Opening Range with Linear Regressions

The chart below is of the S&P 500 Index and has two sets of lines. The horizontal lines represent the opening range and its extension levels. The black lines define the opening range and the two red lines mark extensions off of this range. Once the market traded below the bottom of the opening range black line, the next target was one level down, the first red line. As the 800 level held, the market then tested this line a few times, and like last Friday, had a rally above it.

The downward sloping lines from left to right are the linear regression line and the corresponding standard deviations from this linear regression. Friday morning was an important morning in that the Unemployment Number was to be released at 8:30am eastern time. It was also important technically because the prices Thursday closed right that both the linear regression line and the first extension off of the opening range. Any trading above these lines accompanied by even the smallest amount of momentum, would lead to a strong short-covering rally and higher prices. The overall volume for the day was not very strong, so look for a choppy market next week. If Congress passes a stimulus bill, look for an opportunity to take profits on any rally and/or get short. Support should be around 840 for now, and resistance will be the lower part of the opening range, 890.

S&P 500 Index Futures Opening Range + Linear Regression (click to enlarge)


It is important to keep a longer term perspective and not get caught up in the hype of 200pt up days on the Dow 30. It seems like every positive day, experts on TV come out to say this is the start of the new bull market. Below is a chart of the S&P 500 Index. It is not a daily chart, but a three-day chart. Each candle represents 3 trading days. It clearly shows how small the rally was Friday in the big picture. It does also show that 800 looks to be holding strong, only time will tell how strong that 800 number is.

S&P 500 Index 3-Day Chart (click to enlarge)

S&P 500 Index 2009

S&P 500 Index Opening Range Extensions 2009(click to enlarge)


S&P 500 Index % Stocks Above 40 Day Moving Average (click to enlarge)


After a 200+ up day on the DOW, it is amazing how all the "experts" on television begin talking about the next rally. It was not that long ago that the DOW moved 500 points in the last hour of trading, so it is important to keep things in perspective. There is still a lot of overhead resistance and no sign of up-days with significantly stronger volume.

On a percentage basis it is easy for Bank Of America and some of the regional banks to have incredible days, but that is only because they have fallen so far. Monday should be a key day. The Congress should have made some progress on what ever stimulus package they are going to pass, but more importantly the Treasury is going to explain its plan for the "Bad Bank" that will take on the rotten financial instruments that are causing so many problems. It will be important to follow the specifics of this plan. Chances are the plan that is introduced Monday will evolve over the coming days and weeks. The problem is still what to pay these banks for these assets.

One idea would be to take 180Billion out of the remaining Tarp pool, and start this "Bad Bank". With this starting capital, the bank could then additionally sell a type of preferred stock or bonds based on the initial capital and the questionable assets they will take on. This would give it a multiplier effect, and not limit the bank to the original investment from TARP.

Another factor that should be considered, is not to pay these banks for these assets, but to give them an equity stake in this "Bad Bank". They could claim this stake as an asset, and receive interest payments if it is structured as a type of preferred share. This would not give the banks the raw capital that some of them need to meet the re-lending requirement being put on them by the government, but it would give them a stake in the proceeds along with the tax payers who are fitting the bill. When was the last time the interests were aligned between investors and company in the banking industry?

Hopefully the "Bad Bank" will be structured to where the tax payers are not taking all the risk for an inappropriate percentage of the reward. If this deals starts to sound like the picture below, watch out for new lows in the market.

CEO of the Bad Bank...or maybe the new spokesperson for Citigroup?


***Update***
Geithner Delays Bank-Rescue Speech to Keep Focus on Stimulus

Feb. 8 (Bloomberg) -- Treasury Secretary Timothy Geithner postponed his unveiling of the administration’s plan to shore up the financial industry as officials focus on getting approval for their separate economic stimulus plan in the Senate.

Tuesday????

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NDX 100 2009

Nasdaq 100 Index Opening Range Extensions 2009 (click to enlarge)


Some of the stronger component subgroups in technology.

SMH Semiconductor Holders Trust (click to enlarge)


BBH Biotech Holders Trust (click to enlarge)


Below are a couple of charts showing that it is possible to trade above the opening range.

GS Goldman Sachs 2009 Opening Range (click to enlarge)


U.S. Dollar Index 2009 Opening Range (click to enlarge)

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