I have recently added podcasts to the content mix here on the Wilderness Blog. The podcast is a companion to the Apple Investor in the Wilderness blog. So, now you can get the Wilderness Blog on your iPhone or iPod Touch, or any iPod by subscribing to iTunes. Just click the subscribe link above to go to the iTunes page and subscribe.

The podcast is getting pretty good reviews too, with and average rating of 4 1/2 out of 5 stars! But you don’t have to go to iTunes to get the podcast or the blog, you can get it on your iPhone or iPod Touch directly. All you need is to navigate to www.zacharybass.com using mobile Safari and the blog will get formatted automatically to your iPhone or iPod Touch. Here’s a screen shot:

The Investor in the Wilderness Podcast

That’s right, many of the Wilderness posts are now also simulcasts as podcasts. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.

Subscribe in iTunes

I’ve always tried to be a straight shooter, tell it like it is. And sure, I find it fun to mix a little irreverent humor in with the story, to liven it up a bit, and break down communications barriers. But I’d be hard pressed to find any humor in what I’m going to report today (Thursday Nov 20). I want to start off by saying that there’s going to be a lot of people hurting soon, either from layoffs, or lost fortunes, or both. And those of you that are protected should do what’s best for you and your family first, but don’t forget about those who are less fortunate and unable to make it without some assistance.

Well, here’s the situation. In the past week the markets twice tested the triangle trend line support that virtually every index has been moving in for the past 6-8 weeks. And both times the markets recovered nicely, showing good strength and some hope that the Bulls had something left to fight off the Bears. The first time was a week ago when we were in free fall, hitting 818 mid-session, then with a spectacular second half rally, we finished the session over 900. Then Tuesday (Nov 18th) the markets were tired, as they steadily dropped for most of the day, right into the last hour of the session, touching 826. Then out of nowhere we had a spontaneous rally which cleared critical support of 850 and plotted a bullish hammer. The technicals ended up looking pretty good, as positive divergences and extreme oversold conditions set the stage for a continued rally. The market had successfully beat impending disaster twice.

Wednesday (Nov 19th) we opened neutral and started an early surge, but when the auto industry hearings got going, investors quickly got a whiff that it may be some time before the auto execs see any of that $700 billion bailout package. You could feel it in the air as fear and uncertainty started to build, the VIX (the Fear Index) was climbing and the S&P steadily moved below 850, then 839, then below previous lows, where the Bears apparently tried to dig in and defend this level. Then with an hour left in the session, the Bulls simply ran out of gas, they could no longer hang on, as they simply handed control over to the Bears, and they summarily took the markets down hard, in full breakdown mode on massive volume.

So, what does all this mean? We have a massive breakdown on every index on huge volume. We’ve lost critical support and the mid and long-term MACDs are pointing straight down, and the near-term, 60 minute and 15 minute charts, those MACDs have crossed over to the downside as well. That’s confirming indicators in all time frames. Folks, we’re heading for the 2002 lows. That would be 775 on the S&P and it looks like we’ll have no problem getting there. My concern is that if we lose that level, then the next level of support isn’t until the 61.2% retracement of this entire bear market. If you recall I illustrated that point in the podcast titled Going to Hell and Back, where I said that level on the S&P was 666. I see a definite possibility of us getting to hell, hopefully there’s a life line, because if we stay there too long, then we’ll all get burned.

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Is there anything in the tech world more beautiful than the new Apple MacBooks? And the beauty goes way beyond the unibody design, with it’s rock solid feel and streamlined design. And the multi-touch trackpad that doubles as a button is shear brilliance. Inside it’s a triumph of engineering, simple yet elegant, and yes, truly beautiful. Yup, the MacBook is beautiful inside and out.

You know what else is beautiful? It’s when I hear that Apple could meet or beat last quarter’s record 2.6 million Mac sales total, and sell more than 6 million iPhones this fiscal quarter. This is according to Piper Jaffray analyst, Gene Munster, in a research report released on Monday.

This is why I love this company so much. In the face of dire economic straits, where many retailers are expecting their worst holiday season ever, Apple will continue to break sales records and generate revenue. Apple’s success goes way beyond cool products, it’s ingrained into their DNA, their philosophy, from their attention to detail and the balance they achieve between form and function, to the unparalleled experience you get an an Apple Store. Apple is beautiful inside and out.

You know what else I find beautiful? Triumph in the face of diversity. When there are insurmountable odds stacked against someone, and they find the will, the desire to overcome those odds to become victorious. It speaks volumes, not only of the triumphant event, but also of the character of the individual. It’s a beautiful thing inside and out.

Well, perhaps this is a stretch, but I saw that kind of triumph today in the markets. The Bulls were all but counted out. The Bears had them over the coals, on the brink of disaster. Pinned below the critical support level of 839, it looked like the Bulls were down and out. Had the S&P closed below the old closing low of 848, would have been bad enough, but to close below critical support would have been the death blow, and opened the door to sinking to the 2002 bear market lows.

But the Bulls made a remarkable comeback and rallied into the close, plotting a fine bullish hammer, and broke a five session streak of declines. On the surface this was as beautiful as beautiful can get. But upon closer inspection, there’s a lot of ugliness under the covers.

One of the problem was a lack of participation across the board. The Dow was clearly the leader, advancing nearly 2% after being down by just as much. And the S&P had a great reversal as well, finishing up 1%. But the Nasdaq finished flat. Sure, it had a very good reversal, but failed to deliver in the end. And it’s the growth-heavy Nasdaq where you would expect reversals like this to emanate.

But the real ugliness was even deeper. Now I’ve talked many times about the importance of confirming strong market moves through the performance of market internals. And that’s measured by the advance-decline line, the ratio of advancing issues to declining issues. And like most hard moves down, the advance-decline line was dismal, with decliners outpacing advancers by more than 3 to 1. Then the market reversed and the rally ensued, and normally you would expect the advance-decline line to reverse as well. But it didn’t. The Naz and the NYSE both finished up with decliners still well ahead of advancers by 2 to 1.

Let’s add to this ugliness. The Volatility Index (the VIX, also known as the Fear Index) peaked today to 73.13, breaking the 70 barrier for the first time in 3 weeks. It retreated into the close, but we’re still just below 70! A VIX at this level makes it very difficult to trade stocks because price movement can be violent with this kind of volatility.

So while this reversal was beautiful on the surface, and it may open the possibility of a rally, there is some serious ugliness underneath. And with the Fear Index at these incredible levels, the market is moving on pure emotion. So, as enticing as the reversal was, the poor internals and the fear offset the beauty. And in my opinion cash is the most beautiful thing of all!

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The Trader is dead, long live the Trader. This is my official proclamation now that this Bear market has finally proven to us all that it is futile to trade this market. Technical Analysis, economic reports, historical data, they all have little to no meaning while volatility is sitting above recent historical highs.

Just think about it. In the past couple of years we’ve have market ups and downs, where sentiment indicators like the Volatility Index and the Put-Call ratio, peaked above certain levels we considered watershed events. We called it capitulation. And it was pretty well defined and predictable. Although in retrospect, we thought at the time the world was caving in.

Capitulation happened with a fairly standard confluence of events, that went something like this…

After a strong downtrend, there would be a day when the market would open on a relatively significant gap down. And from the gap down level, the selling might continue for a few hours, and the Volatility Index (VIX, or Fear Index) would rise to the mid 30s or so. The Put-call ratio would peak somewhere between 1.6 to 1.8, and the advance decline line would be dismal, with decliners trouncing advancers 3 to 1, sometimes 4 to 1.

To us pedestrian investors it seemed as though the sky was falling. Then around mid-session, after one final plunge down, there would be a sea change, the proverbial straw that broke the camel’s back. And the markets would suddenly rise, and rise sharply, all the way into the close. The VIX would plummet, the Put-Call ration would drop to under 1.0, and most importantly, the advance decline line would reverse hard, across all the indexes. And we would end the day with advancers totally flipping the stage, trouncing decliners by 3 or 4 to 1.

On the daily charts we would see the telltale bullish hammer on all the indexes and most equities, especially the leaders, and a huge black candle on the VIX. A bullish rally would ensue the days following that event. That is what we thought to call Capitulation.

But these days we’re experiencing a whole new level of market behavior. With this Bear, we’ve had all the worst parts of Capitulation, and a couple of times the market started to rally. But each and every time it has been cut short, never getting beyond a couple of days. And it’s been that way ever since the VIX got above 45. It seems that 45 is the point of Market Entropy. Above 45 and we enter disorder, unpredictability, chaos.

And it is in this state, this twilight zone, that the investor and trader are good as dead, because none of the traditional weapons in our war chest work. They have no value. In fact, they distract, degrade and ultimately destroy our primary goal of preserving capital, by presenting temporary illusions that what we are doing makes sense. And why not, it’s worked in the past?

Well, it’s not working now. And it won’t work while volatility is above 45. And so, why is this so? Why are investors and traders fearful of the market? The reason is because of uncertainty. We are uncertain of what the market will do, how it will react to stimuli, not only from day to day, but from week to week, for the next several months or evens years. The effects of this Bear market are only starting to impact us, and that’s the scary part. Just look at where we are…

The investment banking industry has collapsed, the mortgage industry has collapsed, intra-bank lending is anemic at best, consumer lending has halted. Layoffs are starting to mount, as unemployment has reached nearly 7%, and many think double digits are in our future. The US auto industry is insolvent, commodities, including oil have lost 70% of their value in just a few short months. And it’s not just us, the entire global market place is in similar disarray.

So, how did we get here? I think most would agree we got here because of our insatiable appetite for material things, whether we could afford them or not. That’s right, we borrowed our way into this mess. People bought houses they couldn’t afford, and then using their credit cards, they filled them with furniture and gadgets they couldn’t afford either. And if their credit cards were tapped out, they borrowed on the equity of their homes. And you want to know the most insidious thing of all? Our government’s solution to getting us out of this mess is to borrow more. It’s friggin crazy!

Alright, enough of that rant. So getting back to the uncertainty principle. Let’s look at the last apparent capitulation event this past Thursday and Friday. Thursday had all the signs with a gap down, followed by a rally and a reversal of the advance decline line. Then on Friday we started weak, then reversed with a huge rally going into the close. Now in past markets we would have closed positive and continued the rally. But not here! Instead, with less than 30 minutes to go into the session, we plummeted, losing virtually all the gains from a 5 hour rally.

Why? Well, for a short time there, things were looking good, with the VIX falling and prices rising, then the uncertainty principle was injected, when Fed Chief Bernanke and Treasury Secretary Paulson went on TV and basically told the world that our initial $700 billion bailout plan was a bunch of crap, and we’re gonna try something different. Oh, and by the way, we - he was referring to the United States - really screwed up and we feel ashamed.

WTF!!?? Why do they allow this guy on TV? And why is he saying this stuff while the market is still open? Was this some lame attempt for us to appears as if we’re the underdog going into the G-20 summit this weekend? Perhaps by admitting to being total screw-ups, it would limit the flame throwing? So we traded nearly 5% in market cap for less name calling at the G-20? I guess that about sums it up. I hope it was worth it!

Ok, enough of the rant. But this has got me thinking about this whole credit crisis, and this piece I read early today about how 1 in 7 homeowners are underwater on their mortgages, and how so many people have maxed out on their credit lines with no where to turn should they lose their job. The people that are going to fare best, assuming they don’t lose their jobs, are those that have been frugal with their credit, and pay cash for things.

And then that got me to thinking about the type of companies that may have the best chance of getting through this mess, with minimal damage. Companies like Apple, that have zero debt and lots of cash. Perhaps thats the key right now as an investor? Start accumulating stock in those companies that have long term prospects, no debt and lot’s of cash. But what if the price of companies go down more, I mean significantly more? Should investors just sit in cash and wait it out, or do we start accumulating and perhaps protect those positions with insurance like reverse ETFs? That seems reasonable.

What if you don’t have a lot of cash on hand, like a lot of people after taking such a beating. Then perhaps buying deep in the money leaps are the way to go, and straddle that position with puts as insurance, or even better yet, you could make that insurance really cheap by selling calls against the leaps in a Bear Call Spread.

If you don’t do options, then another strategy might be to dollar cost average into companies like Apple and offset it with inverse ETFs like the S&P 500 ProShares Ultra Short (ticker symbol SDS). You can buy a smaller quantity because it performs at 2 times the market. So perhaps for every 4 shares of AAPL you pick up 1 share of SDS.

Alright, so maybe the trader isn’t dead. Perhaps now is the time to play the market volatility and uncertainty with strategies that are designed just for that.

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Is this what it feels like to go to hell and back? Check the soles of your feet, are they scorched? Or are you one of those skeptics that’s convinced yourself that this market is going down to the 2002 lows, no matter what, and all rallies are false? I know, I know, we’ve been here before. Or have we?

So, not only did we retest the recent low, but we blew past it, touching 818 on the S&P, a full 2% below the 839 level we’ve been focused on. That was a moment for real concern, because at that depth I didn’t think we’d have the ability to recover. But we quickly made it back to 839, and almost lost it again, and then made a mad run that simply upended the Bears, and they finally stepped aside.

The one thing that was missing in our last bottom was a strong reversal of the advance decline line. And today we got it. And what a reversal it was! At one point decliners led advancers by 4 to 1, and we finished up with advancers leading decliners by more than 3 to 1! Wow!

Apple investors have got to be thrilled that we recaptured 95, and in convincing fashion. Todays’ rally completely engulfed the past two down days! And that’s great, but there’s still a lot of work ahead, with the 20s and a gap down both at 101. I’ve often said that Apple is a proxy for the markets, and lately it has disappointed. But if Apple can take out the 20s convincingly, then we have a real shot at the 50s.

Are you still a skeptic? Well then, there’s the volume. There were over 3 billion shares traded on the Nasdaq! That’s a the big boys coming out to play, the institutional traders, not just a bunch of shorts covering.

So now the Bulls are re-energized, they have institutional traders on their side, and the wind at their backs. It’s time to retake the 20s folks, and if we can muster the momentum, we’ll go for the 50s as well! How long will it last? Well that depends on how oversold we get. But for the time being, you have to go with the cards you’re dealt.

If I’m giving you the impression that I think we’ve hit bottom, well I’m telling you right now, that I really don’t know, and I think it would be presumptuous to say that we have. But I do think we have a tremendous opportunity to catch our breath and take advantage of an upside run. And when things turn the other way, it’ll be time to reassess and jump back into the fire.

The Investor in the Wilderness Podcast

That’s right, many of the Wilderness posts are now also simulcasts as podcasts. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.

Subscribe in iTunes

Yup, we’ve been there before. Hoped we’d never return, but it’s in our destiny. Today’s action made certain of that. We’re going to retest those lows. Conventional wisdom says that’s how Bear markets come to a close. You go down for that initial plunge, shoot up to catch your breath, then take another plunge, touch the bottom just to make sure it’s still there, and then rocket up above it all, free from the weight and friction. And you find yourself floating atop the sea of despair that had previously engulfed you.

It’ll be liberating. Right? Investors will feel that they’ve endured enough already, and that they deserve a strong rally. But wait, what if it’s not the bottom? What if we whiz past the recent lows and head for the lows of 2002, what then? Or even worse yet, what if we lose the 2002 lows, will there be any rally? Will there be any way out of this morass? Or will we be so far gone that all we’ll be able to muster is a knee scraping crawl for the next few years? If we continue down this path, there will be much suffering.

I don’t like thinking about this kind of suffering, but it’s necessary to confront it, see it for what it is, why it’s there, how it affects us, and most importantly, how to realize a plan of cessation for that suffering. I’ve always been the eternal optimist, where every obstacle, every adversity, every instance of suffering, presents an opportunity to learn, to grow, to find the path. I mean, what’s the alternative? To Fail? I think not!

So, I won’t complain about Secretary Paulson’s indecisiveness, and total lack of leadership, as the primary cause for our drop in the market today, or the horrific earnings and dismal guidance from Intel in the after hours, …oh, and let’s not forget the complete inability for AAPL to catch a bid and hold that critical 95 level. Nope, won’t do it.

Instead, let’s look at what we have. Or should I say what we don’t have? What we don’t have are buyers. For that matter, with such light volume, on could argue that we don’t have sellers either. If we were in fact looking for a bottom, we’d much rather see lot’s of volume on the way down. That way we could be relatively certain, as the market came down, the sellers would wear out. But in the last three sessions, volume has been extremely light.

Perhaps one could argue that the sellers are already tapped out, and the buyers are simply biding their time. On the other hand, you could also presume that the sellers are biding their time, waiting for the markets to approach those old lows, then jump on board and slam the market straight to hell! In either case, one thing is for certain. This market is going down hard if we take out 839 on the S&P, which of course is our previous low for this current Bear market, and the 50% retracement off the highs.

So, if we take out 839, then we’ll probably visit the 2002 low of 775. So, where is hell? Well, if we take out the 2002 lows, then the next level of support would be the Fibonacci level of 61.8% retracement off the highs. And I’ll give you one guess where that level is… As unbelievable as it sounds it’s 666. So, there you have it, hell!

Click on image to enlarge

Yesterday (Monday, November 10) morning futures were sparked from world markets being juiced on the China $600 billion plan, and we gapped up. Then the government released more details about the AIG plan, that brings the total to $150 billion! I guess at the outset this all seemed like good news. Well, the markets promptly sold the news as it found a wall of resistance at about 950, and unfortunately there were massive numbers of ready and willing sellers there.

Markets moved steadily down into the close, until we hit the trend line support of the triangle bottoms. Apple (AAPL) found that support in the 94.50 to 95 range, and found it early by mid session, and the Bears tried like hell to compromise that level on four separate occasions. On the last try, with just 15 ,minutes to go in the session, the Bears felt they had done their job of antagonizing the Bulls, let up the pressure by covering their shorts. It also appears of few buyers jumped on board and rode the close into the sunset.

When I say the Bears did their job of antagonizing the Bulls, I meant that it’s a strategy to keep the pressure on near this critical support level. The longer the Bears can apply the pressure, the more frustrated the Bulls will become, with some of them simply giving up. As their numbers decrease, then the greater the chances are that the triangle will live up to its expected outcome and that’s to continue the downtrend.

It’s put up or shut up for the Bulls. We need a Bull reprisal, otherwise we’ll lose this level to the Bears. It almost seems imminent, unless the Bulls can mount a major attack. For AAPL that level appears to be around 94. And we’re almost 2% above that level, so shorting here doesn’t have a great risk reward, as it won’t be given up without a rigorous defense. Besides, the 60 minute charts are showing some strength to the upside, being severely oversold and with positive divergences on the MACD.

If AAPL is the leader of Tech and the proxy for the markets, then now is the time to lead us out of the dregs. Hopefully investors will catch wind of Andy Zaky’s latest analysis, which foretells of blowout Q1 revenue that beats the street numbers by $1.2 billion, and earning by a whopping 36%! That would be a monumental underestimation by Apple analysts if Andy’s non-GAAP analysis is correct! And I have no reason to doubt him as he’s consistently more accurate in forecasting Apple earnings than the high and mighty paid analysts. Check out Andy’s report, he does excellent work and deserves greater recognition by investors.

Well, here’s hoping that big money catches wind of Andy’s work and moves Apple and the markets in the right direction. If we can break this continuation pattern on the indices and on Apple, we have a shot at establishing a solid bottoming base. Also, if we rally here and take out the top of the triangle, we’ll be playing into a very bullish Inverse Head and Shoulders pattern, which I illustrated in my last post-podcast entitled, Apple Investors Struggle with Conflict and Contrast.

Best to stay mostly cash, or play things to the light side here. The technicals indicate a small rally is likely, but it’s best to keep a cool head, watch and learn. If we rally, play it light, look for lot’s of resistance, and stay disciplined, if we rally and break out, then great! If we rally and lag, then get your shorts in gear.

The Investor in the Wilderness Podcast

That’s right, many of the Wilderness posts are now also simulcasts as podcasts. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.

1. An overview of the components of a candlestick chart
2. How to create and annotate charts using StockCharts.com

This tutorial will assume that you don’t have a paid membership with StockCharts.com, and where appropriate I’ll refer to member-only features. But let me say this before we go further, if you’re serious about investing, you’ll want to either buy a high quality program, or get yourself a subscription to StockCharts.com.

Chart Choices
Now, there are a lot of great charting programs out there, some are desktop applications that are platform-specific, meaning they only run on Windows, some are cross platform, running on both Windows and Mac, some are Mac only. But they are a much smaller group. Many of the great charting programs are integrated into your trading platform, like TradeStation, eSignal LiveCharts, IQCharts, or Fidelity’s Active Trader Pro. Many of these programs are included with your brokerage account and have realtime streaming data. The most accessible to virtually anyone with an Internet connection, are the online, browser-based applications.

Besides StockCharts.com, there are other notable online charting programs like BigCharts and interactive charts with Yahoo Finance. There are many others, but none come close with the depth, breadth and simplicity of StockCharts. And anyone can use StockCharts cor free, they also have various subscriptions with different levels of service, including realtime charting.

CandleStick Charts
All right, so let’s start with the basics of the type of stock chart that you’ll use the vast majority of the time, and that’s the candlestick chart. It’s called a candlestick chart because each individual division that plots price looks like a candlestick. It has a body and a tail that looks like the wick of a candle. Each one of these candles plots the price history of the security from open to close.

If you’re looking at a daily chart, then each candle on the chart represents the price movement from the opening to closing bell. There are two basic types of candles, solid and hollow, or red and white. The white or hollow candle represents a positive movement from the open to the close, the red or solid candle represents a negative movement in price from the open to the close.

On a hollow or white candles, the open is plotted from the bottom of the candle body, and the close at the top of the body. The wick represents the extent that price moved during the time period. On Solid, or red candles, the open is at the top of the candle body, and the close is at the bottom. So, from this simple chart element, you can tell a lot about the movement of price during the period that the candle represents.

Chart Attributes and Indicators
All the chart attributes are located below the chart, and are presented as a number of drop-down menus and check boxes. You enter the symbol in a text box to the upper left of the chart, then click an update button to draw the chart.

The most important attributes of a chart to set are the periods and range, the range is the total visible timeframe (1 month, 6 months, 5 years, etc). Without a subscription you only have daily and weekly charts to choose from. You can get by with these if you’re simply interested in long-term trend trading, but if you want to do technical analysis you need both smaller and larger periods. The smaller periods I use are 60 minute, 10 minute and 1 minute. I also use monthly period to identify long term trends.

The next most important setting is the size of the chart. This is the physical size of the chart, how much screen real estate it takes up. As I said in the Top Ten podcast, the bigger the better. Without a subscription the biggest size you have is landscape, it’s a pretty good size for quick and dirty work, and with the default daily period, it allows you to see 6 months of data. Landscape fills up a 15 inch screen. If you have a 20 inch screen you could you could see well over a year’s worth of daily data.

Now I often talk about primary and secondary indicators, where the primary are volume and MACD, and the secondary are the moving averages and the RSI. StockCharts by default shows volume as an overlay to price so that you see them within the same pane. This makes it very easy to correlate price movement with volume. The other defaults have the MACD in a pane below the candlestick chart, and the RSI above.

Then finally their are the indicators. StockCharts shows the simple 50 and 200 day moving averages, but I also like to see the 20 day moving average. When markets are more volatile, I opt for the exponential moving average instead, because it tracks price movement much better.

Color Scheme
The last thing that really makes the chart for me is the color scheme. Now, this is a very personal choice, and most chartists stick with a single theme, as do I. The scheme really sets the tone for the chart and says something about the chartist, I guess. I’m a huge fan of beautiful sunsets, and plus I want a theme the is compatible with the wilderness theme. So Sunset is my favorite. I believe it’s soothing on the eyes, provides sufficient contrast between the background and the various chart elements, and it looks professional. I’ve seen some people use a black background with neon colored chart elements. I think it’s gaudy, and gross, making it difficult for me to concentrate on the chart.

Whatever scheme you choose, stick with it. Sure, you can refine it over time, but don’t be in the habit of completely changing it up for the sake of change. Choose a scheme that makes the chart readable rather than making it fancy schmancy. Simpler in this case is definitely better. You don’t want anything to cloud or distract from the story your chart is supposed to convey.

Annotations
StockCharts provides a Java applet, that allows you to annotate your charts right inside your web browser. This feature is available only to everyone, but if you are not a subscriber then you can’t save your annotations, you’ll have to take a screenshot to transfer the annotated chart to your trading log or file system. The ability to annotate is the most important tool in your charting arsenal. Sometimes I’ll open my charts into Photoshop to add additional artistry that is beyond the capability of the applet, but I’m sure there are plenty of lesser expensive graphic programs that will do a fine job as well.

The two features I use the most are the line tool for illustrating trends, and the balloon text box, which lets me write a short note and then extend the balloon to point at the feature I’m trying to expound upon on the chart.

Saving and Sharing Charts
As a subscriber, you can save the annotations and keep the chart live, so that you can retrieve it at any time and see how the chart has progressed with respect to the annotations you drew. Or you can save the chart as a static snapshot, then retrieve it later, or create a linkable version, that can be shared with others.

When you save the chart, the applet goes away and your annotations are imbedded in the graphic on the web page. From here you can save the graphic by right clicking it and select the Save Image As… from the popup menu. Another quicker way is to simply click and drag the image to your desktop, or into a folder, where it will be saved as a PNG file. PNG files can be imported into just about any program, like Word, Mail and Pages, or uploaded to your MobileMe gallery or web page.

Wrap Up
Becoming a proficient chartist should be top on your list of skills as an investor or trader. Your trading strategies should be documented, and the best way to do that is with charts. Many professional traders keep a log of all the positions they take, and that log typically contains numerous annotated charts that contain the reasoning behind the strategies and positions they take.

If your serious about your investment and trading activities, then you need to become a skilled chartist and document your work. It’s the best way to track your performance and learn from what worked and what didn’t.  

Investor in the Wilderness Podcast

Almost every Wilderness posts now has a companion podcast. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.

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In this post I’ll recap the epic struggle between the Bulls and Bears this past week. The latest battle was won by the Bulls as they fought off an attempt by the Bears to bring the markets down on Friday. I’ll examine how this struggle has been one of conflict and contrast. And on the Technical front we have two patterns competing for dominance.

We started the week on a pretty good high, with strong gains spilling over from the week before, and even in the face of extremely disappointing construction and manufacturing numbers, the markets continued to trend up, it seemed nothing would hold them back. The world markets were surging as well, perhaps in anticipation that Barack Obama would win the presidential election. The morning after the election (Wednesday, November 5th 2008), it was sell the news. At least that’s how some had described it. I would say that we were extremely oversold, and a lot of nervous Bulls sought to book profits while the booking was good. The Bears seized this opportunity to take the markets down. So, for the next two days we had intense selling, and gave back nearly two thirds of the gains achieved since the rally began the week before.

The selling was so intense that we set another dubious record for the largest two day loss in Dow history. This drastic turn of events was hard to reconcile, because it happened in the face of strong near-term positive technicals. A more muted sell-off would be normal and expected, but this selling was beyond that. I guess that’s been the name of the game since this crash began. The interesting thing is that even though the reversal was hard, we didn’t break down out of the current patterns. In fact, the MACDs on all the indexes, including AAPL barely budged. It was still pointing up!

That’s one of the reasons why we didn’t continue to breakdown on Friday, we were also extremely oversold in the near-term. In any case, the Bulls showed remarkable resilience, as they held off the Bears for the entire trading session on Friday. Every attempt to bring the markets down was thwarted, as the Bulls bounced off the bottom of the triangle that forms the Bearish Pendant that I described in Thursday’s podcast. This all suggests that the Bulls have regained their composure and that they’ll be gunning for the tops of the pennants. But first they need to recapture the 20 Day moving averages, and that would be 960 on the S&P and 1713 on the Naz. Once there, the next test will be to break up through the top of the respective pennants. So, for the S&P that would be approximately 980, and for the Nasdaq it would be around 1740. So, those are the levels we need to see taken out to break the back of the Bear. Can we do it? Only time will tell.

So, what makes me think that we have any chance of breaking through the top of the pennant? Isn’t a bearish pennant a powerful continuation pattern? Well, yes it is. But we have a few things going for us. The first is that the MACDs on the daily charts is still pointing up, and on the 60 minute charts we’re extremely oversold, and very close to the MACD fast line crossing over the slow line. So, if the oversold conditions start the buying up on Monday, the n the MACD will likely cross over flashing a buy signal.

But that’s not the only reason for my optimism. We have two competing patterns at work here in the 60 minute charts, and they’re both sharing the top of the pennant trend line. Of course we have the Bearish Pennant that we’ve been so focused on, but we also have what looks like an Inverse Head and Shoulder pattern forming, and the top of the pennant is the Neckline of this Head and Shoulders. It’s interesting to note that I mentioned in my closing remarks in this past Monday’s podcast that this pattern might be forming on the S&P 60 minute charts. It would be quite prophetic if it comes to pass.

So, those are my reasons for optimism, but as always I must temper that optimism so as to stay grounded in the full reality of the situation. So even though we have some Bullish action going on, and even though technical indicators seem to be in our favor, and patterns that appear ready to break, I have to take note of the lack of leadership by the leaders. In particular, Apple (AAPL) and Google (GOOG), both of which seem unwilling to join in with this bullish action. The only thing that is keeping me in the game with these two is that they are both at the bottom of their respective triangles, and are perhaps ready to participate in an upside move this coming Monday. The other thing thats bothering me is that the Nasdaq up volume on Friday was 500 million shares lighter than the down volume on Thursday. On the other hand the ratio of the up volume to down volume was a healthy 3 to 1.

So what we have are a number of conflicting indicators. We have the poor Volume trend, upstaged by a strong MACD, then there’s the dichotomy of the opposing patterns, and finally there’s the excellent over all price action across the board, but with leaders like AAPL and GOOG which are simply not participating. So, if faced with these standoffs, what should you do? Well, I rely on what I consider the primary indicators, and that’s volume and the MACD, and if I had to choose between the two, then I would pick the MACD, as it’s a better barometer for momentum. So, given the strength of the MACD, I think the chances are best that volume will improve going into next week and the market will move higher.

So, most of this analysis has been concerned with the near term, the dailies and 60 minute charts. What about the longer-term outlook? Well, that’s difficult to say because the weekly charts seem to be at a pivot point, where they can resume the downward trend, or react to a sharp move up on the dailies, which will start a new uptrend for the weekly MACD. For now, we seem to be stuck traversing the boundaries of the pennant. And until we can break either to the upside or down, it will be very difficult to read where the market ultimately wants to go. One thing for sure is that this is a crossroads for the markets. And you have to ask the question, have we seen the bottom, or are we in for more pain?

The Investor in the Wilderness Podcast

That’s right, many of the Wilderness posts are now also simulcasts as podcasts. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.

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It was only two days ago that things looked a lot more crisp for Apple (AAPL). Everything on the daily charts was positive, good momentum to the upside, and a strong MACD. We were climbing the moving average mountain, as we made it well past the 20s and had the 50s in plain sight. There were definitely obstacles to overcome, but Apple was being fueled by it’s MACD and a strong positive divergence.

The news was equally good in the broader markets, as both the S&P and Nasdaq had managed to stay above their respective 20 Day Exponential Moving Averages. That was Bullish news for sure, because under normal circumstances one would look at that as building a base of support from which to launch the next attack. Meanwhile, the VIX (a.k.a. the Fear Index) had dropped simultaneously, losing 50% of it’s value from just the week before!

Things were looking good on the daily chart front, but the markets continue to lag in the medium and longer term charts. Let’s take the MACD to illustrate the point. Just remember that the longer term charts usually exert influence over the shorter terms charts, however the daily or near-term charts can sometimes crack that influence with a sustained rally. On the daily charts, especially in Apple’s case, the MACD has been pointing up, continuing to rise even on down days, looking to get out of the basement and clear the zero line. This is very bullish.

The problem is that on the weekly charts, the MACD has yet to recover from our horrific October slide, and it’s pointing down on a steep slope. The good news is that the solid rally we had from last week, extending into this past Monday and Tuesday, was starting to curl that weekly MACD up a bit. This is a great sign, because if the Daily can influence the weekly MACD and get it to change direction, and ultimately head up along with the Daily MACD, then we’ll have indicators in multiple time frames, all confirming. That would be a powerful Bullish message.

So now we have the Bear back mounting a comeback with the largest two day slide in the Dow’s history. Two days of pure selling, resulting in a 10% drop in the S&P and an 8% drop in the Nasdaq, which, by the way, plotted a 10 day high on election day (Tuesday, November 4th) of 1785, to today’s close of 1608. This is a 62% retracement of the rally, which is of course a fibonacci ratio. If we hold this level and rally to 1790, then what we just experienced was simply a wave 2. The problem is that the decline was impulsive, and the chances are that we’ll retest that 10 day low of around 1500.

All the major indexes, including AAPL, are plotting a Bearish Pennant since the October slide. And that doesn’t bode well for the future of the markets or Apple. If we break down out of this pennant, and move below the recent Bear Market lows, which are 7900 on the Dow, 839 on the S&P, the Nasdaq is at 1493, and AAPL at 85, then we may be looking at retesting the 2000 Bear Market Lows. Now that’s a scenario I don’t want to think about, but nonetheless it should be kept front and center to help temper our enthusiasm if we should move higher, within the pennant.

A bearish Pennant is a continuation pattern that occurs during a downtrend. The pennant is a pause in the trend, where some consolidation occurs before continuing the downward move. If you were to look at any of the daily charts of the indexes or AAPL, the formation of this pennant would be quite clear. If you were to draw two lines enclosing the pause it would look like a pennant or triangle, preceded by a sharp drop, which is commonly referred to as the flag pole. The theoretical target of a bearish pennant from the point it breaks down to the landing is equal to the distance between the top and bottom of the initial decline. In AAPL’s case the target could be as low as 50. Yikes!

This is the most vicious Bear market I have ever seen. And this Bear is relentless, he just keeps coming back at you. It appears that the Bear to take a little snooze the past week, and allowed unwitting buyers, like myself, to get back in. It felt good to get back in the game after sitting on the sidelines for so long. The VIX had subsided, and at least for a short period of time, it actually looked like reasonable setups might be possible. But, the Bear awoke and the VIX climbed faster than before, making it impossible to navigate this market.

Best to get back on the sidelines and watch the show. Looks like the uptrend that I thought was taking shape has been put away with the last two days of declines. Unless these positive divergences can recapture that momentum, it’s best to respect the Bear Flag patterns, as they are continuation patterns, meaning the likelihood that the market will go lower is good if the pattern plays out.

Investor in the Wilderness Podcast

Almost every Wilderness posts now has a companion podcast. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.

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Although Apple started the trading session today on a down note, our favorite company rebounded and rallied into the close and plotted a bullish hammer, leaving it’s 20 Day Exponential Moving Average in the dust. The S&P and the Nasdaq followed Apple’s lead extending the distance from their 20 Day EMA as well. This was an important day for Apple and the markets, because not only did we say goodbye to the 20s, we did so with strong market internals.

Mastering the 20s was an important event for the Bulls, because it marks an important swing of momentum away from the Bears. And it provides the platform that the Bulls need to extend this rally and affect the longer-term outlook. That’s the key right now, because as good as the near-term looks, and although intermediate-term is beginning to crack, the long-term outlook is still quite poor. The damage that this bear market has inflicted runs deep, and it will take a long time to undo. If we can extend this rally for another week, then the weekly charts will come around, and the monthly charts will improve dramatically.

Now, from a Technical Analyst’s point of view, this is precisely what a trader wants to see, confirmation that the 20s now represent support, providing a platform to continue this rally. And from an emotional point of view, there’s a great relief, as volatility is melting away, leaving a stable, tradable market that I’m sure most of you want to attack. To be successful here, we need to push our emotions aside, and stick with our strategy of capital preservation.

We need to keep reality front and center, because the facts are that the economy is still in very poor condition. Sure, the credit crisis is loosening it’s stranglehold to a degree, but it’s still suffocating the consumer and the ability of businesses to conduct business. The situation cannot be ignored, manufacturing is way down, unemployment will continue to rise, factory orders are drying up, and consumer confidence is the lowest it’s been in decades.

All right, so we know things are bad. So, what do we do? The answer is simple. You go with the trend until the trend is over. And for now the trend is up, so we go with it. It’s a welcome relief compared to sitting on the sidelines for the past couple of months, biting your nails, witnessing the carnage, fortunes lost, and wondering if there was any end in sight. But at least for now, things are looking up, so quoting the old proverb, “You have to make hay while the sun shines.”

The market is on a buy signal my friends. The trend is up, and there’ll be pullbacks along the way. So the strategy is to buy on those pullbacks, and sell into strength. I don’t recommend playing against the trend as Bear market rallies can be quite explosive. And as I said earlier, don’t let your emotions get in the way of taking profits. Don’t lament over whether you should have held this position or that position a little bit longer. Just take your profits and move on.

Investor in the Wilderness Podcast

Almost every Wilderness posts now has a companion podcast. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.

Subscribe in iTunes

Apple and the markets stall before the elections, as volume sinks. Credit markets are easing as the LIBOR dropped for the 16th consecutive day, and the manufacturing index, the ISM, dropped to a 26 year low, but that didn’t seem to phase investors as much as it might have under normal market conditions, probably because volatility is pouring out of the market. And we have some near-term bullish news as there are head and shoulders forming on the 60s.

It was only a week ago that we were getting 500 point swings in 15 minutes, it was a virtual roller coaster ride. And now, for the first time in a long while, we get a flat day in the market. It’s kind of refreshing, yet unnerving at the same time. I’m sure a lot of this posturing has to do with investors simply taking a breather before the elections.

So, the big news today for Wilderness Investors was that Apple may cut iPhone production by 40 percent this quarter as consumer spending slows. This according to Friedman, Billings, Ramsey analyst Craig Berger. That’s a big change, as previous checks showed just a 10% drop in production. In a note to clients, Berger said:

“Apple is a good proxy for broader consumer demand given that it has the hottest, sleekest, most desirable products. That the firm’s iPhone production plans are being revised lower suggests that the global macroeconomic weakness is impacting even high-end consumers,those that are more likely to buy Apple’s expensive gadgets,” and that “no market segment will be spared in this global downturn.”

If Berger is correct, then this could translate into nearly $2 billion in lost revenue. The speculation for lowered production was made after checks on the iPhone supply chain, with companies like Broadcom, which supplies the iPhone’s global-positioning system chip and touch-screen controller; Marvell who makes the wireless-fidelity chip; and Linear producing the battery charger. Other suppliers include Infineon Technologies, TriQuint Semiconductor, and Skyworks Solutions.

So, the thing I don’t understand from this report is what percentage of these suppliers business is for Apple, and what percentage is for other customers. Because if you were to look at the relative growth of Apple products compared to competing companies, they are trouncing them all. For example, Apple’s notebook and desktop business is growing exponentially, while manufacturers like Dell are not growing at all. And Apple is eclipsing not only the smart phone market, but now has the top three spot among ALL cell phone makers in terms of revenue. Perhaps everyone else is cutting back 50 to 80 percent, while Apple is on course to meet the guidance they provided at the last earnings call.

On the credit front things are loosening up for banks as the LIBOR has dropped another 17 basis points to 2.86%. That’s the lowest rate since the Lehman Brothers failing in mid September. The LIBOR is an acronym for the London Inter Bank Offered Rate, that’s the rate that banks charge for three month loans to one another. So, that’s 16 straight days that the LIBOR has dropped! The reason this is significant is that this causes the LIBOR-OIS spread to narrow, which is a gauge of the availability of cash among banks. This means that banks have more liquidity, and are in a better position to grease the skids of the economy.

The markets are benefitting from the huge weight of volatility dropping like a lead balloon. The Volatility Index, or VIX, is falling under the weight of negative divergences, and for the second straight day it has remained below its 20 Day moving average. Every day it stays below that mark, the more investors will build their confidence in the market.

One of the things I talked about in yesterdays podcast, was that the indexes are trying to break through their respective 20 Day moving Averages. And things haven’t changed much since then. We’re pretty much right where we left things yesterday. But the big difference is in the change of character in the Bulls. In previous weeks, if the Bulls tried to capture a level like the 20s, they’d be soundly defeated immediately, running away with their tail between their legs. But this time, they’ve hung tough, keeping the turf they’ve gained. Now if they can just break out, the next obstacle will be the recent gap-downs and the 50 Day EMAs. The Bulls continue to be supported by the rising MACDs, thwarting any attempts to short the markets.

But keep in mind that this is the case for the near-term. The medium to long term still look pretty dismal. And speaking of the near-term, the 60 minute charts are showing an Inverse Head and Shoulders forming. This is a Bullish bottoming pattern. We need just one more push down to form the right shoulder, and then we’re off to the races. So long as the S&P can maintain support at the 925 level, there’s a very good chance that this pattern will play out and we’ll break through its neckline.

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I this episode I have to first recognize and pay homage to what was hopefully a once in a life time event, one that I wish none of us will ever have to experience again. And also recognize that it may not be over just yet. And with that I’ll share with you some good motherly advice, along with the concerns I have in last week’s rally, and why I’m optimistic for the near term.

Was October the beginning of the end for the markets, or was it simply an abrupt end of what was arguably the worst bear market in US history? The evidence is inconclusive right now, so all we can do is navigate the best we can, and take what the market gives us. There’s money to be made no matter what the market does going forward, so long as you listen objectively to what the market has to say, without emotion, and then act accordingly.

I’m going to quote the sage advice of my wife’s mother Jenny, who has long since passed. Jenny raised 4 children, who have all gone on to great successes in life, and those successes are undoubtedly the result of the strong will, values and wisdom that Jenny has imparted upon them. My wife told me that her mother Jenny would often tell her in the face of uncertainty, that you should prepare for the worst, hope for the best, and take anything in between.

There are certain things that are under our control, and other things that are not. What is in our control are the choices we make, what’s not in our control is the direction this market decides to take. So, what I’m trying to say here is, don’t assume that the latest reversal has marked the bottom, it’s simply too soon to tell. There’s still a great deal of uncertainty out there. Sure there’s lot’s to like about the action last week, but there are indicators in the weekly and monthly charts that have not yet confirmed a reversal.

Wilderness investors have managed this unprecedented market collapse by preserving capital, we’ve been in mostly cash, and made a little money along the way with selective shorts. And when we saw the reversal coming, we took measured steps and nailed it with a quick trade on the QLD. That was a singular event, and we were fortunate, and that’s great. It’s got to feel good to dodge a falling knife without a scratch, and then make a quick 15-20 percent right off the bottom. But don’t let your glee turn into giddiness. What we need now is to keep our heads, because the days ahead will require our utmost attention to what the market will tell us, not what we want to hear.

  

So, before you get the impression that I’m expecting all doom and gloom, let me tell you that I see some real promise in how the market closed out October of 2008. For example, I like the way that the indexes have recaptured the 20 day moving averages, for the most part. I’ll explain what I mean soon. I also like how our favorite stock, Apple (AAPL) performed by leading the Tech sector, compared to the other leaders of Tech, like Baidu (BIDU) and Google (GOOG), that haven’t yet been able to catch a sustained bid. Especially Google, since it reported strong earnings, the stock advanced then simply ran out of gas.

The good news is that the leaders of Tech short-term charts are showing good strength, with the intermediate charts showing evidence of turning around. It’s the long-term charts that are worrisome. There has been no indication whatsoever that the long-term direction is improving. And quite frankly, it’s the same story with the markets as well. The only way that’s going to happen is if we have a sustained rally for the next few weeks at least.

So, getting back to the 20 day moving averages. In a normal, healthy market, where volatility is within manageable levels, I would rely on the 20 Day Simple Moving Average (SMA). But in times like these, with the incredible whipsaw day to day, you need to follow the 20 Day Exponential Moving Average (EMA), simply because it reacts to this kind of market quicker and thus more accurately.

Now, when your coming out of a Bear market, your looking to regain the 20 Day Moving Average as your first level of support. And with last weeks action, all the indices poked their heads well above that line with strong surges, and more or less held it going into the weekend. The Dow for sure, as it finished Friday well above its 20 Day EMA by over 126 points. But the Dow is made up of only 30 stocks and so it’s not as accurate a barometer as the S&P 500 and the Nasdaq, which are collectively comprised of hundreds of stocks. And that’s the concern, as the S&P closed Friday at 968.75, which was just a hair below its 20 Day EMA, which was 969.95. And the Nasdaq closed Friday at 1720.95, and it’s 20 Day EMA was 1733.40.

So, this inability of the S&P and Nasdaq to break out from their respective 20 Day EMA is somewhat of a concern. Perhaps that’ll happen this coming week. But that’s a tough call because I’m uncertain how the election might affect the market, if at all. One bright spot, and a big factor for my overall optimism in the short and medium term, is the strong Advance-Decline line that we maintained all week. This is a sign that more and more stocks are breaking the destructive patterns they were following, by sporting increasing volume as they rally. The other very promising sign for the near term is the strong positive divergence across all the indexes with respect to the MACD and the RSI on the daily charts. The weekly charts are showing no such divergences, but the MACDs on the weekly charts is finally starting to curl upward. My belief is that the positive divergences on the daily charts will keep this rally afloat for the next week or two.

The greatest source of my optimism has got to be the fall of the