Stocks get pounded on Lehman, AIG, Merrill

Stocks started the Sunday evening session as well as the open on Monday with a sharp sell-off, with the Dow down over 300 points. Continued worries over the financial sector continues to dominate the news. Rather than rehashing the news I’ll just show a chart. A chart is more useful to analyse than blaming greedy speculators, the Fed, the president, or a vice presidential candidate. The chart to the left is of the eMini S&P futures. The major support was at the July 15th lows. I drew a red line at the bottom of the July 15th candle that offered some support over the last week or so. The dashed line is at the actual July 15th low. That zone was taken out today, as can be seen by the second to the last candle. The S&P continues lower in the evening session, as can be seen by the last candle. The blue trend lines have been very clear that this index has been in a downtrend over the last couple of weeks, so this down trend didn’t come out of the blue (not to be confused with the blue moving average lines). In August it did look like the market was trying to put in some sort of rally, but it was feeble, on low volume, and with a terrible advance/decline ratio as I had pointed out here many times. You can see three clear peaks in the double stochastic in the lower sub-graph. The middle peak created a bearish divergence, although price structure was still trying to push up, at least it seemed to be trying to make it to the 50% correction level of the larger impulse down. It just failed the 50% level and the next attempt at a push up was accompanied by an even lower momentum reading. This has been a difficult trend to stay with on the downside, as the down days had wide range bars with now follow-through. Then there would be two or three counter trend up bars that appeared to attempt a bounce off support. So the short play has been a difficult one in my opinion, but there has been little reason to stay on the long side with the trend indicators being down. That bounce off support was tempting, but I’ve learned my lesson over the years in trying to trade against the trend.

One of the culprits of the sell-off today was AIG. I cut the price scale off on the chart, but the high on the left side was around $50 per share, and the last close on the bottom right side was at $4.76 per share. If one were paying attention to the trend there would have been little reason to ever think about the long side of this stock. If I had scaled the stock to include data from 2007 you would have seen prices over $72 per share. I remember this stock coming up on many stock screeners, including ValueLine. I remember reading positive research reports by respected analysts. A quick look at this chart seems to have better and more reliable information. There isn’t anything magical about this particular moving average indicator. Many other types of indicators with various input parameters would have conveyed the same information. There may have been a couple of times that the indicator tried to turn positive, but quickly turned back down. Once the trend was down there were numerous opportunities to short this stock when the momentum indicator turned down from the overbought zone (the upper dashed line). I normally don’t show individual stocks on this blog, and I didn’t present this stock as it was coming down. I only show it now as an example of not fighting the trend, as well as it was one of the stocks making news today and partially responsible for the sell-off. The Lehman chart was even more dramatic as LEH had been as high as $86 and is now trading at about 20 cents. Using technical indicators should prevent anyone from taking huge hits when a stock or commodity is in a clear trend. Following the indicators doesn’t always produce a profit, but when a trend is clear it is best not to fight it, or at least keep a close stop when trying to trade counter-trend.

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