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.

Dollar Call Comes To Fruition, CME Gold And Silver Hikes

The equity market dropped sharply last week after the Fed’s “Operation Twist” was not enough to get investors excited about the long side. Bearish technical patterns in key asset classes signaled that a major move down was coming after the month of consolidation following the initial drop in August. The only chance the market had of holding on for a move higher was the fact that too many investors and traders had already fled the market and had begun to overload the sell side. At any rate, the market consolidated long enough for key stocks like AAPL and AMZN to make new all-time highs which may have been enough to get retail longs back into the market.

Regardless, the market has flushed and more downside should follow, most likely sooner rather than later, but I am not so sure that the market will completely crash in the near future as it appears that policy makers in Europe and the US are already preparing the market for a default in Greece. The fact that Ben Bernanke announced policies last week that he must have known would not be enough to prop up the market smells fishy in itself. Without getting too deep into detail, it looks as if the politicians and bankers are attempting to flush the market before Greece officially defaults on the basis that the default would eventually price itself in.

Moving on to the charts, I can finally claim victory in my call for dollar strengthening as price activity has now indisputably completed a reversal and breakout of the previous downtrend. I originally suggested that the dollar and gold would both strengthen versus the Euro back in February and I also successfully called for the bottom in the dollar in May, citing capitulation selling volume on the ETF UUP for multiple days towards the end of April and into early May.

The dollar index had a nice consolidation of the big upmove in early September right beneath the $78 area. There was major resistance at $77 and after consolidating sideways for a week or so, the dollar yet again broke higher after the FOMC policy decision. The USDX paused on Friday to digest the buying pressure, however the next major level is $78.87 and should the dollar consolidate again beneath this level, it may build the momentum to break through that level and confirm.

Coinciding with the dollar, the SPX paused on Friday after the sharp decline last week. The many patterns that I cited in the analysis videos – the bear flag, the M&A reversal/shoulder head shoulder pattern etc, have all begun to play out. The targets for these patterns are in the 1030 – 1050 vicinity on the SPX and 9700-9800 area on the DJIA. There is already support in those areas and the fact that these bearish patterns are targeting them reaffirms my belief that the market will ultimately trade there. My outlook for this market over the medium to long term is that there won’t necessarily be any 2008-esque collapses, but over time it will appear to have been a grind lower with highly volatile swings in both directions, though the possibility of an outright crash is certainly on the table.

Regarding the near term, I shorted ahead of the FOMC decision which turned profits and should the market consolidate for a few days, maybe less, I may take another short with a stop based on a close above Thursday’s high or a fill of the breakaway gap which was the close to open from Wednesday – Thursday. To reiterate again, the only hope the market has of rallying, is that too many retail investors have piled into short positions and the institutions decide to swing the market higher to shake out the weaker players. The problem with this is that this type of outcome is more typical when the market is close to options ex, and currently we are still several weeks away from next month’s expiry.

Over the last couple of weeks, I have cited copper as a potential leading indicator for a selloff in the equity market given that copper is an economic forecaster. That predictaion has also has come to fruition. Copper first broke down in the middle of last week and I posted the trigger of the bear flag which coincided with the break of a three-year trendline on the weekly chart.

There isn’t much to say about this chart from a technical perspective since it has crashed through every single major level of support on the chart since the initial breakdown. However there is a bit of minor support in the area of $3.17-$3.23, though that area was more or less tagged on Friday and any bounce will be due to pure overextension from the 20 MA, which it is currently 16% away from.

Crude oil was another chart I used as a leading indicator for a move lower in the equity market being that crude, like copper, also gauges economic strength. Again, there isn’t much to go over here, other than the chart pattern worked out yet again, there was a bear pennant on the daily chart much like the one that played out from late April – June and it enabled me to forecast a drop in oil prices that would translate into pressure on the stock market.

Gold and silver both dropped after the Fed announcement and entered an oversold condition in an extremely short period of time. The original explanation was that the European banks were taking profits on long gold positions in order to cover margin calls from the equity selloff. This explanation is arguably good enough to cover Thursday’ selling, but not nearly enough to explain the continuation into Friday. It is painfully obvious that Gold and silver collapsed because inside info was leaked prior to the CME’s margin hike on Friday.

Simply put, the fundamental case for selling on Thursday and Friday should have been dead from the beginning. The Fed was/is always in a box when it comes to a policy decision regarding the price performance of precious metals – if the Fed attempts to stimulate, then PM’s rise on inflation expectations and if the Fed does nothing, or not enough, then the metals rise due to uncertainty and sovereign credit risk. Between the dollar index hitting new highs, the stock market bloodbath, and treasury yields reaching record lows, gold and silver should have at the very least, held the flatline last week, and even that would have come as a shock. It’s not to say that the metals will always rally, but the knee-jerk reaction from the Fed should have at least given them an upside bias for the remainder o the week.

My guess is that the CME had scheduled a margin hike for Friday on the idea that the metals would inevitably rise after the FOMC for the reasons listed above. Someone inside the CME then leaked info to institutions but the problem was that the margin hike was never cancelled after the metals collapsed. Interestingly enough, the last time that the CME hiked margins, there was a selloff leading into the margin hike, and a bottom was put in after the announcement which of course makes perfect sense. The same exact thing happened last week and I expect gold and silver to bounce this week as the institutions cover their short positions.

Regarding the chart, notice how gold found nice support near the last area of consolidation around $1662. This is a good level for a bounce given how oversold gold is in the short term.

Another gold chart that often revert back to is the weekly, considering that the three-year trendline is one of the strongest trends ever. Some interesting data about this chart is the most recent peak, is really no more extended than other previous peaks in this cycle. This is significant because though the move looks dramatic in nominal terms, percentage wise the most recent peak was normal, meaning that gold really isn’t that extended in terms of this current bull cycle. The three most extended peaks from this trendline are February 2009, (Peak of $1007 – 23%) November 2009, (peak of $1227 – 19%) and of course August 2011 (peak of 1923 – 23%).

By using this trendline as a basis for gold’s health and as a gauge for its cycles, it would then make sense that over more time (perhaps the next year or so) gold may revert back to this trendline yet again as I called for over the summer. Clearly, that wasn’t the case this summer, but as with the call for a strengthening dollar, I have been early before.

Silver sold into the 200 MA on Thursday which should have been a solid level for at the very least a small bounce. That fact that it did not find any kind of support there confirms my belief that there was inside selling. In any case, I entered silver as a long on Friday after the pierce of $31 ($30 on SLV) which coincided with the 2009 trendline that I have talked about many times in the analysis videos. I originally called for silver to reach this particular trendline after the initial blowoff this Spring and through months of bearish consolidation, it has finally reached that level.

Regarding the trade, I think we’ll see a gap lower on Monday, (but not a new low) followed by a rally throughout the rest of the day and into Tuesday. That is essentially what happened the last time the CME hiked margins after gold and silver were down on high volume. Whoever shorted is likely holding into the weekend given the fact that the metals weren’t able to get much of a bid off of the lows on Friday and that pressure should translate into a gap lower on Monday. After that, I would be surprised to see the metals staying suppressed for long, it just doesn’t make any sense to risk profits when someone is that far in the money.

Also adding to the case for a bounce is that $31 is a major level and as mentioned before, it coincides with the 2009 trendline on the weekly chart. If anything, expect buyers to show up in this area on a gap down on Monday. Also notice how the chart continues to lead the news, the chart tells you what is going to happen, and then the news confirms it! Going into next week, I have no trades other than SLV $30 Q4 calls, but as mentioned before, if the market consolidates sideways, I may use that to look for shorting opportunities.

Markets Limp Into The Weekend After EUR/USD Collapses

The EUR/USD collapsed in the shortened holiday week of trading as the dollar index may finally be close to strengthening in the manner that I had originally predicted it would earlier this year. The stock market performed poorly on Friday and did not hold onto to gains made in the beginning of the week. Currently I am almost completely in cash and I have a very neutral stance though things continue to get worse in Europe which gives me a slight bearish bias.

The dollar index is finally beginning to make moves versus the Euro which I had believed to be the fundamentally correct course of action for a while though until now, that scenario had not been the case price-wise. I have previously expressed that the dollar has remained suppressed (particularly over the last 5 months) due to Chinese GSE’s but also because of institutions like Goldman Sachs who have publicly stated that they are increasing long positions in the Euro and short positions in the dollar. It is in their interest to keep the dollar suppressed in order to maintain the illusion of recovery. However, now fresh shorts are already well underwater as the dollar pierced through the 200 MA with conviction this past Friday and a short squeeze could be in play after the dollar consolidates here as the $77 area is a major resistance level.

The 200 MA is obvious resistance, but there is also a pivot low from February at $76.88 which was also pierced and if you use the weekly chart, you will notice that the weekly 50 MA coincides with the 200 MA on the daily. Furthermore, $77.10 is a 50% retrace from the January 2011 high ($81.32) and the May 2011 low ($72.70). Last but not least, $77 is major resistance because the DXY did not consolidate before piercing the level and instead gapped higher in a very short period of time, indicating an overbought condition. Keep in mind though that the dollar was oversold (and suppressed) for a long period of time so despite this short-term overbought condition, any news out of Europe can causes short to cover and the dollar to rip higher yet again.

The bear flag on the SPX has all but broken down though support still remains at the lower trendline. This pattern is not valid until the market can confirm below the support trend and at that point it may be safe to short stocks that are still elevated in price, though I am personally not at all pressured to participate given the increased risk of volatility. The target for this bear flag is 1010, or the June 2010 lows.

If copper decisively closes below $3.99 tomorrow, that would indicate a technical breakdown of the bear flag and the pattern would then be in play. In other words, this chart is indicating a very bearish outlook over the next week to two weeks but again, there are other reasons to not take this as law and short the market.

One of those reasons is because oil held up well on Friday. There is the possibility that oil did not collapse because of the traveling that took place on Labor Day weekend and that it will begin to sell off next week, but that assumption leaves too much in question to base investment decisions on.

Another reason is that the financials have surprisingly held up, relative to the lows put in during the end of August. The pattern on the chart is beginning to look like a potential inverse head and shoulders or perhaps a W-V reversal. The entire situation that we’re in now has everything to do with the financial sector so the fate of financials is tied to the fate of the overall market and additionally, financials are a leading indicator of the market’s performance.

Again, there is no reason to leverage into excessive short positions at this point based on the news. We know Europe is bad, we know financials are a disaster. Every time the media mentions this, the short side looks less and less appealing. Today I saw that Forbes posted a chart of the bear flag on the SPX that I have pictured above. This tells me that retail investors may be looking to short the market. I never want to be on that side of the trade. In any case, be sure to look for oil and financials to confirm the other charts like the SPX, DXY, and Copper before beginning to go short, or long for that matter.

I may take short or long positions next week based on short term momentum but currently I don’t have much of a bias regarding permanent direction. If you do have your mind set on shorting the market in fear of missing the move, use a fractional position to buy November-January out of the money puts that coincide with the strike prices of the June 2010 lows. The small amount of capital committed to the option would not require high risk, and the distance away from the current strike could give you a high reward, regardless of the small capital commitment.

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.

Resistance Levels For The SPX, Current Long Positions

The stock market had another pause day on Friday after Thursday’s 9 point surge. The SPX finished slightly higher on much lighter volume and the 1345 pivot high has been reliable as a resistance level. So far, the market has traded almost exactly the opposite to what most had expected to happen in the post QE environment. This makes sense given that the market sold sharply off into the end of QE and encountered major support at 1260. The end of QE was priced in to the market and despite this, many still believed that more downside was immediately ahead which is why I was looking for a rally beginning with the 4th of July weekend. I do believe that the market is headed lower over time, but there is still upside left, which is why I am positioned long.

1345 has held up as resistance so far as the market rested after a solid move up off of the 20 and 50 MA’s last week. I see two scenarios for next week, the market either pulls back off of 1345 for a brief consolidation before a move up to 1360, or the market opens higher and runs into 1360 before coming back in for a pullback. Either way, I am still seeing some continued upside in the short term. It is also possible that the SPX makes it back to the 1370 double top, but I doubt that it will not happen until it can at least consolidate above 1345 and 1360.

I am long TNA for this swing higher and I am currently about 4% in the money on the trade. The IWM is the best proxy to use for TNA since IWM is not leveraged and because of that, the levels on the chart are more reliable. The IWM confirmed above $83.25 with Friday’s close and is now headed for $84.61. Confirmation above $84.61 should indicate a move to $85.62 which would translate to the 1360 pivot on the SPX.

Another long I have is Sky-Mobi (MOBI) which is a volatile Chinese tech play. Chinese stocks like MOBI have been decimated after a massive run reminiscent of the move in silver a few months back. MOBI had a nice surge behind good volume 2 weeks back and has since consolidated above the 50 and 20 MA’s. As long as it stays above $8.15 on a closing basis, it can be a long play for a move back to just under $12. Entry for this stock is currently open, so any price above $8.15 on a closing basis is okay to use, so long as it doesn’t gap a dollar or two higher tomorrow, but I don’t think that will happen. Just remember that these Chinese stocks are volatile and carry added risk, but in this case, the chart pattern is very favorable.

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.