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.

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

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