Markets Extend Rally Into Holiday Weekend

The banks were essentially bailed out again as the IMF deal ensured that many of the CDO’s would remain solvent for the time being however Greece will ultimately default which will be followed in the future by Portugal, Spain, and Ireland etc. The market liked the news and the ISM manufacturing number that came out yesterday morning which helped the S&P gain 5.5% last week. I did speculate that the market would rally this week but I assumed that 1320 would have been the absolute highest we would be able to move based on the already large move early in the week which should have priced in the IMF/Greece deal and the ISM manufacturing number. Nonetheless, the market bought the news and continued higher. This may be due to the last of the POMO money that had been saved for the end of the month to prevent a drop before the holiday weekend, but it is pointless to speculate and the smart strategy here is to have caution and respect the trend.

The S&P is 4% above its 20 MA and over 5% away from it’s 200 MA which just 5 days ago it was trading beneath the 20, and just pennies above the 200. I went short on Thursday and the only reason I am remaining short is because this market is extremely overextended. The market confirmed above the 50 MA but that level is less relevant because whenever you have two levels, you should always look for the first to give, and the second to be resistance.

You can see that we have broken the upper trendline that goes back to the beginning of May which is the second of the two levels and the market can confirm the break with another positive close Monday though I would be absolutely floored if we had another move like this next week, especially without consolidating beforehand.

Another reason why I think the market will pullback next week is because the UUP held the $21.20 pivot even as the market ran higher. This is a bit of a divergence from normal market activity and is also another reasons why I’m advocating extreme caution. The chart could be building up a bear flag if the UUP stays below the 20 and 50 MA’s and the target for such a pattern would be all the way back to $21 even.

I think that we are in for a wild second half of 2011 and the volatility in currencies like this that makes it necessary to reiterate the importance of only staying in trades for short periods of time. The dollar has the fundamentals to be trading much, much higher right now, but thanks to market manipulation by China, the Fed, and GS, the dollar remains under pressure. This is why it’s especially important now to remember that our job is not to get caught up in the why so much as the what and trade based on what the chart tells you. The biggest mistake you can make right now is trying to force your views onto your trades instead of simply trading what you see.

The best strategy is to remain short term and play individual stocks that are near key levels. In this situation, I prefer small and mid caps as opposed to etf’s and large caps as they are less effected by large swings in the market.

Moving on to TLT, the Treasury auction should have been no surprise and though I thought that it would have been priced in sooner, it certainly appears priced in now as there is a beautiful bottoming tail on the daily chart for Thursday’s action. Friday’s action followed through with a failure to close below the previous low and additionally, lacked volume. I think that an aggressive trader can safely buy TLT for a move up to $95 in the short term with a stop loss at $92.90, or a closing candle below $93.14.

I know some of you are in this trade with me and I was only out of the money for a day on ZSL and as I said, as long as SLV stays below the 20 MA, the short was still in play and as you can see the bear flag played out perfectly and ZSL is now in the money. My target for ZSL is the same, $23 should be resistance but I’ll be unloading around $22.75-$22.90 to protect gains.

Now, something interesting has developed in the SLV chart and that is the controlled, step by step breakdown in price activity. This is now the 4th bear pennant that has played out on this chart since the initial selloff in April and this is significant because there is now a possibility that $30.50 is no longer major support. Remember, anytime you go straight into a level, there is a higher chance of a pullback in the trend when that level is reached as opposed to if the stock consolidates on its way into that level. If SLV continues to meander lower instead of simply dropping down, then we must look at lower levels of support to buy this at again.

This development does not change my exit for ZSL because I won’t risk giving up sizable gains back to the market. At the very most, I may take half off of my position and trail my stop to guarantee a profit, but I absolutely will not forfeit gains by not making an attempt to protect my position. Now, that said, this might not change my exit for ZSL, but it certainly will change my potential entry of AGQ to play silver from the long side if and when it bottoms out. This trade is going to depend on many circumstances and I will provide a more detailed analysis on when and how to enter at a later date but for now, I am holding ZSL and the trade is going as planned so I’m not trying to get too far ahead of myself.

Once again, keep it short term, don’t eat up the headline news, and protect your portfolio at all costs! Do not give back gains to this volatile market because it will take you for everything you have. Be sure to have a good 4th of July weekend and I will see you all next Tuesday for the shortened trading week.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

One Response to Markets Extend Rally Into Holiday Weekend

  1. Pingback: Markets Extend Rally Into Holiday Weekend » Greece on WEB

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