The Chart du Jour
Despite Wednesday's huge equity market reversal of Tuesday's gains, the price action of the S&P on an hourly basis looks constructive to us. The hourly moving averages are rounding, and the short term Elliott wave count appears that the market may now be in a corrective IV wave of an anticipated V wave advance.
Bank of America's pre-announcement of lower earnings for the Quarter did shake people up a bit today, and longer term this points to the underlying weakness in the financial sector. The losses on bad loans and corporate paper are real, and rumors have it that J.P. Morgan, Chase, and Morgan Stanley Dean Witter may have been particularly hurt by credit derivative assignments when Conseco loans were restructured. Eventually problems on the same front with Xerox loom. Credit derivatives on Xerox are no longer trading, and are 1000 basis points bid with no offer. The cracks in the corporate bond market are truly starting to appear and matter.
But in terms of one stock -- Morgan Stanley Dean Witter -- the time may not be right to sell right now. Although Morgan Stanley parted with its risk management head Lisa Polsky approximately two months ago, and rumors have been circulating that the firm dropped $1 billion in debt-related positions, technically we wonder if Morgan Stanley has not reached the neckline of a yet-to-be-formed Head and Shoulders top, with a short-term period of relief to precede the eventual massacre.
One can certainly imagine further words of assuagement from the Fed surrounding their Dec 19th meeting about no longer having a tightening bias. This may give the market a false sense of relief. If during these words, MWD stock were to pop up to around the $83-$87 area, then -- NOT NOW - would likely be the ideal time to sell it aggressively. It may take multiple weeks of course to actually get to this target area and then round around in the second shoulder, but let this Chart du Jour serve as an early heads-up for a good short-entry level to be looking for. Once in, a stop set near $98 -- above the high of the first shoulder -- would be appropriate.
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