, we’re giving GM $69.4 BILLION when its current net worth is almost 87 times less! What the hell kind of math is used to justify such nonsense? Oops, my bad – that’s Washington DC math.

Well, when you throw in the assured future handouts to insurance companies, commercial real estate firms, government run healthcare, State handouts, “free” college educations, etc the bond market is saying – no thanks. All of these so-called freebies are “budgeted” at today’s interest rates.

Like the fools that they are in government, they extrapolate funding this madness to infinity with ultra-low interest rates but forget that the bond market does not have to play along. The bond market is bigger than the President. The bond market is bigger than Tax-Cheatin-Timmy at Treasury. And although Helicopter-Ben doesn’t know it, the bond market is bigger than even the Federal Reserve.

Today the bond market may have said to all the aforementioned: DROP DEAD!

With today’s price collapse in the 10-yr Notes and 30-yr Bonds and commensurate yield spike, spreads widened. The 2yr/10yr spread is now at the widest spread ever. The 2yr/30yr spread is now just three basis points shy of its all time 1992 record. The 30-YR fixed mortgage rate on the eRATE real time mortgage quoter spiked a huge 28.2%! Yesterday it was quoted at 5.08% and today was quoted at 6.52%! Surely this was a knee-jerk reaction and will fall somewhat, but it should be a wake-up call.

So what happened? Today’s 5-YR Note auction went well – better than expected – and the bond market still crashed. Uh-O, good news and the market still drops thus increasing interest rates? That’s bad and why I say the bond market is getting tired of the bailouts. Remember, GM is only days away from filing BK and therefore another MASSIVE cash infusion.

Tomorrow brings us a 7-YR auction and thus perhaps more fireworks – or not. You see, it is the 7-YR that many believe is the cutoff between where the foreign central banks will slow or stop buying Treasury’s IOUs. The US is beholden to the kindness of foreign banks of China, Saudi Arabia and others. At the moment they seem willing to buy short term IOUs, but not the longer term junk, which is driving up interest rates.

Question: If long term rates continue to rise while Helo-Ben is powerless to stop them, how much of a so-called recovery do you thing there will be?

The government must STOP THE BAILIOUT MANIA NOW!!!

Ever since the Helicopter-Ben fueled up his money-helo, long term interest rates have been going up – slowly. That was not supposed to happen. Ben thought he could wave a magic wand and make everyone do his bidding. He was wrong. However, the bond market is massive and cannot be turned around like a Ski-Nautique boat; it’s more like an aircraft carrier. Therefore, I believe we have time to avoid the worst possible outcome: Jimmy Carter era interest rates. Call Congress and demand an end to the madness.

We should consider today’s action a shot across the bow. If the Treasury and White House do not cure their bailout psychosis, the USA will become the ultimate subprime borrower. “Change you can believe in.”

Sadly, I believe the current changes in the bond market have to do with; systemic structural weakness in the US financial system, the gross amount of government debt, and obscene fiscal irresponsibility. The lofty yield curve is a vote by the trading community that the US economy is a massive systemic risk, with a real possibility of core failure.

April 28 3:13 GMT

The following is a commodity market commentary based on technical analysis for the Crude Oil.  It is based off of a daily chart. Trading ideas or trading signals can be generated based on your own risk tolerance and time frame. Please read the latest How to Use the Trade Ideas blog if you have questions.  If you still have questions after, feel free to comment.  This is trade is likely to be a week or longer in duration.

Oil has formed a flag formation.  This is often a continuation pattern.

An upside breakout will offer a profit target of $70-72

A downside break, which is less likely with this formation, would offer a profit target of  $35.

~Cory Mitchell, CMT
Market Strategist

Remember, failed breakouts are tradeable too!
—————————
Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open a Standard account and receive up to a $1,000 bonus.

Open a SuperMini or Standard account now and receive a 100% cashback worth up to $300.
Open a Standard account and trade commodities, receive 10% cashback worth up to $1,000.

Since most of the posts refer to GMT, the time zone for the site has been updated to reflect GMT. This should make it less confusing. If you notice on the last post the time the post was made now corresponds with the time frame of the trade. For example: The day trading signals are for trading after 7:00 AM GMT and the post time now corresponds with that. Trading signals will normally be posted by about 7:10 AM GMT and are valid till canceled, stopped out, profit target hit or till 9:30 AM GMT.

The Federal Deposit Insurance Corporation is a member bank funded insurer that covers cash deposits up to $250,000.

There has been talk recently that if the fund has become depleted and is in danger.  So the questions become: Are deposits at risk? And how will the FDIC rebuild its depleted reserves?

The second question is easy.  The FDIC has already increased fees to bring up their reserves.  But this action is not likely to make a huge impact in the short term.  So the first question becomes center stage – are deposits at risk?

With more than two dozen banks having failed already this year, the FDIC will run out of funds if the situation does not stabilize.  It is no question they are facing a threat, but the likelihood they will fail, and depositors will not receive their deposits up to the prescribed amount, is extremely remote.  So the short answer is no, deposits are not at risk.  The FDIC has a $30 billion credit line and the government has said that they will back the FDIC if it gets into trouble.

The FDIC is essentially backed by the government.  This means the government can provide indefinite funding to keep the organization afloat.  Since the government theoretically can print as much currency as needed, the government would not let the FDIC fail.  A FDIC failure would likely result in a run on the banks, further bank failures and a crippled US economy.  The government would not allow this to happen – not through a FDIC failure.

But while the dollar amount of deposits seem to be safe, for it will be covered by the government backed FDIC, the cost of funding and all the other bailouts which the government is printing more currency for does not come without its own price tag.   The more currency that is printed and in circulation then theoretically the higher chance there is for inflation to creep in and a weakening of the currency.

So far, despite mass spending, the USD has done well against other currencies such as the EUR and GBP.  This is likely due to the fact that this bailout problem is not country specific, but rather global in scope and thus other countries are also being forced to save some of their business.  The USD currently appears to investors as the lesser of evils and somewhat of a safe haven.

While generally headlines have been grim it would seem that deposits are safe, and during these time savings rates are also at their highest levels since 1995.

The Dow Index also rallied sharply on Tuesday, finishing higher by more than 350 points or 5.5%. Positive comments from Citigroup may have played a part in the rally.

~Cory Mitchell

Want to learn more about the markets? The Master Trader Ebook can help. Check it out today. http://corymitc.dtcoach.hop.clickbank.net/

On Wednesday after the market closed, everyone was talking about a market rally (from the reports I saw/read). Up 130 points was just the move that was the result of restored confidence, but not only that, it was going to trigger further rallying. Well, Thursday showed market participants that the bear is still more likely to eat Goldilocks than give her some porridge (or money for that porridge).

While short term traders should play both sides of the market and make money in any which they can, investors should not be buying. I have said that investors for the most part (unless you need to buy a few million shares) can slip easily into the market, so there is no reason to buy until there is a significant move upwards. A 130 point move up, despite what the many of the news reports seemed to think, is not a significant move.

From an investing standpoint, we are a ways away from an entry point, which I would view as a reversal to this bear market. Thus I won’t even publish an entry point for the long positions. No point losing money when you can just keep it as is for the moment.

There is no need to pick bottoms to make money.

But lets look at the broader picture of the market once again. From Jan 1942 to 1965 the market went from approximately 100 to 900. It multiplied by 9X in 23 years. Then from 1982-2007 it went from 900 to 14000. It multiplied by over 15 times in 25 years. Thus in about the same amount of time, gains were accelerated by more than 50%. That is quite an improvement. What caused this massive acceleration? (I have left out 1965-1981 as the market was range bound during this time and did not reflect any growth, actually negative growth when factoring for inflation, over that 16 years)

In my opinion, perception. Perceptions changed. Just as in the microcosm the 90’s investors believed we had entered a new era of unlimited potential prosperity and perpetual growth, the last 25 years has been filled with this new era type thinking. Market participation has increased in terms of volume which then created a need for government and businesses to focus on short term gains. With a the seeming positivity bias built into the market, participants chased short term gains to higher and higher prices (on the aggregate over the last 25 years). But when major catalysts changed that sentiment and major fundamental flaws were revealed it became apparent this market was in severe trouble. Hence, why I use technical analysis for trading and talk about fundamentals for fun.

Are these numbers I used above somewhat arbitrary? I suppose on could argue so, but looking at a multi-decade chart I picked the major trends since after the great depression. The point is that there has been a major acceleration of growth in the stock market and now we are seeing a major acceleration to the downside to correct for this.

I am currently sticking to my target of 6000. The Dow closes at 6594 on Thursday. I will reconsider this downside profit target if a close above 7000 occurs anytime soon.

The Non-farm Payroll Report comes out on Friday, always a big mover, so watch for that as it could take us a lot close to either of these levels.

~Cory Mitchell

I wanted to bring up a few things about the current problems in the stock market. The near term target is now 6000 (see my previous posts in the Market Blog category).  If we pan out to a very long term view of the indexes, both the S&P (1950-now) and the Dow (1930-now) we see the major trends both coming in at around 4000 on the Dow and 400 on the S&P.

Do I think we will go that low?  Well, I am not going to make that call.  But that is the very long term trend line support.  And just like the Nikkei traders, discussed below, who never thought they would be selling at current levels, the possibility is very real that current market participants will be selling at seemingly illogical levels in the not too far future.

If we look at the Nikkei, that market has been falling for the last 19 years.  From a high of around 40,000 in 1990 to around 7,500 currently!  One of the world’s “Super Powers.”  Many initiatives were thrown at that market, and they have failed.

The current initiatives thrown at the markets are also failing.  It was pointed out that banks being bailed out by these plans are viewed as high risk, and who wants to invest or put their money in a high risk bank?  These banks that are being bailed are going to find it very difficult to raise funding.  So if the purpose of bailing a bank out is to help stabilize it, and the very act of bailing it out gives the perception of instability, how can this work?

The point is, in bear markets, when things seem they can’t get any worse, they often do.  And then when everyone has given up the market will rally.  But currently there are a lot of people saying “buy, buy, buy, great deals, great deals!” as the market continues to make new lows.

I don’t personally like sentiment indicators, but I do think that in a strong downtrend like this, the bottom will come only when everyone  backs off and says “no more bailouts, and no more buying”.  At that point the market can see the impact of what has been done, it will have been priced in (for lack of a better term – the whole “priced in” theory is a little misleading) AND THEN buyers will step in in force because they actually have some concept of what values are.  The more money that is thrown at this problem, the harder is to gauge the impact, and in uncertain times the masses aren’t going to step in when the government and Fed are themselves showing panic.

I am not out to fear monger or make people worry even more than they already are about their financial future.  But living in this moment we have to look at the current market, and all I can say, as I have been saying for over a year now, DO NOT BUY, yet.  If there are deals today, and I am sure there are, in this market they will still be there in a little while.  No point jumping into a fire to grab gold nuggets, when you can simply wait till the fire goes out.

~Cory Mitchell

The DOW broke below 7500 and then respected that level, before falling below support at 7100. This action by the DOW confirms, or makes much more likely, another primary downswing to the target of 6000.

~Cory Mitchell

A proposed House of Representatives bill-HR 1068 would tax each buy and sell order by up to 25 basis points of the transaction value.  While it is hard to say at this point whether the bill will be passed I encourage active traders and investors in US markets to do what they can to oppose this bill.  Here are some of the reasons why this will affect everyone.  But first, granted it is possible that as traders and investors we can always trade a different market, but foreign investments are capped (as far as I know, I am not a US citizen so I can not say that with absolute certainty), and also the flow of funds out of the US to foreign markets hurts the US economy.  But here are some further reasons this bill should not go through.

-day traders and market makers who make money on thin margins already would be forced out of the market.

-65% of liquidity comes from short term traders squeezing small profits.  If these traders leave for other markets, liquidity dries up and everyone suffers.  Spreads widen, and transaction costs increase.  This cost is not going to be assumed by brokers, but rather by investors (the ones remaining).  Trading costs would likely increase because mass liquidity allows for smaller charges per transaction.  Decrease the number of transaction and brokers will raise prices to compensate.

-Price transparency and thorough analysis is generally reserves for high volume stocks.  If you have every traded an illiquid security, you know that prices can be very random and hard to analyze.  A decrease in volume would create this environment in many many more securities.

-Traders would avoid the tax, and hence the US market.  This will pull funds out of the US economy and those funds will go into foreign countries.

-Companies are more likely to list on foreign exchange, or move their current listing to foreign exchanges so that their securities can be traded actively as they are currently.

-The tax will not generate the revenues expected by the government.  Projections for profit are based on current market conditions, but the tax would impact market conditions and change them overnight.  In effect, the money brought in would be nothing what is expected thus making the tax pretty  much null and hurting a lot of people in the process.

Likely this bill is too flawed to pass.  But with the current crisis it is just possible that something which is so obviously ignorant as this is could be pushed through.  Asinine decisions are being made all over the place in the current economic situations (and it was dimwittedness that got us into the mess in the first place), therefore it is more prudent to be proactive and than to sit on ones hands thinking this bill is too stupid to pass.

If you work for a firm, I encourage your office to voice concern (for your own sake), or do what you will to prevent his bill from going forward.  I like in Canada, and I trade currencies, so this would not directly hurt me.  I write this so you are informed of something that is occurring and can make your own decision on it – and I do encourage you draw your own conclusions, these are simply mine.

~Cory Mitchell

http://everythingdaytrading.com (another site to check out)

The market rallied today up more than 230 points on the Dow Jones Index to close around 7,350.  It is possible that the break below 7,500 was a bear trap.  But with confirmation from so many indexes, it is more unlikely.

Rallies occur in bear markets all the time, it is whether the upward pressure can be sustained that we need to focus on.  A move above 7,500 would signal the breakout was likely false and we will test moving back up to 7,800 and if that is surpassed we will likely test the 8,400 level.  If we can not break and hold above 7,500, this would signify that we are indeed headed for another leg downwards to 6000.

~Cory Mitchell