Jay Matulich

Can Wall Street Stem the Downturn?
Market Insights from Mike Paulenoff, Harry Boxer, Jay Matulich & Jack Steiman.

Can Wall Street stem the downturn? Our Wizards think not, as we check in with Mike Paulenoff, Harry Boxer, Jay Matulich and Jack Steiman.

According to Jay Matulich, principal of Septos Capital Management:

Since our last conversation on July 15 when I said financials were bottoming and commodities were topping out, the market has been erratic, except for the move in financials and the drop in commodities. Right here I’m looking for a countertrend rally in commodities to start any day, and I’m very interested to see how far this rally can go. If it doesn’t go very far, the market in general is in for a lot of problems come the fall. It all has to do with more and more asset write-downs by banks and financial institutions. Having said that, a Fannie Mae (FNM) & Freddie Mac (FRE) bailout by the government, which is imminent, could give the market a bit of a shock to the upside. However, I think that would be short-lived.

I’m looking at gold to make a move up any day. If gold rallies some but then starts to come back into a down trendline, I think the asset write-offs are going to affect every asset class, except the US T-bonds which I’d be long. It’s a very dicey period we are in. The Fed and the Treasury induced what looks to be a bottom in the financials through the naked short provision, whereby they excluded a number of banks and financial institutions from being able to sell those shares without actually having possession of them. Whether that holds remains to be seen. It’s somewhat of an artificial bottom in my opinion, giving the Fed and the Treasury time to work things out with FNM and FRE, and also giving banks more time. Credit spreads have been going up relative to treasuries, and again with this Fannie and Freddie bailout likely coming any day now spreads may come down, but I want to see if they hold. The market is all predicated on the credit situation in the U.S., which by the way is starting to have an affect in Europe and the Far East. As we de-leverage, it’s a long, long process, and it just doesn’t turn around on a dime. It takes months and quite frankly even years. So I’m fairly conservative on the equity side, looking only at dividend growers and stable groups. In September I think we’re going to see the market move down below the recent July lows, because of more asset deflation -- an unwinding of more leverage -- both here and abroad.

According to Mike Paulenoff, author of MPTrader.com:

Increasingly, my technical work on the NDX, QQQQ, and the QID (UltraShort QQQQ) is warning me that I should have a short position ahead of a potentially nasty breakdown in the technology sector. I also understand that DELL is coming out with its earnings results after the close on Thursday, which may well provide a pop for the sector; however, between now and then, a downside breach of 46.38 (last week's low) in the Q's could trigger a very nasty long side liquidation.

I leave you this evening with a look at the BIG picture of the QID. The juxtaposition of the recovering price structure with the rising daily RSI amidst flat-to-slightly rising 50 and 200 DMA’s combine to suggest strong to me that the QIDs are in the early stages of a potent upmove in the aftermath of the July-August decline from 48.67 to 38.27. A hurdle of near-term resistance at 41.85/90 should trigger upside acceleration into the next stage of the advance … to 43.70-44.00.

View chart.

According to Harry Boxer, author of TheTechTrader.com:

The best that can be said about Monday is that despite the sharp sell off the indices did hold last Thursday's weekly lows on the Nasdaq 100 and the S&P 500, so key support now exists around the 1886 level on the NDX and the 1262-64 zone on the S&P 500. That’s a level at which the indices need to hold to stem the tide.

One stock that’s looking very good in this market is Sequenom (SQNM), which has been consolidating very nicely in a bullish flag type formation. It looks like it could be getting ready to make a move out of this consolidation. The reversal in mid-July ended the uptrend, but despite the early August dip that saw it test the 40 dma, the stock is back up and meandering around the 21 dma and above the 40, slightly below the declining tops line, which is just a slight decline, almost a lateral decline of the tops line. This entire pattern here looks like a long, 7-week flag type pattern consolidation. With the underlying tehcnicals holding up well and the balance of power ¾ green, this looks like it could make a break to the upside and explode. I don’t know what’s going to trigger that, maybe some news. But in any case this is a powerful looking pattern, with very sharply rising angel of ascent. A breakout here could get this stock to a quick run to mid-to-high 20s and maybe even the low to mid 30s. From a longer-term standpoint the weekly chart shows the consolidation just above the top of the accelerated channel. The heavy volume over the last few months indicates the possibility that strong accumulation is underway and the stock could move higher. Traders may want to use a tight stop below the 18 ½ area, or the 40 dma in the 19 ¾ area.

According to Jack Steiman, author of SwingTradeOnline.com:

We closed just off the lows but more importantly, very close to those critical support levels on the Dow and S&P. The Sp is fighting for its 1260 life and the Nas is threatening to take out key support as well at 2360, last week’s low. 2367 is also the 50 day exponential moving average. We closed at 2365. It's getting close to breaking down. Below 2360 Nas and below 1260 Sp is a lethal combination for the markets. You do NOT want to be long anything in that environment. 1260 has held for quite some time with just an unusually high number of successful tests which is why it's even more dangerous now should that level go away. The selling would pick up in a hurry and we'd get what would be akin to short covering as the longs would run for shelter and fast. No support until 1240 price. Below that would be the July retest of 1200. With the daily charts looking top heavy and with their Macd's now crossing negative it looks likely we'll finally break below 1260 and not far down the road at that. Staying on the side of the market moving lower below 1260 in time.

The 10-year note continues to break down, which shows strong buying interest in the issue. Works inversely that way. Why are folks running to that instead of buying stocks, you might wonder? It shows a real appetite for safety at any cost, even if it means locking yourself in to very small gains over time. Folks just want some safety. With the 10 year continuing to look strong technically, it doesn't give much hope for the bullish case near term. Just something to keep on watch for some further evidence regarding where folks are running with their dollars. Right now they want no part of any risk. Safety at all costs.

The continued poor action from the leaders has to be the biggest concern for the bulls. Goog, Rimm and Aapl just can't get through critical resistance at 500, 135 and 180, respectively. Aapl and Rimm took it on the chin and Rimm is approaching massive critical support at 125. If Rimm loses 125 that's a MAJOR NEGATIVE for the Nas. Keep that level in mind please. It has tested it now two times and bounced strongly. The more times you bang on that door the more likely the odds that it eventually gets knocked down. Rimm below 125 speaks loudly about what could occur on the Nas and it's not good. Commodity stocks as well refuse to be able to have any sustained rallies. They bounce for a week or so and then roll right back over. A broken sector now I believe in a bear market as you know by now. The love affair is so intense there you hear day by day how all is still well in that sector. It's not!!!

The advance decline line was a disaster for the bulls. Volume continues light ahead of the post-Labor Day action which is when things will pick up in a big way. The internals are just so bad on days like today it has to be discouraging to the bulls. Nearly four to one on the negative side is not what you can feel good about if you're trying to find something positive about today's losses. The losses were across the board in all the major indexes with nothing leading that I could find. Commodities, financials and the other major leading sectors could not find a bid anywhere, thus the reason for such a poor advance decline number. Respect the message there. With the Sp and Nas so close to losing big time support you have to feel the odds are pretty good it'll happen when you see internals this bad looking. Again, play the message.

See SPX chart.

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