Here We Go Again

When, oh when will we get somebody competent in charge of the ever-growing Department of Bailouts? If you’ve been following this sorry show, you know that Bank of America was stupid enough to buy Countrywide and then stupid enough to follow it by buying Merrill Lynch. Both are disasters, and now because it bought two disasters, Bank of America is coming back to Uncle Sam for more money.

More? Yes, because BofA and Merrill already received $25 billion of your tax dollars. That did squat, so now that Idiot One is having trouble buying Idiot Two, your tax dollars are coming back onto the table to fund the acquisition! Remember the hullaballoo over bailing out automakers, companies that actually do something useful? The sum in question was $25 billion, but was turned down vociferously, so Bush forked over $14 billion from the TARP to tide automakers over until they become Obama’s problem.

For automakers, $25 billion caused a multi-week national debate. For seething, stinking, criminal-infested financial companies, it’s a rubber stamp. Nobody understands finance, so it sails. Phrases like “systemic risk” and “financial meltdown” are scary enough and vague enough that ordinary folks assume they can’t possibly get their arms around the situation, and it was just necessary for the brains in charge to earmark $700 billion to “keep the system running.”

Seven-hundred-billion dollars is almost the same amount as Obama’s proposed stimulus, which will undoubtedly be fought over for months, but it happened lickety-split for banks — and looks ready to happen again. This has got to stop or we’re going to need to re-set the global financial system just to bring the numbers back down to levels people understand. Billions are pretty tough, trillions are a lot harder, and we’re fast moving into tens of trillions. Glance at the national debt sometime.

Now that I got that off my chest, what does the flagging of Bank of America as the next Citigroup mean to the market?

The consensus is that we’re falling off the cliff again as the market breached the lower edge of its recent rising wedge and its 50-day moving average. However, let me give you some food for thought.

The last time we saw the news heat up this badly this quickly was in mid-November. The same sectors were leading the plunge. Financials, of course, were the biggest culprits. They are now again. They’re down the most this year of all the major sectors.

Looking at one popular way to play the long side of the financial sector, ProShares Ultra Financials (UYG), we see that it bottomed on Nov. 20 at $3.74 with an RSI of 28. With RSI, anything below 30 is considered oversold and due for a bounce.

Where’s UYG now? It closed yesterday at $4.78 with an RSI of 40. There’s 22% of downside from there to the Nov. 20 low. Sounds like a lot, but in the market we’ve had for the past six months, it’s nothing. In fact, the last 37% of the decline to the Nov. 20 low happened in just two trading sessions: Nov. 19 and Nov. 20. What happened after that? A meteoric 68% rise in five sessions, and an 85% rise in 11 sessions.

Things happen fast and big in this market, and playing the extreme opposite of the momentary trend has been what works. Watch technical indicators like MACD and RSI for clues on when to enter and when to set trailing stops.

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