Friday, November 7, 2008

Obama's Effect on the Markets

Today's market was relatively calm, a "mere" 2% gain across the broad indices, especially considering that Obama was speaking today (which I didn't know until it already happened). A look at today's price movement showed that for the most part the market was waiting on Obama's speech, as the market just trending sideways in a symmetrical triangle and then broke to the downside after/during Obama's speech. The indices recovered late in the day from likely short-sellers locking in profits for the previous two day rout of the indices.

I had some entertaining comments on my Facebook in regards to my status update of:

"Richard is thanking Barack for exceeding my expectation. A quick 10% downturn in just 2 days."

I know I was asking for trouble from the Obama fans who had to come to his rescue and defend him. Eventually, things started escalating and I decided to stay out of it. But, I wanted to clear things up here. The reality is that what I said is completely fair. I made the call last week on shorting any election rally, especially if Obama is elected, and riding the wave down into Friday. Recall:

So, to my predictions. I'm thinking we trend sideways Monday and Tuesday with a lot of volatility. With Obama winning Tuesday night, I would have said we'd see a big fall the next day, but I'm thinking we're going to get a head-fake upwards. So, Wednesday we get a bull trap and it fades possibly even by the same day, then head down for the rest of the week. It's inevitable to have the markets go down when you are bringing in a president threatening to raise capital gains taxes to anywhere from 25% to almost double what it is now. Again, I believe we will see new lows on the indices before the year is over. The target many people and I have is that 7500 DJIA, 800 SPX support.

Although we never got that head-fake upwards as it was just a complete rush of selling from the opening bell, it should have been apparent from my tone above that regardless of if there was that head-fake upwards, the play was clearly down.

So back to those comments trying to defend Obama. Look, we're here to make money. I don't care if I was right or wrong, in the end, all that matters is that I made money. Furthermore, the call to short an "Obama-rally" was valid on a purely technical play. Technicals indicated that we were entering into an overbought situation Tuesday night. Add to that the resulting election of Obama, and we have a catalyst to have a technical correction. Yes, I am more bearish on the markets with Obama as president than if McCain was president, but the play here was short-term, not long-term. I've mentioned and commented in other places about what the play was for the elections. My belief was simple; if McCain won, markets down; if Obama won, markets down x2. I would have just as easily "thanked" McCain for a similar downturn if he had been elected even though I voted for McCain, and I would have likely seen comments like, "See! McCain sucks! He's going to bring down our markets!" Whoever was going to win (although Obama was a lock), I was going to capitalize on that. And, Obama was merely the catalyst for this play.

So, as far as where I see this market headed now, take a look at this chart below where I have marked the Fibonacci retracement levels as well as the Elliot Waves (click for larger image):

5 waves down, 3 correction waves up, before resuming the larger overall trend- in this case, the down trend in a bear market. If you can't read the Fibonacci levels, they are:

38.2%: 100.54
50%: 105.79
61.8%: 111.03

As you can see, the second wave hit resistance at about the 50% retracement level at $105 and change. The 38.2% also acted as resistance for the 1st Correction Wave at $100. This one I plotted is predicting the 3rd Correction Wave up, likely hitting resitance at either the 38.2% retracement, and if it breaks that, at the 50% retracement. But, if I move each wave, one wave back, so that the first wave actually ends on 9/18, we could easily head towards the lows of this year as the Correction Wave 1 becomes Correction Wave 3, finishing off a cycle, and resuming the overall downtrend.

But based on the holding of the 90 level which could have acted as a psychological support, it looks like we're in the 3rd Correction Wave, and will likely trend up for the next days, possibly up to a week. A run back at 100 is likely if the 3rd Correction Wave forms, with 105 being a strong resistance, and the 107-108 acting as a huge resistance. The 107-108 area is where the markets gapped down earlier this month, as well as it being approximately where the 38.2% retracement level is (looking on a 1 year time frame). If we get to 105, I will likely go all-in short and with that, hope to wrap up this year and take the last month or so off, ignoring the markets and enjoying the Christmas season. :)

As far as what I've done: I've held onto my UltraShort QQQ position (QID) that I bought for the election fall-out, even after the 10% drop. But, I did cover it with a call to protect some of my profits Thursday near the close. Along with the UltraShort QQQ play, I also bought puts on the SPY on Monday and Tuesday and cashed out for a very nice profit on Thursday. I have started building a position in SPY JAN 85 puts as part of my plan to "wrap up this year."

Lastly, always keep in the back of your mind when you want to go long, that this is bear market:

From the chart, we can see that the trend is clearly down, with the 200 and 50 DMA still trending down. Any long plays should be short-term, and should be used to exit existing long positions. In a bear market, bears get fat, pigs get slaughtered.

As always, take what I say with a grain of salt. I cannot be held responsible for any losses, as well as potential profits you incur from what you read. What you do with your money, is your problem, or hopefully, your delight.

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