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Monday Market Movement – IBM Makes US Nervous

Posted on the 20 October 2014 by Phil's Stock World @philstockworld

Monday Market Movement – IBM Makes US NervousIBM spooked the markets this morning.

The Dow component missed on earnings and revenues by wide margins, reporting the worst quarter since Q1 of 2009, when the stock was under $100 so no surprise they dropped $14 (7.5%) from $182 to below $170.  That gave us a great opportunity to short the Dow at 16,250 in our Live Member Chat Room and we caught a quick 50-point drop already (7:48) for a $250 per contract gain to start our week off right

Fortunately, we followed through with our plan on Friday (see morning post) and flipped bearish again into Friday's close – the Futures trade was simply a way to take advantage of an obvious and immediate catalyst pre-market.  We'll hear from two Fed doves this morning – Powell speaks at 10 but not much expected from him and Tarullo goes at noon and is bound to say something doveish if the market is read into lunch.

Monday Market Movement – IBM Makes US NervousAs to IBM – it's not as bad as it seems as IBM took a $4.7Bn one-time charge as they PAID GlobalFoundries $1.5Bn to take their money-losing semiconductor unit off their hands.  I wish IBM had called me, I would have been happy to take their semiconductor unit for just $1.3Bn…  

Still, we had IBM on our Buy List and were hoping they would come down so we could add them to one of our Porfolios but I don't like their "idea" of repositioning to more cloud computing, as I think that's really a commodity play with lower margins though I still believe in Watson and if you consider that IBM wrote off nearly $5 per share – the earnings weren't so terrible.  So it's going to be watch and wait on IBM at $170 – hopefully they go lower and get irresistable but we're not going to run in and catch a falling knife on this one.  

Monday Market Movement – IBM Makes US NervousWe'll also be keeping a very close eye on our levels this week and, as you can see from the Big Chart, we've found a bit of support (finally) but only at the weak bounce lines we were watching last week.  

As I noted in our Live Member Chat Room (you can join us here while the rates are still 50% off) this weekend, now that we have a bounce we can re-draw our lines using our 5% Rule™ to give us an idea of what to expect in the week ahead:

  • Dow 17,160 was the -2.5% line and we fell 880 to 16,280 so we'll look for 176-point bounces to 16,466 (weak) and 16,632 (strong).
  • S&P 1,988.75 was the 7.5% line and we fell to the Must Hold line at 1,850 so we'll look for 1.5% bounces (28 points) to 1,878 (weak) and 1,903 (strong).
  • Nasdaq 4,600 was the 15% line and we plunged almost 12.5% but we'll say the 5% line held at 4,200 and call the drop 400 points, which gives us 80-point bounces to 4,280 (weak) and 4,360 (strong).
  • NYSE 11,000 was only the Must Hold line (the line at which a bull market should be holding) and we plunged to support 7.5% lower (after testing 10%) at 10,200 for an 800-point drop and we'll look for 160-point bounces to 10,360 (weak) and 10,540 (strong).  
  • Russell had the worst fall, from their Must Hold at 1,200, down 15% to 1,040 but found support at the 10% line at 1,080 so we'll call it a 120-point drop and look for 24-point bounces to 1,104 (weak) and 1,128 (strong).

INDU DAILYWe MUST take our strong bounce lines by Wednesday or there's serious danger of forming the right shoulder of the dreaded "head and shoulders" pattern that would send a very bearish technical signal to TA traders.  

As you can see from Dave Fry's Dow chart, we're both expecting the Fed to talk up the markets this week but whether it will be enough to pop us back over that 16,600 line on the Dow along with the other strong bounce lines remains to be seen.  

IBM is the entire drag on the markets this morning so look for the Nasdaq and the Russell to shake it off first (IBM is not in them) and then we'll see if the other indexes manage to follow into the green.  Today will be primarily a "watch and wait" day for us as we see what levels get cleared.  Only if we see 4 of 5 weak bounce lines taken will we be likely to begin making bullish bets again.  

Monday Market Movement – IBM Makes US NervousOur Short-Term Portfolio is, as I noted, bearish but also mainly in cash (83%), with 10% of our money on the SQQQ spreads that will, hopefully, protect us from further downturn.  As we discussed in great detail over the weekend, 10% of our STP is now almost $20,000 and we've leveraged our protection 3:1 using our SQQQ hedges so we have about $60,000 coming to us should the Nasdaq take a dive while risking just $20,000 of our year's profits (20%) to protect our long-term positions in the Income Portfolio and Long-Term Portfolio.  

To a large extent, the fate of the Nasdaq will be decided this evening, when AAPL reports their Q3 earnings.  AAPL is a large, long position in both of our Long-Term portfolios, which is why we prefer the SQQQ hedges into this event.  We'll also hear from TXN and CMG this evening with MCD up tomorrow morning along with Dow components, TRV, UTX and VZ.  

It's going to be a very excting week, dominated by earnings reports and I don't consider IBM to be a major negative as it's mitigated by circumstance but, if we see a trend – 83% cash will NOT be enough!  

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