Weekly Trend & Trade Review

Trader Talk

The short term momentum oscillators remain negative, confirming the bearish stance of the AlphaKing Trading indicator. The accumulation/distribution profile remains negative, with the lower volume on the Friday surge non-confirming the 2%+ set-up advance delivered on Thursday. Still, the bulls have a shot at turning this very important confirming indicator positive if they can engineer a 2%+ high volume follow-through advance sometime next week. The leadership profile did turn positive on Friday, with 443 stocks making new 52 week highs versus 283 stocks making new 52 week lows.

The 4% rule remains bearish, while Federal Reserve policy remains bullish. The VXO volatility indicator closed the week at 33.6, continuing the up-spike in fear. The primary Elliott wave count suggests the wave 3 of 3 meltdown run remains underway, with the current rally pop part of a minor wave 2 prior to the start of the meltdown crashing wave 3 of wave 3. If so, we remain on the cusp of a stock market crash of historical proportions.

Traditional seasonal trends have us looking for a difficult third quarter for the bulls, while the Presidential cycle remains bullish for the remainder of 2008. The Benner-Fibonacci cycle will remain bullish until 2010, though this prolonged time period may include one or more cyclical bear phases. The AlphaKing combination cycle sees a bear market slump running all the way into mid-December when the next major turn-date is slated to land.

Summary:

What can we say about the action this week other than to say "WOW!" The big question is what does all the violent ups and downs mean? Let's split the answer to that question into two parts, with the first looking at how stock market bottoms are formed (AKA the bull case,) with the second part focusing on what we're seeing now in relation to how bear markets usually unfold as bull hopes meet reality of imploding fundamentals (AKA the bear case.)

Bull case: Bears end after a capitulation that causes a huge spike up in fear as measured by the VIX as everything gets way oversold in a clear show of panic, followed by a vicious rebound, all following prolonged cash-infusion actions from the FED. Clearly all of those landed this week. The number of stocks making new highs have also eclipsed the number of stocks making new lows. So the bottom is in? Perhaps, perhaps not.

Bear case: The AK indicator remains negative, as does the 4% rule, and the accumulation profile (due to the lack of volume on Friday's big advance.) Breakdown/pullback are the hallmarks of bear market, with both often landing in vicious camp, which we clearly saw this week. Thus the technicals overall say the bull push has so far failed to deliver what is needed to turn a bear into a bull. The internal wave count suggested the NASDAQ was due a big recovery bounce before the next leg of the bear lands for real, and we certainly saw that Thursday and Friday. Is the repeat of the RTC bailout plan a game-changer? Maybe - at least in the short term - but probably not longer term. If the investment world loses a couple of trillion dollars, and the US government buys back some of that busted debt, does that mean the now very scared investment world sitting on the edge of catastrophe will go back to business as usual once the debt problem has been shifted from under Peter's cup to under Paul's? Or will the investment companies who have experienced the horror that 30 times leverage can deliver take that money simply to get rid of the busted crap so their balance sheets are more like 15 times leveraged? If so, the investment world is still not healed despite today's promises of massive cash infusions, as no one will be lending money to anyone in large amounts even after the busted debt has been taken off the balance sheet. Thus government money simply goes into the financial black-hole of disappearing money, and Wall Street is still closed for business, and still in need of huge inflows, as 15 times leverage is still a HUGE problem. Indeed, the current action from the FED and Treasury ensures that the investment banks have to put a price on all this busted debt, which means they can no longer hide behind their lies of how things really are. Which means the government has put a date to the day of reckoning where we get to see who has enough money to survive and who doesn't.

Our take: We simply cannot believe Wall Street, businesses, consumers, or investors, are going to take on debt like they have in the past to party-on like its 1999, nor for the US government to print money to drop from helicopters to fill consumers wallets. Thus the system should remain wounded, and the over-leveraged weak still on their way to bankruptcy. Worse, the economy is not even in recession yet. Wait until losses start to pile up from side of the equation. Wait until consumers loses their jobs as unemployment rises. There are only two ways out of this mess: put money in real people's wallets so that they can buy houses, and cars, and everything else - AKA reignite the party - or else let prices collapse as the weak get taken out so the rest of us can buy good assets cheap to go on to be winners on the rebound. The deleveraging process will ensure Wall Street remains wounded, and the fast-approaching recession will ensure that things get even darker going forward.

In short, we've seen nothing yet, and capital preservation remains the key.

Kevin Wilde, Chief Trading Strategist, AlphaKing.com

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