Commodities Are Leading The Market Lower

Gold, silver, and copper are lagging the market and could signal a downturn after the light volume holiday period comes to a close. Additionally, the NDX is also lagging the market which is telling us that investors are putting their money into less risky assets like DOW stocks.

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.

DOW Gaps Into Key Trendline Before 300 Point Rally

The US markets opened lower but found support at a key trendline going back to the August lows. The media continues to pump the downside but the levels on the chart have worked phenomenally.

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.

Friday’s Yields Demolished – Perfect Example Of Why News Is Secondary

In yet another example of why the news cannot be trusted, US bonds yields were crushed on Friday even though the headline news that has been at the front of everyone’s minds is the possible default on US debt obligations. So in the face of a possible default yields on the 10 year were down 5% on Friday as equities were also down substantially on the opening bell before recovering throughout the session. The market is so used to bonds being fundamentally linked to monetary pressure that traders may have forgotten that there are several other factors that drive bond prices. Ultimately, the US has the ability to pay off its debt by raising the debt ceiling, but the reason why it wouldn’t be paid (hypothetically) would be to lack of agreement in Congress and the White House. Therefore, it’s not the bond that is insolvent per se, it’s the ineptitude of the clowns in Washington to simply raise the debt ceiling and then debate the budget afterward.

That all being said, one could have come to the conclusion that bonds would rally by observing the bullish consolidation pattern on the chart of TLT.

TLT made a 9 month high Friday and was able to pierce resistance at $98. There is still strong resistance at $98 as it came off of the highs after breaking through them earlier in the session and it is possible that bonds may have put in a short term top since some of the fear should subside after the debt ceiling is agreed upon.

Also, a downgrade is looking more and more likely. Moody’s is either making themselves look more foolish than they already are by constantly attempting to grab attention, or they are actually serious about a downgrade and will do so next week. Moody’s, like S&P have missed many obvious ratings in the past (take MBS for example) and it seems foolish for anyone to care what credit ratings they decide to give out. Additionally, a downgrade of US debt without labeling many others across the globe as junk is hypocritical and adds to the ridiculousness of their image. In any case, I would advise staying out of bonds until the outlook becomes clearer but if I had to choose, I’d have to favor the downside in the near term.

The S&P was down about 20 points by 10 am Friday after the news that Boehner’s bill failed in the House overnight but the market rebounded after Harry Reid announced that his own debt agreement bill would be pushed through the Senate. Not coincidentally, the market initially fell into the 200 MA which also coincides with the trendline going back to March 2009. A confirmed break of this trendline will signal a fundamental change in the market. I do expect this to eventually play out but with yesterday’s price activity, it was obvious that it was not set to happen then and there.

Remember the fundamentals of the chart, any time you gap down into or trade straight into a key level without first consolidating, there is usually a 90% chance of that level holding and it usually results in a bounce. For this reason, I have not sold any of my long positions and you can see the market is already sharply off of the lows and managed to only lose .65% with the close on Friday.

To further support my theory, the weekly chart of the SPX shows an inside bar bull flag off of the sharp move up from the Independence Day rally. The pattern is valid as long as it stays above 1258 on a closing basis though I personally won’t hold long positions if the market moves much lower.

I think the more likely scenario is the market sees some upside next week though it may be a bit of a stretch to think that it will break resistance at 1345 which has been an amazing resistance level so far.

Once again, if the powers that be really believed that there would be a default, gold and silver would have been up 5% yesterday and I believe that gold, like treasury yields, confirm the likelihood of a rally in the equity markets next week. Gold should have traded much higher yesterday if there was a legitimate default risk and like I mentioned earlier, situations like this are why the news is secondary to the chart. I have been talking about this for a few weeks but gold is still very extended which should tell us that any bad news is already baked into the chart – and that is why gold did not explode on Friday.

So, to follow up with Thursday’s analysis on silver and due to requests, gold is still extended and Friday’s close of $1628 was less than impressive considering the noise that was going around regarding the debt ceiling. Gold is up 10% in the last four weeks which is the most it has been up in the shortest amount of time since the bottom in October 2008. I have talked about this many times before, but to summarize once again, gold typically makes two peaks during the bullish moves in its cycles. This here is the making of the second peak and it is no coincidence that it is happening as the debt ceiling is being debated. Any debt ceiling resolution should be negative for the precious metals and should be a catalyst for a correction in both gold and silver.

The bottom line is until I see bottoming patterns that coincide with cycle lows in gold and silver, I won’t spend any investment capital on them and they will remain nothing more than trading vehicles until that time.

Financials Rally Off Of Lows As Market Pauses

The banks had a big up day today thanks to the hangover from the news that The President may have found a debt deal that he believes is reputable. The S&P finished slightly negative but was lead by financials as they stand to benefit the most from a debt ceiling hike due to the fact that they are directly exposed to the derivates that would collapse because of it. Utilities were also higher but commodities and energy stocks lagged as many have been overbought, namely gold. Gold stands to lose the most from the debt deal because its main attraction at this current time is sovereign credit risk, which will subside, if only temporarily when Congress comes to an agreement.

Gold broke through yesterday’s low but had an impressive rally in the afternoon to close just slightly negative. The Fibonacci fan resistance at $156.50 (which translates to Friday’s high for spot gold) on the GLD has worked so far though I personally won’t take this for a short since it will most likely take 1-2 months for gold to bottom. I think the low for gold will be around $1475-$1495 depending on how fast it falls but once again, I won’t take the short because of the time factor. The debt ceiling hike should serve as a catalyst for a correction that takes us back to the 2008 trendline on the weekly chart.

Silver traded similar to gold and once again made a lower low but still managed to tough out a rally in the afternoon session. The rally took silver right into $39.50 which is the level that it failed to confirm above yesterday. Expect this to be short term resistance if there is continued pressure on the sector. There is also additional resistance at $41.

To quickly recap for those who haven’t seen this yet, the trendline on the chart above is where I believe silver is headed. This could play out over the next 2-3 months or perhaps even longer though I believe that it will happen sooner rather than later. In short, if silver trades into this trendline without consolidating, it will be a strong buy. Unrelated to the long term trends but also worth mentioning is that if silver closes negative for the week, it would also fail confirmation above the 20 MA.

The SPX had a pause day after yesterday’s big rally through the moving averages. The trading range today was only 7 points which may mean that the market is waiting for more news to find its direction though I have to favor the upside if volume remains suppressed and no significant news breaks. Again, the debt deal is key. I think that the agreement will be largely priced in, but I am expecting a large rally after the announcement that may last 2-3 days.

This, plus the technicals on the chart is why I am positioned long the market. I entered TNA at $82.16 and I am currently about $1 in the money. Short term resistance for the SPX is at $1333 while additional levels are at $1345 and $1359. I am generally expecting the market to reach $1345 within the next week or so and it is possible that it makes it back to $1359 shortly thereafter.

Financials had a strong day as the XLF rallied for a 1.14% gain. I was a day early in calling the bottom but the sector has since recovered and most bank stocks are sharply higher. Goldman Sachs (GS) was up 3.32% today and is now 5.5% off of yesterday’s low. JP Morgan (JPM) is 6% off of Monday’s low and Bank of America is 4.5% off of the lows. Resistance for XLF should be between $15.11 and $15.14 and I will most likely unload my FAS long into that level.

I am still holding the Aug 11 $38 Citigroup (C) call which is now up 27% from my entry of $1.16. I am looking for confirmation above $39 to exit so that the call will go another dollar in the money. I believe that this will happen over the next week so and once again, Citi, like the other banks, will surge if there is any positive news regarding the debt ceiling.

Dollar And Markets Positively Correlate After Debt Deal

The stock market positively correlated with the dollar during the afternoon session after news that a “bi-partisan” deal was likely to be agreed on in Congress and by the President. Gold and silver fell sharply as financials continued to inch higher.

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.

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.