Everyone’s Talking About The SP 500 Symmetrical Wedge – US Total Debt Reaches $15T

If you have not heard by now, the S&P 500 is trading within a symmetrical wedge pattern, which has most in the investing community buzzing. Because symmetrical wedges are generally neutral, they attract quite a bit of attention since no one knows for sure which way it will break. The point I want to make about this wedge is that way too many people are watching this pattern for us to simply buy the first sign of a breakout.

When a more than average amount of people are watching a particular chart pattern, the success rate generally declines. This pattern will play out as a bullish continuation, or a bearish reversal, whichever it is, confirmation must be utilized on any breakout or breakdown of this wedge. Confirmation being a secondary close below the low or above the high of the breakout candle. This method keeps traders out of bad trades, and prevents needless stop outs.

Currently I am short the USO. I took profits on 2/3 of my initial position after the pullback from the 200 MA pierce, and added 2/3 back today after the gap higher. Today’s move looks like an exhaustion gap as it tagged gap window of $39.80 and the pivot high of $39.50. Additionally, the USO hammered into the .618 level before closing lower during today’s 3pm selloff.

USO closed today in a doji formation which leaves the door open for a star or “island” reversal tomorrow. In any case, oil is extremely extended and regardless of the CME margin easing, oil really has no business above $100 in this economy.

In other news, the United States went over $15 trillion in total accounted debt today, a number that is up over 40% in just the last couple of years.

http://www.usdebtclock.org/

Stocks And Yields Walk Down A Familiar Path In October

The 10 year is already 25% off of the August lows as yields closed out the week at 2.23%. The stock market has calmed and has acted relatively complacent since the shortened holiday trading week earlier this month. Stocks have shaken off poor earnings from market leaders such as Alcoa, J.P. Morgan, IBM, and Apple. The market is being lead by energy plays like Chevron, Exxon, and Conoco Phillips, up 18%, 16%, and 20% respectively from the September lows. Energy makes up a large portion of the SPX, and CVX and XOM are also two large components of the Dow Jones Industrial Average. It appears that many of the underlying issues with global markets are being ignored so long as the indices can post a gain. Volume on the SPY has been almost pathetic since Columbus Day which can be telling us that the market is up on hot air. On an intraday basis, most of the volume of late has come in the 3pm timeframe and it is clear that institutions have been buying the market late in the day in order to force positive closes above key resistance areas. This is not an uncommon occurrence, however the frequency of these actions have increased exponentially over the last three weeks.

Despite this, the uptrend is monumental and must be respected. There were many investors who bet against the market in the middle of 2009 and in fall 2010 for the same reasons I have listed only to have their portfolio evaporate at the hands of low volume bear market rally which was fueled by the Fed’s POMO.

The 10 year is forming a similar pattern as it did last year leading into November. In 2010, the TNX formed an inverse head and shoulders beginning in August, which ultimately played out after the Fed began QE 2. Currently, one could make a case that there is once again an inverse head and shoulders pattern on the TNX (albeit a very sloppy one) leading into November when the Fed makes its next policy decision. At the very least it has made higher lows, and as stated previously, it is already 25% off of the 52 week low.

Ultimately, there are two reasons as to why this may be happening. The market is either expecting more intervention by the Fed, or the market is being led higher which would be a setup for a selloff following any disappointment from the FOMC. The scenarios seem simple, but the market is just floating right now and barring any type of sharp reversal in the next couple of weeks, the market does not seem like it wants to budge from its current course just yet.

There are a few mixed signals regarding market breadth, commodities, and currencies. As far as market breadth goes, the Nasdaq 100 lagged the market this week, closing negatively for a loss of 1.42%. Meanwhile the S&P 500 finished positively gaining 1.12%, and the DJIA also finished positive with a gain of 1.41%. This is an unhealthy signal for the market. In a true bull market, the Nasdaq 100 should be keeping pace (and often should be leading) with the market. The DOW is composed of dividend yielding, safety plays such as WMT, MCD, CVX, and KFT. When the DOW is leading a rally in a bear market, it is a sign that investors are not comfortable putting their money into riskier stocks. Obviously AAPL’s miss had an effect on the Composite, however, GOOG, INTC, YHOO, and MSFT all posted better than expected numbers which gave the NDX an opportunity to drive higher. Small caps are also an important indicator to watch, the Russell 2000 finished flat this week, losing just .04 points, but still well behind the DOW and S&P. Again, if investors do not feel confident enough to take on more risk-heavy plays like small caps, then it tells us that there is still an air of caution in the market, despite the solid gains made in the past 3 weeks.

One thing that is worth mentioning about the chart of the NDX is that there is the potential for a massive W-V reversal should the market pull back – maybe to the 2225-2250 area. This will have to be monitored as it lines up with the idea that the market is leading into Fed intervention for a potential move higher.

On Friday the SPX was pushed higher in the last 10 minutes of trading in order to force a close above 1230.71, which was the previous higher of the recent trading range. However, this is not a breakout. a breakout comes after confirmation, which would be a close tomorrow above Friday’s high of 1239.03. Notice how in the beginning of the month, we closed below the August low of 1101.54, but the next day the pivot low was made and so began the current rally. Confirmation completes a breakout and therefore saves a trader from making a decision that can turn out to be a costly mistake.

In any case, should the SPX confirm above 1230, it has short term resistance at 1249 and then following that it has two master levels. One is 1260, the flatline of the year, which is needless to say, an extremely important level. The final area of short term resistance is the 200 MA. Confirmation above this area could signal a structural change in the market, though I personally do not expect that to play out.

Another slightly conflicting signal is the Euro. It is not conflicting in the sense that it has made a higher low, and looks identical to the yields chart. It also has an inverse head and shoulders pattern on the daily chart that has a target of 147.75. That exchange rate would be close to the YTD high, and though the pattern is somewhat sloppy, it has to be on the table as a possible scenario.

The conflicting signal I’m referring to is that the Euro broke a major trendline over the summer and will have a mountain of a task in getting back above the triple necktie of moving averages on the weekly chart. Also, the longer term view of this chart shows that the Euro may beginning to form a head and shoulders reversal starting in June 2010. If the Euro inches higher, but hypothetically, cannot get through the weekly MA’s, a right shoulder would be in play with a neckline around 132.50.

Oil like stocks, bond yields, and the Euro has recently made a higher low which indicates short term bullish momentum. However, there is a topside trendline that was closed above this week but without confirmation. In fact, the weekly chart of oil shows a doji candle which is more of a neutral signal, and not a candle to base a breakout on. Oil has support between the 50 and 20 MA on the daily chart and a pullback may allow it to build enough momentum to break through this trendline. If oil can get above $90/barrel it should coincide with a breakout above 1230 on the SPX and the next stop will be around $95.

Copper has also made a higher low but the bounce has been only half of what other major asset classes have had. Since the most recent low earlier this month, the SPX is up 14%, oil is up 15%, the 10 year yield is up 25%, and the NDX is up 13%. Meanwhile, copper is only up 8% off of the October lows. Another key difference between now and 1 year ago when the market was leading into QE 2 is that this year copper not only broke through a major 3 year trendline in August, but copper is also near it’s 52 week lows, while this time last year it was in the process of making new 52 week highs.

The weakness in the metal is probably the best indicator that this rally has been full of hot air. Copper leads the market and is still down over 30% from its YTD high, while the SPX is down only a mere 10% from its peak in early May of 1370. The only technical upside that copper has is that after many attempts it has still failed to confirm below the 200 MA on the weekly chart. Should copper stay in this area for the next 2-3 weeks and fail to break through, it will likely catch a bid and back test $3.70-$3.75 which should coincide with a higher equity market. If however, copper confirms below the 200, it will be headed for $2.70 and the equity markets will fall with it for another test of the 52 week lows.

Overall, the next 2-4 weeks should decide where the markets are headed over the next 4-6 months. Any large intervention program would probably make for a similar scenario as the one that we had last year, though I still do not expect the market to make new highs again. Conversely, any disappointment will take the air out of this rally and the October lows will be retested again. Therefore I think that regardless of the FOMC’s policy statement, we will be headed lower over the next 12 months. The market can rally on weak volume so long as Europe stays quiet. However, Greek bond yields reached another high this week of 188% and Merkel and Sarkozy believe that they have come to an agreement to bail out the banks with 100 billion Euros. The plan is pathetic, 100 billion Euros is enough to bail out community banks, not institutions with trillions in CDS exposure like Deutsche Bank, and Credit Suisse and in addition, the longer that they take to complete the EFSF, the more the market will price it’s ratification. Be sure to have a large cash base and keep positions small as news is going to be the driver of the market for the next couple of weeks.

POMO, EFSF News Causes Stock Surge

The Fed began POMO again today which helped the markets to stay afloat early in the session. Lighter volume this morning meant that banks did not have to use much if any of the Fed’s money to buy the market. However this afternoon the market surged on 8x average volume after news that the EFSF would be expanded. Upon actually reading the article, the fund would not be expanded and instead turned into a bond insurance plan for the first 20% of losses. The news is nonsense and is a cover for the fact the $2.75 billion was injected into the stock market. Volume on the SPY for the 3pm timeframe was around 18 million – a total of $2.178 billion dollars.

EDIT: AAPL misses earnings for the first time since 2004. Maybe another reason why the HF’s pushed the market higher this afternoon.. the backlash looks a lot less severe when the market closes at the highs.

Markets Still In Weak Technical Position After Mid Week Rally

The stock market still closed out the week in a weak technical position despite the reversal Monday afternoon. Most stocks are below all major moving averages and are in confirmed downtrends. Financials are leading the market lower and any bounce into key resistance can be safely played from the short side.

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.

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.