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How to Profit from Bird Watching

By Jeff Clark
Thursday, March 15, 2007

Let's take another look at Wall Street's version of the canary in the coal mine...
 
 
 
Shares of Merrill Lynch (MER) warned us of the current correction, just as they warned us last year before the market corrected in May.
 
The patterns are so similar it's spooky.
 
MER peaked right after announcing record earnings in April 2006. The shares then dropped 20% and led the S&P 500 through an 8% decline.
 
MER peaked again this year right after announcing record earnings in January. The shares are now down 20%, and at the lows of the day yesterday, the S&P 500 was off about 7% from its high.
 
It's now time to start looking for signs of life from the canary. And, if you watched close enough yesterday, then you caught a little glimpse.
 
Early on in yesterday's trading session, the Dow was off about 90 points, and MER traded as low as $76.85. Both rebounded a bit and then headed lower again. But as the Dow hit a new low and traded down 135, MER held above $77.
 
It's a small divergence, but a noteworthy one.
 
I've written before about how the trading activity in MER provides clues of potential reversals in short-term market trends. Yesterday's activity was no exception.
 
The Dow rallied back from minus 135 to close up 57 points.
 
So, does this mean the correction is over? I'm not sure we can say that just yet.
 
The canary has taken a turn for the better, and as long as MER holds above Wednesday's lows ($76.85), then we should see some additional buying over the next few days.
 
But the intermediate term is a bit more worrisome. The market rarely conforms so well to the A-B-C correction pattern I wrote about last week. The market dropped rapidly, rallied back up very near to our 1,425 target on the S&P 500, and then dropped again – nearly hitting the 200-day moving average, our downside target.
 
Either the crystal ball is working to near perfection, or we're being set up for a big surprise.
 
For now, though, the bulls deserve the benefit of the doubt. And as long as the canary holds above Wednesday's lows, then we can venture cautiously back into the mine.
 
But let's stay wary of anything much more long term than the next few days. And if MER drops below $76.85, then get out fast.
 
Best regards and good trading,
 
Jeff Clark




Recent Articles
Market Notes
Welcome back, volatility… VIX spikes above 20.
 
Utilities companies Northeast Utilities, Reliant Energy, and Oneok all at new highs
 
Warren Buffett holding M&T Bank at new 52-week low.
 
Big names in the lows list: Chiquita Brands, Sirius Satellite, Waste Management, H&R Block, Washington Mutual, and Progressive.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1224.71 +0.3% +11.4%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.19 -0.6% +7.2%
Euro 1.34 +1.4% -11.0%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%