Monday, October 20, 2008 Today's Overview

Monday, October 20, 2008

Today's Overview

(Special Note: The newsletter will not be published this Friday because I’ll be traveling to

New York City for Saturday’s TheStreet.com Investment Conference. Our regular schedule will resume Monday evening.)

The market opened the new week with an inside day ahead of market-moving events Tuesday. The blue chips showed a stronger bid than big tech, which was held down by selling pressure in Research In Motion (RIMM) and Apple (AAPL). The technicals are unchanged after the slow uptick, except for the Market Volatility Index (VIX), which responded to the narrow range session by dropping nearly 24%.

Let me repost two paragraphs from my RealMoney column this morning. They sum up my thoughts on trading conditions as we head toward midweek:

“Tuesday could mark a major turning point for this dark chapter of the financial crisis. That's the date when holders of Lehman Brothers credit default swaps need to pay up, after the bankruptcy filing put those instruments into default. While Wall Street is bracing for the worst, anything less than a catastrophe may trigger a powerful wave of buying.

What can we expect if bulls take control of the tape after that nervous event? With the market stuck at historically oversold levels, the next bounce could be dramatic and quite profitable for short-term traders. However, serial bottom pickers are likely to lose out once again when the upside fizzles out under the weight of a 2009 recession.”

It makes sense to treat news coming out of the auction like the reaction to a Fed rate announcement. In other words, it could take up to two sessions before we see the real trend take hold of the market. However, I have to feel bullish about short-term direction, regardless of the news, because it will lift a big weight off the market. As usual though, I recommend against buying in anticipation of a positive response because that‟s gambling, not trading.

In summary, the technical focus for this week is surprisingly simple. We need to see how the news impacts the VIX and the diagonal patterns on the major indices. The Nasdaq averages are now well-positioned to rally back to last week„s highs while the blue chips could trade above those levels and into their 20-day SMAs. Of course, that‟s assuming a positive response. The flip side is bad news because there‟s little support between the current price levels and the bear market lows.

I sold TFS Financial (TFSL) into October resistance because I wanted to be flat heading into Tuesday. It was nice to see a multiday trade on the long side work as intended.

PLEASE SEE IMPORTANT LEGAL DISCLAIMER ON LAST PAGE Monday, October 20, 2008

Random Notes: Bullet Points on the Market

• High dividend paying stocks are the only ones in my database, other than a few financials that show constructive basing patterns.

• Volume dropped to its lowest level since late September, with traders and institutions unwilling to make real commitments ahead of the Lehman Brothers auction.

• Coal led the market Monday but still doesn‟t show much of a bottoming pattern.

• Monday was the first inside day on the S&P 500 and Nasdaq 100 since Oct. 1.

• Commodities and commodity stocks are starting to hold their lows much better.

• Gilead Sciences (GILD) could be the first major biotech to break out of a downtrend.

Daily Spotlight

The Research In Motion (RIMM) price action is getting uglier by the day. The stock gapped down in September, following a poorly received earnings report. It moved lower for the next two sessions, even though the gap dropped the price more than 20%. A bounce finally began Oct. 10, when it jumped 18 points in the next three days. But it has now rolled over and is back to testing the lows.

The six-month pattern is grinding out a perfect Elliott Wave gap trend, with the June 26 posting the breakaway gap and the Sept. 26 gap posting the continuation gap. This sequence suggests the stock is currently going through a fourth wave consolidation ahead of a third selloff wave. Now comes the bad part. This classic setup predicts a final low somewhere between $20 and $30.

* * * (Spotlight presents updated index analysis, quick takes on reader favorites and fresh views of active picks. The section belongs to our subscribers, so let Alan know what charts you would like to see by sending him your requests. Please note that Alan can’t answer all of your requests due to time and space restrictions.)

(See Watch List on the next page)

Watch List

• TeleCommunication Systems (TSYS) tested four-week resistance. (long - 10/16/08)

• TFS Financial (TFSL) tested three-week resistance. (long – 10/14/08)

• SPDR Gold (GLD) bounced in an inside day. (short – 10/14/08)

• U.S. Natural Gas Fund (UNG) ticked higher and sold off in a bearish outside day, after natural gas reversed at $7. (short – 9/25/08)

• General Mills (GIS) posted an inside day at 50-day EMA resistance. I‟ll pull it on a rally above that level. (short - 9/24/08)

• Semiconductor HOLDRs (SMH) posted an inside day. (short –9/3/08)

• iShares Mexico Fund (EWW) moved sideways in a quiet session. (short - 8/29/08)

• Removing Kimberly-Clark (KMB)

ay’s JoPetsmartClose: 24.00 (PETM [Up .86]) Today's Close: $20.72 up $0.67

Petsmart (PETM) topped out at a two-year high at $35.48 in May 2007 and sold off in a long decline. It bottomed at $21.34 in March of this year and bounced up to the mid-$20s, before rolling over and testing the low. That selloff gave way to a strong rally that lifted the price to a six-month high before the uptrend failed, sending the stock back to the low on Oct. 10.

It‟s been bouncing along this level for the last seven days and could move higher soon in a strong recovery rally. This is a bilateral setup. Buy the bounce or sell the breakdown of seven- month support. I favor the upside right here but a short sale also shows excellent reward/risk if the market doesn‟t cooperate The short-term pattern looks constructive, with a 60-minute triangle that could yield a rally back to the Oct. 14 high at $23. The company reports earnings in mid-November.

(See second chart on the next page)

Petsmart

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Alan Farley is a freelance writer and a contributor to TheStreet.com's RealMoney. TheStreet.com is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission.

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