SPX Negates Tuesday’s 400 Point Opening Gap

The S&P reversed yesterday afternoon and today was a continuation of the selling as the market lost all gains from Tuesday’s gap higher. The market looks weak and is in a weak technical position after the evening star reversal that had played out today. This reversal should indicate more downside for tomorrow. Copper lead the market lower losing nearly 7% and this is yet another reason why I’ve remained short.

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.

Is Silver Headed Lower Once More As Part Of A Massive Five Wave Cycle?

Silver, like gold has been in a bull market since the earlier part of the 2000′s decade and aas everyone knows it has recently peaked just below $50 before a large correction brought it all the way down to $33. Silver has since recovered and is hovering near $40 on the back of the political posturing over the debt ceiling. Silver and gold serve as safe havens versus currency debasement and the risk of a default that could send the OTC derivatives market into another Lehman-type phase should the debt ceiling not be raised. Most believe that the debt ceiling will be raised – let’s face it, the politicians like Obama, Reid, and Boehner will not only not be automatically counted out for re-election, but they would go down as the stooges who couldn’t come up with a simply compromise that had catastrophic repercussions on the global economy. I think that whatever happens, they will manage to get the debt ceiling hiked and that will cause precious metals prices to come down off of the recent highs.

I have recently talked about gold and the three year trend that it is extended from and how it is even now following its own typical cycles going back to 2008 and I have used that as an example as to how a correction in gold would coincide with a debt ceiling agreement. However, it also appears that silver may have even larger cycles that could coincide with the debt ceiling and an agreement could serve as the catalyst for another large move down in silver. From a purely technical standpoint, this is very possible.

Those of you who have been following my recent work may recognize this chart. I have stated that I think that silver ultimately gets back to this trendline on another move down. However, it is not clear if this trendline will be the low, or just a major support level on a large move down that may occur due to an event (however big it might have to be) that sends silver crashing to new 18 month lows. It sounds crazy, and I hate to sound like the bear, but let’s just look at the charts.

Going back to 2004, silver has gone through four waves that have extremely similar qualities. From late 2003 to April of 2004, silver had a run from $5 to $8, which is a 38% leg up. Immediately after peaking, it collapsed to $5.50, a 32% loss. Throughout the next 2 years, it consolidated in a tight trading range and did not make a new high. Then in the summer of 2005 it began another move up, this time it was from about $7 to a high of $15 (over 100%) in the spring of 2006. Towards the end of spring it collapsed to $9.50 – a 37% loss. For the next year it consolidated in a tight trading range before bottoming out in the summer of 2007 around $11.75.

From there it rocketed all the way up to $21 in early 2008 for a roughly 90% gain. Once again, immediately following the peak, it fell from $21 to $16 within a few short weeks for a 25% loss. Silver then consolidated for a few months then peaked again just shy of $20 which was only 5% off of the high. Following that last peak came the financial crisis, where silver lost nearly 60% as it dropped all the way to $9.00 once again.

After bottoming out at $9, it recovered under the QE program and traded higher for the next year or so before consolidating within a tight trading range beginning in late 2009 and ending in summer of 2010. After Jackson Hole, silver shot from $17 to $30, then after a brief pullback, it made a high of $49.50, or a 290% gain from August 2010. This is where it becomes interesting. As we know, silver fell from the highs of nearly $50 all the way to $33/oz for a 32% collapse in less than two weeks. What amazes me is how unbelievably similar the chart looks now as the move up, consolidation, and collapse from 2007 to late 2008. Silver has recently consolidated after the initial blowoff top this past spring, and has made another move higher to about $40 on the back of the debt ceiling argument. It is still 20% off of the highs but the pattern is almost a mirror image of the on made in 2008. If silver is part of a massive five wave cycle, then there is a possibility that silver falls back to levels not seen since 2009-2010. Determining the price target is difficult but there is support at $30, $26, $21, $17, and $15.

Once again, it does sound crazy, but based on the chart patterns, such a move is on the table. However, if silver were to collapse to $17 and then recover once more – perhaps to $25-$30, the next move could be “the big one” as many in the precious metals community have been talking about. Then again, maybe silver doesn’t collapse to $17 and instead only falls to $25 and then recovers to $33 before making another 200-300% leg up which could even take it to over $100/oz.

In any case, its food for thought. However, there is more to this theory than just spot silver’s movements. A huge credit goes to Seeking Alpha and Financial Sense Contributor David Urban for finding the first two charts that I am about to show, the rest I found after researching this further.

This chart is of Silver Wheaton (SLW) which is commonly known as a benchmark silver stock and it is clearly showing a head and shoulder reversal on the weekly chart.

Silver Standard (SSRI), another benchmark silver producer is showing the exact same pattern. Again, credit to David Urban for these two charts, the rest below are ones I found after seeing SLW and SSRI.

Coeur d’Alene (CDE) also a top silver mining stock, SHS top is clear as day.

First Majestic (AG) is showing a sloppy, but valid SHS reversal. The pattern is valid because the high of the head is higher than the high of the right shoulder and the neckline is ascending instead of descending, which would void the pattern. This pattern is sloppy, but the patterns in the other miners confirm AG’s chart.

Great Panther Silver (GPL) also has a sloppier pattern but again, it is confirmed by the other head and shoulders reversals shown above.

Head and shoulders on Alexco (AXU) as well which is another up and coming silver producer.

Global X Silver Miners (SIL) another perfect pattern.

Endeavour Silver (EXK) is a near mid tier producer and again has a slightly ascending, but valid pattern.

This topping pattern is not limited to one class of silver assets, there are juniors, seniors, mid-tiers and ETF’s that are showing the head and shoulders top. This coincides with the analysis I have on silver’s long term cycles and these charts could be potentially be leading indicators for the next leg in the silver bull market.

Does this all play out? Maybe, or maybe not. Like I have said before, the best patterns are failed patterns, and the fundamentals for silver are most certainly favoring the bullish side, but I feel that the size of these moves should not go undocumented since they coincide with current events and with the movements in spot silver over the last 7 years. At the very least, I think we can all agree that they are definitely incredible patterns and are worthy of recognition.

SPY & Financials Reverse, Gold Extended But Still Tearing Higher

The SPY is close to a moving higher again after a sharp move down this morning on the back of European bank fears. There are also oppotunities in the financial sector on oversold stocks for long swing trades. Gold and silver are very extended and the trade is becoming short term crowded but shorting them at this level is risky.

Financials Close Off Of The Lows To Make Possible Short Term Bottom

The S&P closed a few points above the even number level of 1300 which is typical of an options expiration week since whole even numbers are closely associated with strike prices, and what better level is there than one that ends with 00? I think the big story for the market’s activity next week will be the financial sector as many of the major banks were beaten down hard last week and are close to the lows of their respective charts. I will most likely play the long side of the financials next week for a short term bounce, and I believe that it is also possible that this translates into a rally in the overall market.

I have a short term level for the S&P at about 1306 which is a level that was tagged on Thursday and one that the market stayed above on Friday. This is by no means a major pivot but I think it may serve as minor support as the market consolidates off of the highs. Additionally, the 20 and 50 MA’s are beginning to scoop underneath the price activity and the 20 MA is already above 1306. This forces me to favor the upside and it is likely that the market is now putting in a higher low.

Using 1258 as the high and 1356 as the high, the market has made a 50% retrace of the Independence Day rally (1258+1356 = 2614/2 = 1307). The close yesterday was 1308 but the low of the day was at 1307.52, which is almost exactly 50% off of the high of 1356.

Bank of America has now pierced the $10 level on the chart and has made a bit of a bottoming tail on the daily. It sold right into this level without previously consolidating which means that it is valid for a long play as long as it stays above yesterday’s low of $9.88.

BAC has earnings on Tuesday so I don’t advise holding the stock into the announcement, however I’d still favor the upside as it has sold into earnings and is already at the bottom of the chart which tells me that any bad news has more or less been priced in already.

GS pierced $130 and has now made a higher low off of the bottom that was set in late June. This looks like a bullish setup for a long play, first target is the 20 MA, I would look for it to hit about $132.50.

Similar to the chart on GS, JPM has made a higher low after a nice double bottom. It closed negative on Friday but made a lengthy tail on the daily chart which suggests that a short term bottom is in as long as it stays above Friday’s lows. The target for a bounce should be about $42.

Probably the best chart so far is the XLF. Good series of higher lows and a possible bottoming tail from Friday’s action. Upside target is the pivot low of $15.34 which would also be a pierce of the 50 MA. There is nothing fancy on any of these charts and none of them should suggest anything more than a one to two day swing trade. For this reason, I like the FAS for added leverage to the possible bounce. Use XLF as a proxy for FAS since FAS is leveraged and does not accurately represent levels on the chart.

I am looking for a gap lower tomorrow that stays above the $14.73 low on XLF, if this happens I will most likely go long the FAS and possibly another sector ETF (maybe QLD, SSO, TNA) that represents the overall market depending on where the SPX ends up after the opening bell.

Gold Extended From 3 Yr Trend, Covered Short In Q’s

Gold is extended from its 3 year trendline and will be a much better buy when it comes in for a tag of that line. Today I also took 7% profits on SQQQ, no need to be exposed to options expiration week volatility.
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Here’s an interesting chart I came across after I made the video:

This is a relatively new ETF that trades 2x inverse to the performance of gold miners. Note the tail after the pierce of support during today’s trading. If DUST stays above this level on a closing basis, it is a buy for what could turn out to be the right shoulder in a beautiful head & shoulders reversal. The best part about a long play here is your stop loss should be any close below $40.05, which would amount to just a $.60 loss on a $40 ETF. The upside in the immediate short term will be as high as $43-$44 and it could run all the way to $48 before peaking again. I will disclose this if I enter a position.

S&P Loses Gains For Second Day On The Back Of A Weak Euro

This is already shaping up to be a wild options expiration week. The market fell for the second day in a row due to the negative news about the emergency meeting that the EU was having for Italy regarding what to do with their rescue package. This hurt the Euro as the exchange rate plummeted below $1.39. Gold and US treasuries rallied again as a safe haven play and the equity markets confirmed what I had predicted yesterday which was that we were in for a down day today since many asset classes failed to confirm above or below major pivot levels.

Though GLD rallied .89% SLV fell sharply into the red as it lost 2.38% on the day. This is likely to be explained by gold being a better store of value and a safer asset than silver. The stronger dollar did not hurt gold today because gold buyers benefitted from the fears in Italy and consequently, both gold and the dollar moved higher, while silver retreated from the highs and forfeited back some gains.

I said yesterday that $143 and $141 were the levels to watch on FXE and that a move in either direction would be decisive because the trading range had become so tight. Today it gapped below the lower trendline which completes the symmetrical wedge which I had said in one of the videos last week, was a bearish wedge.

Despite today’s move, I think that downside is limited to $138 in the short term. It’s likely that it pierces the 200 MA tomorrow and tags $138 on the way there. If however it consolidates for the rest of the week, then it may have to momentum to fall to $137 following any type of consolidation or sideways trading. I am now out of my EUO Jul 11 calls as there is no reason to risk giving up gains as there is now much less upside to the trade and my contracts had already gained over 350% since the 30th of June.

The Euro may stabilize by the end of the week but UUP can confirm a breakout of $21.67 with another positive close tomorrow. The dollar has broken out of the upper trendline in the symmetrical wedge pattern but it needs to confirm above $21.67 in order to move higher. Given the almost automatic bearish bias that UUP has, it isn’t hard to imagine the dollar failing to confirm tomorrow and instead, coming back in to test $21.60 as support before making another move up. If the dollar does confirm above $21.67, then it goes back to double top at $21.86.

Once again TLT continues to rip higher closing up another 1.5% and is now 4.5% off of the bottom that I had called on June 30th. TLT will likely test $97 tomorrow but given the vertical move, I doubt it closes above it.

Are you beginning to see a pattern? The dollar, the Euro, and TLT are all close to major support/resistance and both have little up/downside in the short term. It appears that while trends may be reversing, we’ll likely see a bit of a pause and/or consolidation tomorrow.

The SPY had an extremely weak showing and barely scraped off of the lows by the closing bell as it appears that everyone is now trying to take profits from the monster move all at the same time. Again, like the three charts above, this one tagged support (50 MA) and has another level just beneath that which it may possible tag intraday tomorrow, but a close below 1310-1313 would come as a bit of a surprise.

Part of the reason why I believe we could see a little bit more downside tomorrow is because the Q’s are still extended despite today’s move lower. A really rough support level has been drawn at $57.50 and I’m only using it because it’s about the same amount of percentage points lower as 1313 is from the SPX and i has been tagged a couple of times since February. Additionally, it’s half of an even number which is a bit of a mental level for traders. However, if this level doesn’t work out, we could see the Q’s lag and fall to the 50 MA which would be around to $57 level. I certainly think this is possible by the end of the week but I also wouldn’t be surprised at all if the Q’s continued to outperform.

I am still long SQQQ and am up $1.50 (6.5%) but I will be watching this closely and I’ll be making a point to protect gains.

Failed Confirmation In Equities, Gold & Silver Weekly Trends

I did a video before the close on some of the action from Friday’s trading but tonight I will follow up on that analysis and update a few new items that have developed since the close on Friday. As shown in the video analysis on Friday, the markets had above average volume in the morning session during the gap down off of the dismal jobs number, but immediately after a 200 MA pierce on the 10 minute chart, a buy program pushed the market higher and volume soon dried up which lifted equities into the closing bell. My interpretation of this is that since most of the Wall Street financiers tend to take it easy on Fridays, (which is partly why Friday’s are historically known as positive days due to less volume) the large bank and HF’s were just waiting to hear the jobs number so that they could trade based on it, and then proceed to stay out of the market for the rest of the day.

Simply put, Friday’s action was nothing but profit taking. I think we’ll see some more downside early next week but remember that it is an options week so expect violent swings. We are still very overbought at the moment and usually the institutions take the market in the opposite direction that the market is headed in going into options ex.

On Friday the managed money took profits off of the jobs number and then largely stayed out of the market for the rest of the session. The reason why I believe we’ll see some more selling next week is because of options expiration which usually includes high volatility and high volume that generally favors the downside. We’re also overbought going into the expiration which could take for some very wild swings in both directions. More importantly, I think we’ll see more downside because we’ve only had a one day pullback. If you are up 7-8% in less than 2 full weeks, the jobs number just becomes an excuse to take profits off of the table, but you wouldn’t try to buy back those stocks you were up on if they had only pulled back .5 – 1%. You would most likely wait for them to come back in at least 3-4% for a 50% retrace before trying to buy the dip.

Additionally, as you can see on the chart above, the SPX failed to confirm above the critical 1345 level on a closing basis. A failed confirmation means that it needs to come back in again before it can retest this pivot.

The failed confirmation also extends to the weekly chart. Yes, it did confirm above the 20 MA, but whenever you have two levels that are that close to each other, you should always consider the farthest level as the most important one. So, in this case, 1345 is more major and the 20 MA is minor.

The Q’s also could not confirm above a major resistance and the level on this chart is even bigger than the one on the SPX. We’ve now hit a quad top (triple top on the weekly) with Friday’s close because the Q’s failed to close above Thursday’s closing price. The $59 level on the QQQ has not once been confirmed above since we initially tagged it in February. A retrace this week should take it to $58 at the least.

Adding more pressure to the market will be Italy, which appears to be the next pig nation to begin making headlines. Some European officials called for a $2T aid package which is double the size that the original plan was supposed to be and the EU has now called for an “emergency” meeting to discuss the unsustainable debt levels and perhaps how to attempt to contain the contagion. In short, pressure on the Euro, means a stronger dollar and a weaker equity market.

The Euro is near the lower end of a symmetrical wedge with support at $141 and a tight resistance level of $143. Any move this week should be decisive because the trading range is so tight, a breakdown and confirmation below $141 would send the SPX lower while a gap above $143 would continue to hold the current situation steady.

Moving on to gold, there has been a lot of noise this past week surrounding a possible breakout in the PM’s. I touched on this Friday but I do not believe that this is the case. Gold is still extended from the 3 year trendline on the weekly chart and has not completed the current down cycle. I’m actually somewhat surprised that gold has rallied over the last week considering the lack of news out of Europe, but nonetheless it is where it is. I think the absolute lowest it gets is $1450 and it will do that within the next month. I think it’s likely that Gold will rise to somewhere just below $1700 (possibly $1675-$1690) before ending the year around $1650 give or take.

I haven’t looked at the weekly chart for silver on a long term basis for a while but I really love this topside trendline that extends back to early 2009. With the recent surge, it is likely silver tests and fails a break of the 20 MA on the weekly though it is possible it gets as high as $38 in the process. It will then continue the leg down into the lower trendline and make a long term bottom. Speculation past this is too far ahead to make any guesses as silver trades much less like clockwork than gold does but as of right now silver is predictable enough to trade, and for the long term investors, to buy during the dips.

A week or two ago I said that TLT would be a buy for a move up above $98 if it had a pullback. Granted, the move down was sharp and I did not expect it to move so violently, but I did nail the bottom in this to the exact day and it is now 3% off of the lows after recently piercing the 200 MA. Treasuries recovering could spell headwinds for equities and TLT also negated a possible bear flag on the daily chart. It is now back above the 50 MA with Friday’s high volume surge and can confirm with another positive close tomorrow.

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TLT had a sharp decline on the weekly chart as well but it also failed to confirm below the 50 MA as well as $95.20 which has been a master level for the last 3 years. So that’s two rejected pierces of major support levels on TLT with Friday’s move.

As you can see, the story this week has been all about confirmation and particularly, the lack of it. which is why I still favor the downside going into next week. The market defied taking the stairs up and the elevator down by instead doing the opposite, but now it is time for a bit of rebalancing. Certainly it’s possible that the market can still move higher after coming in first, but I would be amazed if the SPX managed to get back to 1370 this week and the Q’s to broke above $59.21 given the current overbought status, the rally in treasuries, and the pressure on the Euro.

SPY, QQQ Reach Key Pivot Points

The tech sector has led the rally over the last 2 weeks but the market is reaching key pivots and looks to have put in a short term top.

Equities Finish Off Of The Lows On Options Friday

The S&P managed to complete a two day rally for the first time this month with Friday’s close of 1271.50 on the S&P, 12,003.04 on the DOW, and 2616.48 on the Nasdaq. The 12,000 level on the DOW makes sense as round numbers are generally the case for an options expiration and additionally, the 12,000 level is a huge mental support and is not likely to be taken out with just one attempt. On Thursday I said that we would likely close higher Friday, which we did, and now I believe that the market has put in a short term bottom and will rally for the next week or so, but ultimately this down cycle is not at all finished.

So yes, I do expect this market to go lower fairly soon, but to give you an idea of how overdue for a rally we are, yesterday AAPL closed below it’s 50, 20, and 200 MA’s for the first time since April 2009. What’s more is that it was trading above all three of those moving averages just 10 trading sessions ago and since then has lost nearly 10% of the stock’s value. That to me, is simply screaming oversold.

The tag of the 200 MA and the 1257 support on Thursday was an indicator of a bottom as evidenced by the bottoming tail on the daily candlestick. Yesterday, we closed well off of the highs but still managed to tough out a rally to follow up Thursday’s action, and it had significant volume behind it.

Given the oversold condition, and the belief that so many traders are most likely waiting with their orders open below support, the contrarian might believe that the market is not ready to attempt another test of 1257 quite yet. The best way I can explain this is that when everyone is expecting the market to move one way, most often is does the exact opposite and it is clear that everyone has been doubting the market’s strength as of late what with the fear of a Greek default, which translates into what was the highest put to call ratio in 18 months. I think it makes sense that we see a minor rally in the next week or so, not an overly significant one, but enough of one to even out the lopsided short trade.

It also appears that the weekly chart confirms that a pause in the selling is up ahead. I have trouble believing that a doji candle would have been made last week if we were about to flush once again. Hedge funds, iBanks, and HNWI’s do not short charts that go straight down, nor do they buy charts that go straight up. So here’s an old equity trading 101 saying – “buy the dips, sell the rips”. In other words, never chase charts and always wait for a pullback before entering any stock that is in a confirmed up or down trend. We will get a shorting opportunity, but if you are thinking about opening new shorts at this level, you are doing so when it is already down 7.5% in the last 45 days and down 5.5% in the last 21 days.

I would look for it to gain back at least half of the 5.5% lost in the last three weeks which would make our upside target between 1290 and 1299 which are the levels that I have drawn in the daily chart above. The 20 MA is currently at 1299 and a tag or pierce of that MA could potentially be the time to go short but it won’t be clear to me until we get there. I think that it is safe to play this from the long side but I would limit those longs to stocks that are close to or at support and have lagged the market on the way down. And as always, be sure to use prudent stops as even though we are oversold, the markets are still extremely weak and are subject to any new news that comes out of Greece and the EU.