Bailout Plan Fails, Go for Gold

The market plunged following the failure to get the bailout bill passed. Economics aside, I think there is also alot of politics being involved in this whole deal. The House would reconvene only on Thursday to vote on a revised bill. I'm not an economist or politician. I don't really know or care what the outcome will be on Thursday. I'm a trader. All I want is for the market to settle down. But I do like what I see on the VIX on Monday. More on that next time.

Back to the market on Monday. Not many stocks were able to hold up, with the exception of Gold, which is the flight to safety haven during such turmoil times. The chart above shows SPDR Gold Trust (ETF) (NYSE:GLD) breaking out of bull flag today with good volume as the market tumbled. A good looking chart, but watch for resistance around $92.

You'll see similar looking bull flag charts in Barrick Gold Corporation (USA)(NYSE:ABX) and Randgold Resources Ltd. (ADR) (NASDAQ:GOLD), but these two have not broken out yet.

---

Mon: Personal Income, Personal Spending

Tue: Chicago PMI, Consumer Confidence

Wed: ADP Employment, Construction Spending, ISM Index
Notable earnings: MOS

Thurs: Initial Claims, Factory Orders
Notable earnings: GPN

Fri: Non Farm Payrolls, Unemployment Rate, ISM Service
Notable earnings: FDO

More of Bernanke and Paulson This Week

We did see a quick and sharp bounce in the market last Friday after the VIX printed a bearish reversal bar on Thursday. I talked about the VIX here. However, the market gave back all of its Friday's gain on Monday. Only consolation is that volume during the sell-off on Monday is low. The market is very event driven right now and gyrates wildly in either direction. Remember to trade small and staying in cash is also a position to take.

Lately, you've been hearing alot of Bernanke and Paulson. This week, be ready to hear more from them as they testify on Tue and Wed on the recent economic and financial mayhem

Tue: Fed Chairman Bernanke to testify on US financial markets
Notable earnings: LEN

Wed: Existing Home Sales, Fed Chairman Bernanke to testify on US economic outlook, Fed Chairman Bernanke and Treasury Sec Paulson to testify credit bailout plan
Notable earnings: BBBY, NKE, PAYX

Thurs: Durable Orders, Initial Claims, New Home Sales
Notable earnings: ACN, RIMM

Fri: GDP, Michigan Sentiment
Notable earnings: JBL, KBH

VIX at Extreme

The VIX has hit 36 today, a level not seen since mid Mar this year during the Bear Sterns saga. In the chart above, I annotated the recent last 3 times where VIX hit this high. As we all know, the VIX is a fear gauge and usually when it is at extreme, the market is likely to reverse.

But I'm not calling for a bottom right here right now. The major indices have broken new lows and closed with wide range bearish bars today. Also, notice how the VIX bar closed today is different from the last 3 times. It closed with bullish engulfing bar, different from the bearish upper tails or bearish bars it closed the previous 3 times when it hit 36 level. So while the level 36 is a resistance, the market doesn't look like its about to turn around, yet. Watch for market capitulation, bullish candlesticks at support areas for the major indices and the VIX turning down for confirmation of turn around. It could be happening quite soon...

MER, LEH, AIG - Same Looking Charts, But Different Fates

This coming week will be a historical one in the financial sector. Bank of America Corporation (NYSE:BAC) has agreed to buy Merrill Lynch & Co., Inc. (NYSE:MER)for about $44 billion, or around $29 a share. Come Monday when market opens, the stock will gap up to $29 from where it closed at almost $17, which is a 70% premium. I'm not sure why BOfA is willing to pay such high premium at such times.


Lehman Brothers Holdings Inc. (NYSE:LEH), on the other hand is not so lucky. BofA, which was earlier in talks with Lehman has now ditched Lehman for Merrill. Other potential buyers have also pulled out of talks. Will Lehman have to file for bankruptcy or a last minute white knight will appear?


Question is will American International Group, Inc. (NYSE:AIG) be the next to get into trouble and end up like Merrill or Bear Sterns? AIG is also reported facing liquidity crisis and seeking help from Federal Reserve.


Notice all 3 stocks have been printing lower highs the past few months and formed descending triangle which broke down last week, shaving off much of their market capitalization. While Merill is lucky to have BofA offer to buy it at 70% premium, Lehman's fate is still hanging in the air, though chances are slim if the Fed doesn't step in. As for AIG, this week could prove to be critical as we have the FOMC policy statement and also major banks like Goldman Sachs and Morgan Stanley announcing earnings. Keep your eyes open...

---

Mon: NY Empire State Index, Capacity Utilization, Industrial Production

Tue: CPI, FOMC Policy Statement
Notable earnings: GS, ADBE, BBY

Wed: Building Permits, Housing Starts
Notable earnings: MS

Thurs: Initial Claims, Leading Indicators, Phil Fed
Notable earnings: FDX, ORCL

Fri: Options Expiration

Watch for Potential Bear Flags Formation

We saw the high volume sell-off in the markets last week. So what's next? I believe the next few days will see consolidation or some retracement of the sell-off, so now is not the time to go short or buy put options. I would watch the following sectors for potential bear flags formation in this coming week:

-Agriculture
-Dryshippers
-Steel
-Energy
-Coal
-Metals
-Technology
-Utilities

Here's a few charts to show the near vertical down move accompanied by high volume- characteristics of potential bear flags:

Research In Motion Limited (NASDAQ:RIMM)


DryShips Inc. (NASDAQ:DRYS)

Peabody Energy Corporation (NYSE:BTU)

Exelon Corporation (NYSE:EXC)

---

Quite a quiet week ahead in terms of economic news.

Tue: Pending Home Sales, Wholesale Inventories

Thurs: Initial Claims, Trade Balance, Treasury Budget

Fri: PPI, Retail Sales, Business Inventories, Michigan Sentiment

Chop Chop Chop!

What have we got here? Nothing but choppy markets! From the chart above, the S&P 500 has been contained in a 40 point range (1260-1300) since August. The 1300 level mark is a tough nut to crack, given it is the longer term down channel resistance and also a recent horizontal reistance. We will need to see a clear break of either 1260 (downside) or 1300 (upside) to have a better sense of direction.

---

Tue: ISM Index, Construction Spending
Notable earnings: ACH

Wed: ADP Employment, Factory Orders, Fed's Beige Book
Notable earnings: JOYG, SNDA, HOV

Thurs: Initial Claims, Productivity, ISM Service, FOMC member Fisher speaks about US Economic challenges, UK rate announcement
Notable earnings: TOL, COO

Fri: Non Farm Payroll, Unemployment