Silver Bounce Nailed, Futures Higher Overnight

Silver gapped lower today but rallied higher throughout the day as predicted on Sunday night and additionally, the overnight prints are showing spot silver up as high as a percent and a quarter. Institutional short covering came late in the morning session and again just a half an hour before the closing bell as silver made an intraday low of $26.15, but closed $4.63 off of the lows for just a .30 decline. The pattern on the chart is a bottoming tail and more importantly, silver tagged support in the $26-$27 area, but rallied back for a close just off of the flatline.

This should signal some short term relief in the selling and any shorts may be squeezed out should silver make its way back above $31 tomorrow. The likely scenario is a gap higher off of the opening bell and I plan on exiting my SLV $30 call tomorrow should that happen.

A Tip For Option Trading

Today I learned a lesson when it comes to trading options. There may be an option that you are in the money on and are thinking of selling, which is good because no profit should ever turn into a loss, however, in some cases stocks can become extended and pure emotion and irrationality comes into play. In these cases one can profit from being in the money on a call option by taking advantage of the irrationality of others while maintaining gains and minimizing risk. It’s never a bad decision to take gains off of the table for a profit, but there is nothing wrong with leaving some exposure in your portfolio when a stock is hot.

Last week, I purchased AAPL $385 calls for $2.80 and sold them shortly after for $4, a 70% gain. Not bad. Today those same calls are going for over $40 and will most likely run higher as the market floats up on low volume ahead of the Fed.

Yes, I sold those calls for $4 for a 70% gain, but today they would have gone for – $40/$2.8 = 14.2 or 1420% gain from principle.

What I am trying to say is – take some profits but it doesn’t hurt to LEAVE RUNNERS ON THE TABLE!!

And that, is my tip today for option traders.

Equities Float Higher On Low Volume After Irene

As predicted last Friday and over the weekend, Irene has not had a negative effect on the equity market as many analysts had concluded. Manhattan had some outages and most big fund managers flew to Florida late last week, meaning that today only 170M shares traded on the SPY as the market strolled higher for 2%+ gain across the board. The SPX rallied above the highs of last week and paused only at the very end of the day where it found resistance at the $1208 pivot high.

The S&P closed at $1210 which is above the 20 MA and the pivot high of $1208. There appears to be some more upside in the market but given the light volume, just a close above the 20 MA and the pivot high is not enough to buy the market unless it can confirm tomorrow. I do think we’ll see a pullback tomorrow but if that is not the case then $1220-$1240 could be in play by the end of the week especially if volume continues to dry up (which should be the case anyway towards the end of the week).

Also, I’d like to address a news story that I have heard other buzzing about. If you haven’t read it yet, it’s about how bankers are predicting a market crash within weeks.

This whole article sums up my general sentiment on the market, or rather the inverse. Here you have it from the horse’s mouth: buy the market. In my humble opinion, the banks are currently begging retail investors to short the market so they can push it higher into the holiday. The amount of negativity out there has worked well as a contrarian indicator for my analysis recently and this article is more or less the epitome of what I’ve been talking about this whole time.

So now that I’ve gotten that off of my mind, have a great week and stay dry for those of you in Manhattan.

Markets Surge As Gold Topples Off Highs

Today the SPY finished at the highs and managed to take out resistance at $116.50 which now negates the possibility of any bear flag and signals a higher low in the market. The market came back off of the highs around lunch time but had a robust move in the afternoon session for a gain of 1.41% on the day. Gold was down sharply and closed at $1754 on high volume. I closed out my DZZ long for a 13% gain in just two sessions though I do believe there is still some additional downside. After the bell, the CME raised margin requirements on gold by 27% and it that should force some of the longs who haven’t taken profits yet out of the market.

The SPY ripped higher and negated the possible bear flag with today’s close. Volume was light and the move looked much like short covering especially in the later session. I’ve mentioned this over the last two days – traders simply do not want to hold shorts especially ones that they have 20+% profits on going into Jackson Hole and seeing the market higher today likely forced their hand. I think we’ll see a bit of a pullback tomorrow after the monster move today and yesterday, mainly because we’ve had a nice rally and broken through a key technical level, but also because of the pressure that will be on AAPL tomorrow after Steve Jobs’ resignation. For what my opinion is worth, Jobs will still be on the board which really isn’t any different from him being CEO other than he’ll most likely have more time to himself, which quite obviously he has earned. That said, any selloff in AAPL (and there will be one) is overblown but nonetheless will provide a nice excuse for a pullback tomorrow.

Ultimately, I am still leaning towards a rally after Jackson Hole. Again, I think it’s possible that we get a selloff after the meeting on Friday, but going into Labor Day the market will be tired and the low volume will favor the upside. Any selloff during the Fed’s meeting is going to be a fakeout and I don’t expect any kind of new lows to be made.

Gold was down a whopping $79 today after being down about $65 yesterday. The CME raised margins requirements which is something I did not expect to happen until Friday’s Fed meeting but it will have the same relative effect. The blowoff over the last two days tells me that there was major inside info but the technicals also told me that this was likely to be the case anyway which is why I took the DZZ long and covered today. Once again, there will be more downside for gold and commodities but the easy money is not something to pass up and I am out of that position for a nice profit. For the rest of 2011, expect more pressure on commodities as demand in the US drops. Once the hot money comes out of gold, look for the selling to trickle down across the rest of the spider web as well which is not unlike the effect that silver had in May or the effect that oil had in 2008.

Overall I am basically flat going into tomorrow and I probably won’t take any longs until things become clearer going into the Fed meeting. I’d like to pick up some positions given that there is a selloff on Friday during the Fed announcement assuming that analysts panic but no new lows are made. Until then, continue to remain cautious as there is always a chance that something in Europe blows up overnight and throws a wrench into everything.

Market To Sell Into Fed Announcement?

With today’s flat open and steady rally throughout the day, the major market indices have begun to form what could play out as a bear flag going into the Fed announcement. Yesterday I said that we could see some short covering going into the Jackson Hole conference. It’s 11 am and the SPY is trading on fairly low volume so far (at least in comparison with the recent trend) which could mean that shorts are covering but there really aren’t many new buyers either. I think that this is likely to be the case. Neither side feels comfortable holding into Friday given the amount of volatility that we have seen which will only increase on Friday.

My prediction for the market’s reaction to the conference is the market will sell off sharply when Bernanke disappoints everyone by not hinting enough easing measures. This selloff will precede a rally into and possibly a little past Labor Day. The rally has the potential to be 1000 points or more though I don’t specifically expect that to happen.

Like I mentioned above, the market is starting to set itself up for a selloff into the Fed announcement. The bear flag on the SPY should take the market back to the pivot low of $110 where it may find double bottom support. This pattern can be negated with a close above Thursday’s open of $116.50.

The bear flag on the DIA is very similar to the one on the SPY albeit the fact that the Dow has outperformed the SPY. The DIA should find support at $106 and the pennant can be negated with a confirmation above $111.60.

QQQ is the weakest of the three which is normal because the NDX usually outperforms during bullish phases and underperforms during bearish ones. It is important to note that QQQ can take out the recent low and fall to $48-$49 without signaling another leg down in the overall market.

The reason I show the three charts and include the possibility of QQQ falling further than the others is because they need to confirm each other and QQQ has a lot of support in the $48-$49 area. So yes, I’m including a bit of Dow Theory in this analysis, but this appears to be the way this market is about to play out. If the SPY and DIA reach $110 and $106 respectively on a breakdown after the Fed meeting and QQQ reaches $49 at the same time, I will be a buyer of the market. Also, if the market trades in a tight range tomorrow and stays inside of Friday’s candle, I’ll short the market for the move down.

Stocks Plummet Again On European Fears

The story of the week has been Europe though news was somewhat suppressed in the beginning of the week as the market floated higher on low volume with a tight trading range. I exited TBT on Thursday on the failed bull flag though there may be another bottoming tail in play on the daily chart as it closed higher than Thursday’s low today. TBT was only a small position and the stop out does not hurt much.

Over the last two to three days I have stuck to intraday trades of sector etf’s mainly because of how sloppy this market has been. The volatility is still elevated and equities are much too sensitive to news to be holding significant positions overnight. The switch over to the daytrading techniques has been successful, I pulled profits on ERY and TZA on Wednesday and Thursday The moves have been less profitable but the strategy has certainly been safer. I will resume swing trading if and when the market finally stabilizes. Quite frankly, the volatility has been aggravating and I was close to taking a nice vacation from this week due to the instability. Nonetheless, it is refreshing to not be heavily exposed during this beatdown and there are few interesting developments on the charts that I’d like to share.

The only bullish part about the chart of the SPY is that the bottoming tail is still well intact despite the obvious weakness in the market. The tails on the previous two candles signal that there are a lot of sellers who are still willing to enter short positions even at these levels.

For those of you who might not know, my strategy is to use the chart to understand the mentality behind the moves. So, if I had to explain the reasoning behind the activity over the past week, I would conclude that the low volume in the beginning of the week was the institutions allowing the market to float higher, and that the selling later in the week was them driving it lower before options expiration so that they could pocket the premiums. Otherwise the flush over the last two days is due to thousands of ants that are convinced that this is a good level to short the market at.

Not to downplay the weakness in the market but the SPY has not confirmed or even tagged the 110 low yet which means that we still have a bottom. So the point I am making is that despite the downside hype, we have not made a new low. In other words, the chart leaves out opinions and tells it like it is.

If the market does in fact plunge once more, the downside for the SPY should be in the $107.50 area and after that, the master level is around $101.75. Should $110 be tested again, it would be more vulnerable as the recent bounce would be considered consolidation from the move down. Another thing to remember is that Bernanke speaks at Jackson Hole this week and though no announcement regarding additional easing will be made without the FOMC, the market will still hang on his every word which can cause a reversal in favor of either side.

The most intriguing chart so far is copper. Copper has held up well over the last two days and actually posted a gain today despite the sharp decline in equities. There is a bit of a bull flag there on the daily chart and if copper gets a solid bid, it could signal interim bottom in the market. On the other hand, if it breaks down, it could become a failed bull flag which would indicate that there will be more immediate downside.

I would have liked to have seen this chart last week and picked up JJC for a pierce of that 3 year trendline. If this trendline holds, copper will get another bounce and there is a bottoming tail there on the weekly chart. This week’s candle was negative but the range stayed inside that of the previous week’s which is typical action after a bottoming tail takes place. Again, if copper gets a bid off of this trendline, it will likely breathe some life into the equity markets and could possibly signal a bounce.

The last chart that really catches my attention is silver. Silver has underperformed gold which certainly makes sense because silver is much less of a fear trade than gold since silver has industrial and technological applications. Because of this silver is negatively effected during a period of economic contraction as the demand for those goods falls as the economy shrinks. However, today’s action was a different story as gold did make a new high but looked weak intraday especially compared to silver which had a giant move higher. Again, it is surprising to see silver outperform gold in this environment and it leads me to believe that a big fish may have taken a large amount of shares and/or ounces off of the market.

In any case, today’s action does signal a breakout above $42 assuming it confirms today’s move on Monday, or perhaps sometime late next week after first consolidating. It will be interesting to see if the metals pull back or rally into the Jackson Hole conference. There doesn’t seem to be any way the conference can turn out without the metals surging. On one hand, Bernanke could sound hawkish, and then the risk of default due to not having any life support will scare the market and force everyone into gold. On the other hand, he hints at additional easing and the metals surge anyway. I think the only shot he’s got is to sound complacent, condescending, and indifferent, as if he is slightly confused as he looks down on the market and shakes his hand for reacting the way that it has. In my opinion, this is kind of how the most recent Fed minutes came off and it is part of the reason the market found its footing and moved off of the lows.

In any case, that’s my take on the upcoming Fed conference and my advice to traders is so completely stay out of everything this week unless it is a day trade. Cash is outperforming many asset classes including bonds (which have negative real rates) and equities so it doesn’t make much sense to heavily expose your porfolio until the dust settles. Abide by your stops, and if you enter a winning trade, take the easy money.

SPX Breaks Higher But Rally Is Showing Weakness

The SPY closed above Tuesday’s highs which were made during the rally after the Fed minutes. This is a key level for the market as it is now above that 700 point reversal and has a chance to rebound. However, today’s action was extremely weak considering the 6 point rally in the S&P as the market gapped higher on lower than average volume and failed to sustain the highs of the day. For this reason, I have sold F, HBC, and C as the market may yet again flush out weak hands and make yet another move lower.

The SPY is currently set up for an evening star reversal and I think that there is a high probability that we’ll see a gap down on Monday followed by slightly more downside on Tuesday. However, it is very important to keep in mind that I do not believe we’ll make a new low, though if we do, the market essentially goes back to sqaure one and may not bounce again until it reaches 1000 on the SPX. Remember what I mentioned in the most recent video analysis, the institutions will fake out amatuers with moves and by promoting media hype. I successfully called confirmation of Tuesday’s bottom when I saw the market plunge on Wednesday but not make a new low. If the SPY does not close positive on Monday, then today’s action is still not confirmed and the market will likely consolidate further before fully rebounding.

One big positive for the market is the weekly chart. There is a blatantly obvious bottoming tail on the weekly chart of the SPX and this week’s action should lead into a rebound. However, often times a bottoming tail is followed by another down day that does not make a new low. Case and point, the daily chart of TBT over the past week.

Ultimately, I think we’ll see some consolidation next week that most will mistake for another selloff and will miss out on being long for the rally that will follow. I think the best course of action is to wait in cash here and look for longs should the market pullback next week but fail to make new lows.

As stated earlier, I have liquidated my longs however I still maintain my position in TBT as it is one of the strongest chart patterns in the market. Again I hear news of treasuries “surging” yet an accomplished market technician will tell you that this is simply the beginning of an inside bar pullback on the daily chart of TBT. TBT is holding up well and after consolidating it should shoot higher to $29.

As a side note, above I mentioned how bottoming tails are typically followed by another down day that does not make a new low and cited TBT as an example. Note how on Monday the tail made on the chart was large as the ETF closed back near the highs. Then the following day it sold off again but stayed within the tail made on the previous day. For this reason I opened my TBT long since the news was pumping the upside in bonds and the downside in equities yet the charts were failing to make new lows or highs respectively.

Be smart, the market is still volatile. I am mostly in cash outside of TBT and though I do believe we’ll see some selling Monday, I probably won’t look for shorts in the market. Instead, I’ll most likely be looking for long opportunities on any consolidation next week.

Update August 8th, 2011

Hey everyone, wild week in the market last week. I was stopped out of all positions which is unfortunate, but better than holding through all of the volatility. The key here is to abide by stops and keep positions small. I planned a video for tonight but am having trouble with the software so I was unable to put one up however I wanted to give at least a quick update on the market so I will summarize a few things in this post.

First, I am long Aug 11 MS $19 call @ $1.45 and that position is up about $.15 as of Friday’s close. I like $20 as a support because it is the resistance level going back to the financial crisis and should now act as support, especially since the stock has traded right into that level without first consolidating. A few other plays that are looking cheap or are close to critical support are WMT, F, BAC, AA, and XOM. There are several large cap stocks that have tagged or are currently hovering above support and I think this bodes well for the market.

Regarding the S&P downgrade, none of the reputable minds on Wall Street care much for their ratings. Investment banks pay people hundreds of thousands of dollars to run valuations on stocks and bonds. In other words, the rating given by an agency that has whiffed on so many obvious calls (internet stocks in 2000 and MBS in 2007) means nothing to them. There may be a knee jerk reaction, but don’t expect the downgrade to be the reason the market falls again (if it does). If anything, I think that given the timing, the downgrade is actually a nice contrarian indicator since the market is already down 11% and all of the bad news seems to be out there now. There will be a massive rally, and there will be an opportunity to make huge gains as long as we play it safe.

Currently, everyone is looking for a bounce to short the market. I too am looking for a bounce but I think that it will be bigger than most people expect and some might mistake a bull flag for a rollover, so keep in mind that the institutions will always go the opposite route that the mainstream media has the average investor expecting. Speaking of which, options expiration is this week and we have sold off very hard going into it which leads me to believe that the large funds will be looking to crush the fresh puts that have sprouted up in the last week.

Also in the wake of the debt ceiling, I am a believer that if interest rates fall, yields on US Treasuries will be decimated. Stocks, and, oil, and copper are getting hammered on. These are leading indicators of economic contraction. The US treasury is still the best bond out there and 2.5% yield on US debt still beats -15% equity in the stock market. Again, the rating means nothing and if anything is a contrarian indicator. Most would expect a downgrade to post negative performance but in this case, the fundamentals outweight the hype that the S&P and Moody’s have created.

Moving on to gold. We had a key reversal in GLD on Thursday and Friday’s trading did not get us above that high which means the reversal is still in play. However, it could just turn out to be bullish consolidation. The G-7 has said today that it is ready to act in order to calm global markets. The ECB said on Friday that it would begin purchasing Italian and Spanish bonds, which is essentially a QE program for the EU. And of course, the Fed meets this week at Jackson Hole on the anniversary of QE II. I don’t expect them to announce QE III, but they will certainly have to make themselves sound accommodative. They would make themselves look foolish if they announced a QE III only a month after QE II expired, but remember that Bernanke made his legacy as the guy would wouldn’t let the market collapse and there is no way that he will say anything hawkish while the CNBC camera is on him showing the up-to-the-second tick of the S&P and gold as he speaks. Regarding QE III, I don’t think that a third program will get the market back to the YTD highs. At this point, the fundamentals are so bearish that even a weaker dollar won’t have much effect on the obvious global contraction. The dollar will also feel upward pressure as the ECB purchases european bonds in an effort the stabilize their own markets.

All in all, the above describes my sentiment on the many issues that have developed over the last week. Keep in touch via email and don’t hesitate to ask me to elaborate my opinion. Be careful and keep it short term.

Updated Winners For 7/26

Latest Winners:

SQQQ – entry 7/7 $21.98 exit 7/12 $23.69 +7.3%

C Aug 11 $38 c – entry 7/18 $1.16 exit 7/21 $2.28 +49%

EUO Jul 11 $17 c – entry $.25 6/30 exit 7/11 $.90 +360%

FAS – entry 7/18 $23.20 exit 7/21 $25.01 7.3%

Loser

VECO – entry 7/14 $41.31 ext 7/15 $40.93 -1%

The key to being successful is to win and lose small.

Let’s move on to two more winners in the rare earth industry:

GWMGF – Entry 6/16 $.623 – current price $1.04 +40%

I put the buy alert on GWG on 6/16 which was the day the stock bottomed. It is up nearly 50% from the lows of that day and has not yet even stopped for a breather. Congrats to GWG shareholders.

In my latest video I said that MCP could go to $75 in the next three weeks. Since then, it has broken out above the inverse head and shoulders that I talked about in the video and is now headed higher.

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Currently, I am still long TNA, MOBI, and PG. Mobi as well as many other Chinese stocks had a sharp move higher today and may be close to a breakout. Refer back to my analysis from Sunday night for a breakdown of MOBI’s chart.

PG and TNA will likely see more downside as the market pulls back off of the highs but the chart pattern in the overall market is bullish and when the debt ceiling agreement is done, there will be a pop across the board. However, I do not expect this pop to last and will look to unload my longs into the rally.

Small Cap Alert: LL Possible Swing Trade

Lumber Liquidators recently collapsed on a rating/outlook cut. Their market cap was 700M last week and today it is only 27.6M. There are two really solid levels to play this for a bounce.

If LL has another collapse tomorrow through the first level of $17.35, then depending on the circumstances, I may enter for a swing trade with the upside target being $19.50 and I would use confirmation below the second level of $16.56 as a stop out. If however it consolidates sideways for a few days, then I will likely enter on a pierce of $16.56 and use a close below $16 as a stop out.

Upside for the first scenario is upwards of 11% with the downside at about 4.5%. Upside for scenario two is 15.5% with a possible downside of 4%.