Yet Another Test For the Bulls

Investor’s first read – Daily edge before the open
DJIA:16,336
S&P 500: 1,912
Nasdaq Comp4,504:
Russell 2000: 1,010
Thursday: February 4, 2016 9:03 a.m.
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That was sweet. Spot on. A rally after a sharp spike down in early trading, just like the charts signaled.
What’s important is the market bounced after taking a nasty hit in the first hour of trading (the spike down). This confirms that we are in that whipsaw I have been referring to. One day it looks like a big “up”, the next day like a big “down.”
Pre-market trading suggests yet another test for the bulls at the open today.
Yesterday, I headlined, “ Bulls Must Now Come Off the Sidelines,” and they showed some interest, buying with the DJIA below 16,000 (S&P 500: 1,875). But this market needs a stampede if is going to reverse the damage done in January.
This is a consolidation pattern that can be resolved either way.
The broad-based S&P 500 is down 10% from its May 2015 high. That’s a pin-prick (“ouch”) compared with the carnage a bear can mete out in all its fury.
If I didn’t read anything (Fed, earnings, P/Es, politics, Europe, oil, recession), I’d feel uneasy about this one.
I don’t enjoy being negative. People hate bears. They hate people who say “SELL at market tops when they are making money, and hate them even more when they are right after a big crunch.
The Street calls it a “bear” if it’s down 20%, and this acts like a BEAR !
A bear would call for DJIA 14,680 (S&P 500: 1,707).
There is an even chance this year will be a bear market. It all depends on the news that hits the market along the way. Unexpected adversity or just disappointments would do it.
This is definitely a green stick fracture, and it wouldn’t take much more for it to reach a full break.
January met my expectations, and I still see the rest of the year as rough, but with several juicy trading opportunities.
TODAY

There is good support in the DJIA 15,870 area (S&P 500: 1,870). A decisive break below those levels would be very bearish.
There is resistance in the DJIA 16,590 (S&P 500: 1,950) area. A break above those levels would be bullish.
Based on what is “known,” the bulls should be buying aggressively. So far, they haven’t, which begs the question – “Why ?”
Once again, it’s up to the bulls to hold the line … or else !
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SUPPORT “today”: DJIA:16,213; S&P 500:1,897; Nasdaq Comp.:4,468
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THE MAKING OF A BEAR
Unless triggered by some horrific event, a bear market isn’t obvious at first. It begins with slippage as if it is just another correction in an up trending bull market. But rallies fail to attract enough buyers to reach new highs. Some begin to sell, others remain on the sidelines. Interest fades and bids weaken in face of one disappointment after another – new negatives surface – stocks start to slide – the Street’s optimism wanes, then sours. Fear mounts, then accelerates, as investors start to raise cash. No longer is it heresy to mention the word “bear.” Doomsters re-surface with talk of DOW 6,000. Fear turns to panic. No one, not anyone, wants to buy a stock. Selling intensifies. “If only I sold at a higher level,” investors lament, “I could be buying here.” The selling drives prices lower until one day when no matter how much selling there is, the market doesn’t go lower (capitulation).
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EARNINGS
Corporate earnings will rise to the surface in 2016 as the “decider”. The flow of Q4 earnings started with Alcoa’s (AA) report yesterday.
S&P 500 earnings for 2015 will drop some 5.5% (ex-energy – flat). The Street is looking for some 7% growth this year. As of Friday’s close, that works out to a P/E of 14.9 vs a 10-year average of 14.2. Projections were for growth of 8% last year and ended with zilch for the year, though the market held up well considering.
Stock prices won’t hold up as well if revisions start to plunge again this year. Expect a bear market if they do.
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OIL :
On Jan. 7, I listed “panic prices of selected oil stocks,” seeking to pinpoint the level where these stocks would bottom out.
Four of the six oil stocks/ETFs plunged below these prices briefly, then rebounded.
I warned that, “If production cuts are mentioned, the bottom ‘is in.’ ”
No one officially said production cuts would be agreed to, but it was implied, ergo the oil stocks bottomed out on Jan. 20. Buyers below those panic prices should lock in a quick gain. We may be ready to test the lows.
As of Jan. 29:
Panic prices selected oil stocks and results:
ETF (OIH) projected bottom: 21 – low was 20.46 – up 18.6%;
ETF (XOP) projected bottom: 24 – low was 22.06 – up 5.3%; 24;
ETF (VDE) projected bottom: 69 – low was 68.63 – up 16.5%;
ETF (XLE) projected bottom 50 – low was 49.93 – up 7.2%.
Exxon Mobile (XOM) Chevron (CVX) did not drop to projected bottom.
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MY TECHNICAL ANALYSIS of the 30 DJIA Companies:
On occasion, I technically analyze each of the 30 DJIA stocks for a reasonable risk, a more extreme risk, and an upside potential over the near-term. I add the results of each, then divide by the new DJIA “divisor” (0.14602) to get the DJIA for those levels. This gives me an internal check on the DJIA itself, especially if certain higher priced stocks are distorting the averages,
As of January 29, 2016, a reasonable risk is 16,261 a more extreme risk is 16,010. Near-term upside potential is 16,772
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 STATUS OF MARKET: Bearish – but trying to turn. Expect volatility
 OPPORTUNITY: RISK: Risk high, but opportunity for traders at lower levels.
 CASH RESERVE: 25% – 45%. Consider 75% now
 KEY FACTORS: Fear taking hold. Concern for the number and extent of additional bumps in interest rates by the Fed; strength of economic rebound; Outlook for Q1, 2016 earnings
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Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
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Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.

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