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.

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Dollar Closing In On Double Bottom As S&P Consolidates

A few days ago I discussed how the failure to come to an agreement regarding the debt ceiling was bad for both the dollar and the market and that the two may lose some of the negative correlation that they have had for some time. The dollar has sold sharply off of the highs of the month and the market has pulled back off of the recent move up and has made a lower high. I think that a pullback is necessary for the market here if it is going to rally after the debt ceiling announcement as there needs to be some doubts as to whether or not it will happen, otherwise the trade will be one-sided.

Once again, 1345 has proved to be a perfect level of resistance for the market. The S&P lost five and a half points today and it is closing in on the 20 MA. I think the 20 MA will be pierced shortly but I do not think that the market gets below 1320 before making another move higher. That would make for a higher low and a higher high leading into the debt ceiling negotiation, should there not be one before then. In any case, the pattern over the last six days is a bull flag and should play out by early next week.

The dollar is closing in on double bottom territory and may get there within the next 4-5 trading sessions. At this point, UUP is so close to $20.84 that it isn’t going to take much to get it there. Remember that a default would equal less spending which would be positive for the dollar, but it ultimately has catastrophic repercussions and is the reason why the dollar is falling and gold is still surging. Note that other currencies aren’t doing all that well either, so the effects of a US default are extended to the rest of the world and in many countries, the outcome for them would be worse than the outcome here.

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.

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.

Gold Reaches All Time High, Markets Reverse After Fed Announcement

The stock market was sharply higher today after Ben Bernanke’s statements regarding the Fed possible involvement in future asset purchases should the economy not improve. To use a term heard from an industry contact today, “it’s as though every time Bernanke breathes in public it’s good for the PM prices”. Gold closed for a new all time high of $1585.50 and silver finished 7% higher as the dollar plummeted for a 60 cent loss after being nearly up nearly an entire point.

Gold is up 7% in the last 7 days and is extended from the moving averages. It has a chance to confirm this breakout with a close higher tomorrow. It of course makes sense that gold would move higher with all that has been going over the past two weeks but the threat by Moody’s to downgrade the US should the debt ceiling not be raised was really nothing more than noise and should not have been taken seriously. Sure, they might downgrade the US’s credit rating if the deal is not done but to be blatantly honest there is less than one-thousandth of a percent’s chance that they will not come to an agreement by August and the market already knows this.

Bernanke’s comments were bearish but he did not say that he was going to resort to additional stimulus until he deemed it necessary. Economic data is still awful and no amount of QE will change that. Also, the last treasury auction was fairly favorable which was caused by to the instability in Europe and it is also possible that policy makers may be forced to intervene in the forex market yet again if the USD/JPY stays below 80.

On the weekly chart, today was not the first time gold had taken out a recently made peak only to fall to lower levels in the weeks following. Gold has failed confirmations above peak levels in the past (notably June 2010 and December 2010) and retraced back to the trendline going back to November 2008. I believe that for the reasons I have listed above and gold’s current overbought condition, that gold is in for another similar outcome in this instance but I do not see any opportunity to play it from the short side.

I’ve had a few questions over the last week or so on this, and I would not be buying gold at this level. Buying here would be chasing plain and simple. Until gold, or any other asset for that matter, puts in a base of support, it is dangerous to enter any long position.

The market is showing signs of weakness after the inability to sustain the highs after Bernanke’s comments earlier today. It fell most obviously because of the Moody’s threat but also take into account that today was a Whipsaw Wednesday which is a volatile trading day prior to options expiration. The reversal now sets the market up for a potential bearish consolidation above the 50 MA but nothing else is clear at the moment.

FXE had a nice morning star reveal today which is the bullish version of an evening star reversal. Note the sharp move down, followed by a gap lower and a tail on yesterday’s candle, then a sharp move up today for a gain of 1.2%. The target on FXE is $142 which coincides with the 20 and 50 MA’s and the lower half of the previous support trend in the symmetrical wedge that I had covered for a couple of weeks before it broke down the other day. I expect FXE to reach $142 by the end of the week but I personally won’t enter this trade.

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.