Silver Long Triggered On Pierce Of Trendline

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Market To Sell Into Fed Announcement?

With today’s flat open and steady rally throughout the day, the major market indices have begun to form what could play out as a bear flag going into the Fed announcement. Yesterday I said that we could see some short covering going into the Jackson Hole conference. It’s 11 am and the SPY is trading on fairly low volume so far (at least in comparison with the recent trend) which could mean that shorts are covering but there really aren’t many new buyers either. I think that this is likely to be the case. Neither side feels comfortable holding into Friday given the amount of volatility that we have seen which will only increase on Friday.

My prediction for the market’s reaction to the conference is the market will sell off sharply when Bernanke disappoints everyone by not hinting enough easing measures. This selloff will precede a rally into and possibly a little past Labor Day. The rally has the potential to be 1000 points or more though I don’t specifically expect that to happen.

Like I mentioned above, the market is starting to set itself up for a selloff into the Fed announcement. The bear flag on the SPY should take the market back to the pivot low of $110 where it may find double bottom support. This pattern can be negated with a close above Thursday’s open of $116.50.

The bear flag on the DIA is very similar to the one on the SPY albeit the fact that the Dow has outperformed the SPY. The DIA should find support at $106 and the pennant can be negated with a confirmation above $111.60.

QQQ is the weakest of the three which is normal because the NDX usually outperforms during bullish phases and underperforms during bearish ones. It is important to note that QQQ can take out the recent low and fall to $48-$49 without signaling another leg down in the overall market.

The reason I show the three charts and include the possibility of QQQ falling further than the others is because they need to confirm each other and QQQ has a lot of support in the $48-$49 area. So yes, I’m including a bit of Dow Theory in this analysis, but this appears to be the way this market is about to play out. If the SPY and DIA reach $110 and $106 respectively on a breakdown after the Fed meeting and QQQ reaches $49 at the same time, I will be a buyer of the market. Also, if the market trades in a tight range tomorrow and stays inside of Friday’s candle, I’ll short the market for the move down.

Stocks Plummet Again On European Fears

The story of the week has been Europe though news was somewhat suppressed in the beginning of the week as the market floated higher on low volume with a tight trading range. I exited TBT on Thursday on the failed bull flag though there may be another bottoming tail in play on the daily chart as it closed higher than Thursday’s low today. TBT was only a small position and the stop out does not hurt much.

Over the last two to three days I have stuck to intraday trades of sector etf’s mainly because of how sloppy this market has been. The volatility is still elevated and equities are much too sensitive to news to be holding significant positions overnight. The switch over to the daytrading techniques has been successful, I pulled profits on ERY and TZA on Wednesday and Thursday The moves have been less profitable but the strategy has certainly been safer. I will resume swing trading if and when the market finally stabilizes. Quite frankly, the volatility has been aggravating and I was close to taking a nice vacation from this week due to the instability. Nonetheless, it is refreshing to not be heavily exposed during this beatdown and there are few interesting developments on the charts that I’d like to share.

The only bullish part about the chart of the SPY is that the bottoming tail is still well intact despite the obvious weakness in the market. The tails on the previous two candles signal that there are a lot of sellers who are still willing to enter short positions even at these levels.

For those of you who might not know, my strategy is to use the chart to understand the mentality behind the moves. So, if I had to explain the reasoning behind the activity over the past week, I would conclude that the low volume in the beginning of the week was the institutions allowing the market to float higher, and that the selling later in the week was them driving it lower before options expiration so that they could pocket the premiums. Otherwise the flush over the last two days is due to thousands of ants that are convinced that this is a good level to short the market at.

Not to downplay the weakness in the market but the SPY has not confirmed or even tagged the 110 low yet which means that we still have a bottom. So the point I am making is that despite the downside hype, we have not made a new low. In other words, the chart leaves out opinions and tells it like it is.

If the market does in fact plunge once more, the downside for the SPY should be in the $107.50 area and after that, the master level is around $101.75. Should $110 be tested again, it would be more vulnerable as the recent bounce would be considered consolidation from the move down. Another thing to remember is that Bernanke speaks at Jackson Hole this week and though no announcement regarding additional easing will be made without the FOMC, the market will still hang on his every word which can cause a reversal in favor of either side.

The most intriguing chart so far is copper. Copper has held up well over the last two days and actually posted a gain today despite the sharp decline in equities. There is a bit of a bull flag there on the daily chart and if copper gets a solid bid, it could signal interim bottom in the market. On the other hand, if it breaks down, it could become a failed bull flag which would indicate that there will be more immediate downside.

I would have liked to have seen this chart last week and picked up JJC for a pierce of that 3 year trendline. If this trendline holds, copper will get another bounce and there is a bottoming tail there on the weekly chart. This week’s candle was negative but the range stayed inside that of the previous week’s which is typical action after a bottoming tail takes place. Again, if copper gets a bid off of this trendline, it will likely breathe some life into the equity markets and could possibly signal a bounce.

The last chart that really catches my attention is silver. Silver has underperformed gold which certainly makes sense because silver is much less of a fear trade than gold since silver has industrial and technological applications. Because of this silver is negatively effected during a period of economic contraction as the demand for those goods falls as the economy shrinks. However, today’s action was a different story as gold did make a new high but looked weak intraday especially compared to silver which had a giant move higher. Again, it is surprising to see silver outperform gold in this environment and it leads me to believe that a big fish may have taken a large amount of shares and/or ounces off of the market.

In any case, today’s action does signal a breakout above $42 assuming it confirms today’s move on Monday, or perhaps sometime late next week after first consolidating. It will be interesting to see if the metals pull back or rally into the Jackson Hole conference. There doesn’t seem to be any way the conference can turn out without the metals surging. On one hand, Bernanke could sound hawkish, and then the risk of default due to not having any life support will scare the market and force everyone into gold. On the other hand, he hints at additional easing and the metals surge anyway. I think the only shot he’s got is to sound complacent, condescending, and indifferent, as if he is slightly confused as he looks down on the market and shakes his hand for reacting the way that it has. In my opinion, this is kind of how the most recent Fed minutes came off and it is part of the reason the market found its footing and moved off of the lows.

In any case, that’s my take on the upcoming Fed conference and my advice to traders is so completely stay out of everything this week unless it is a day trade. Cash is outperforming many asset classes including bonds (which have negative real rates) and equities so it doesn’t make much sense to heavily expose your porfolio until the dust settles. Abide by your stops, and if you enter a winning trade, take the easy money.

Last Week’s Winners, Long & Short Ideas For This Week

Winners from last week:

FAS – Entry 6/20 $23.09 exit 6/14 $24.46 = +5.7%

QLD – Entry 6/21 $ 79.75 exit 6/22 $82.81 = +3.7%

TZA – Entry 6/22 $38.04 exit 6/23 $40.86 = +7%

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I like ZSL for a short this week if SLV can get back to $33.20 – $33.50.

I like the short side value SLV has a $33.50. From this area, it would be 9% away from the downside target on SLV of $33.60.

You can use ZSL to short SLV to maximize profits. 9% x 2 = 18%. With SLV at $33.50, expect ZSL to fall to at least $19.50 which would make the upside target about $23. There is a nice pivot at $23 and a big gap to fill just above that area but you can bet I will have unloaded before then. Adjusting for entry and exit, you should be able to make at least 15% of off this. Stop is a confirmation above $34 on SLV.

I put out my entry of LOGI at $10.37 on Twitter today and will continue to use it to disclose entry and exit points intraday. Though this is a weak stock that is in a downtrend, it just tagged the resistance level that it broke out of in March 2009 after the financial crisis. Obviously, this is a long term support level and should be good for at least a small bounce.

Again, this stock is in a downtrend and carries a little bit more risk than normal, but going into today it was very overextended from its 20 MA and it also pierced that 2009 low this morning before rallying about $.25 higher near the flatline for a slightly negative close. It has a gap to fill at $11.10 which is the first target, and could potentially rally to the 20 MA around $11.70 but I won’t be holding it that far unless it gaps much higher tomorrow and stages a robust reversal. If that isn’t the case, which is what I am expecting, then I’ll probably be a seller at $11.05 for a gain of $6.2%.

Dollar Rebounds As Dow Loses Over 279 Points

Last Friday I warned of the credibility of the “breakout” on the SPY SPDR citing that a spinning top candle combined with below average volume could not be considered a breakout despite the close above the 50 MA. I also persisted with my sentiment yesterday citing bad housing data from the Case-Schiller report and the Greek bailout being fundamentally bearish for the Euro. Today, the market opened lower after a paltry ADP jobs report. Consensus was that anywhere from 170,000 to 200,000 jobs were added last month. The release missed the low end of the consensus by 132,000 jobs (78%). That’s right, 38,000 jobs were added last month. Pathetic. Additionally, the ISM manufacturing index came in at 53.5, missing the consensus of 57.6. The market sharply sold off with no signs of stoppage intraday. The dollar initially opened lower but rallied in the afternoon session and particularly, in the last 15 minutes of trading.

As referenced above, I warned that the spinning top candle from Friday’s trading was suspect and not confirmation of a breakout even though the price had closed above the 50 MA. After today and yesterday, it appears that we have an evening star reversal on the SPY. For those who are not familiar, an evening star is a two day reversal pattern which includes a trading gap and a hanging man candle (Monday) followed by a reversal (today) that erases all or close to all of the previous candle’s trading range, including the wick or bottom tail. The gap up from the first candle is typically and exhaustion gap. Exhaustion gap’s typically come at the end of a trend though they can represent a pullback which is often mistaken for a false rally. For more on exhaustion gaps and bearish reversal patterns visit Gap Analysis and Bearish Reversals

In addition to the reversal, the SPY broke below the 50 MA today though it did not sell off enough to test the 100 MA or support at 131. Though neither of these levels were breached, it appears that the bears now have control of this market after the gigantic 2.25% reversal and we should expect to see the 100 MA tested soon, if not by the end of the week.

Moving on to the DIA, unlike the SPY, support at 123 was breached though the 100 MA is still a few points away and there is additional support at 122. Both the DIA and the SPY formed evening star reversals on heavy volume and both closed below their respective 50 MA. The DOW appears to be the weaker index and may prove to be the better of the two to play from the short side. DXD is a great way to short the DOW if you would like to gain additional leverage. While the DOW was down 2%, The DXD was up around 4% as the option premiums surged while the price closed well above the previous pivot of $17.

The dollar opened lower which is unusual when the market is also down as the two generally act inverse to each other. However this kink was worked out in the afternoon session as the dollar ETF UUP rallied from the low of $21.24 to close just at $21.39, just fractions below the highs of $21.41 which came in just the 15 minutes. Though the dollar is still trading below its 50 and 20 MA, those two MA’s are still trending higher and today’s candlestick bullishly engulfed the lows and highs of the previous candle which completed a key reversal in the dollar. On top of that, volume was also above average at 6.8M and once again represents accumulation volume as today’s trading volume eclipsed that of the last 5 days, all of which were negative days. It is widely known that volume confirms moves and in this case we have a high volume reversal following a 5 day, low volume pullback which clearly suggests that the pullback was in fact, just a pullback.

The COT report from last week also shows that bearish sentiment in the dollar has weakened, and likewise, bullish sentiment in the Euro has weakened.

I’ll continue saying this until it no longer applies but the best strategy right now is to be long the dollar, or short the Euro, or short the market. At the very least, you should be hedging your equity longs with covered calls or puts and collecting income from the option premiums. After today’s major move, it feels as if the window to get in on this trade may be closing as now the dollar is certainly no longer overbought after the 5 day selloff which was convincingly snapped today.

Dollar Rolling Over After 4 Consecutive Negative Days? – Not Exactly

The markets have rallied into the end of the week as the dollar has been shaking off the overbought condition that it had accumulated in the first three weeks of May. The bull flag that I discussed on Wednesday has since broken down and is no longer in play. The dollar index has closed lower now for four consecutive days and has in fact breached the 50 MA. So does this all mean that the dollar’s recent move was a dead cat bounce? No, it doesn’t, and here’s why:

 

I have heard some noise that because the S&P has closed above the 50 MA, it is now headed higher once again and that the bearish sentiment was overblown. The noise I am hearing is not coming from market technicians and the reason is because no market technician worth more than $5c would call today’s move a breakout. First off, the candle that represents todays trading is a spinning top. A spinning top is similar to a doji. Both candles are signals of a pause, a moment of indecision, or a pivot point. In other words, no such breakout can be confirmed with a doji or a spinning top. You do not have to be a market technician to understand this concept – if there truly was a breakout, it would make sense that the candle would be a marubozu or some type of engulfing candlestick that shows no downside momentum throughout the trading day.

Secondly, the volume is not only below average, but it is weak even without considering average volume as only 120M shares moved on the SPY today. Again, any market technician should know the Dow Theory and that “volume confirms moves”. Weak volume on what appears to be a breakout is an indicator that price activity may be lying to you, and in this case I believe it is.

Lastly, it is common knowledge that the market generally gets a lift on Friday and being the day before Memorial Day weekend, many are on vacation early and are trying to take advantage of the 4 consecutive days off as the markets are closed onMonday. Light volume almost always gives the market an upside bias especially since POMO has a bigger effect with lighter trading. In short, if the market is to reverse course, it needs to do more to confirm this move.

 

Trading inverse to the market and closing below the 50 MA was the dollar. Volume was higher than the previous two days but still below the 20 day average which goes back to the initial increase in volume near the YTD low and is a good short term moving average to use here. Today and the 19th were the only two selling days that you could make an argument where there was distribution volume, but even so, the amount of accumulation volume easily trumps the 2 days of distribution volume.

Again, the closing price was not confirmed by volume, and in addition, the price managed to rally off of the lows as it found support at the 26 MA. From a technical standpoint, it made sense for the dollar index to pull back this week after a 3 week rally, but going back to the point I made about Memorial Day weekend, historically, the market gets a lift around this time of year, though it is usually short lived. Giovanni Moreano of CNBC posted an analysis on how the stock market trades leading up to and after Memorial day and here is some of the data:

 http://www.cnbc.com/id/43157752

In the past 20 years, the major U.S. indices have been, on average, relatively flat in the week prior to Memorial Day. In recent years, however, they have been slightly negative.

A week after Memorial Day, all three indexes posted a gain, with the NASDAQ showing the biggest average gain, up 1.42 percent.

Within a month, those gains fizzled for the S&P 500 and Dow, both turning negative returns. And in recent years, those losses have accentuated, down about 2 percent or more.

Though the markets have rallied into Labor Day, the S&P has on average a -2% return in the 2 months following Memorial Day with the Dow behind at -2.13% and the Nasdaq ahead with -1.73%. Trading in 2010 fits this description perfectly as the dollar peaked in June and the market bottomed in early July. The dollar has only rallied just below 3% from its YTD low last month. If we are to follow historical trends here, then the dollar could rally anywhere from another 14 to 17 percent in the next 2 months based on the 2009-2010 timeframe. That is quite a move in a short period of time, but it has been done before and it appears to be happening once again.

So price activity has been weak over the last couple of days, but I believe that the dollar’s uptrend remains intact. Reasons include, the light holiday trading volume, historical performances, and most importantly, the European debt contagion coupled with the ineptitude of Greek, Portuguese, and Spanish politicians to make any significant changes for the better in their countries. So to those who are short the market, short the Euro, or long the dollar, remain patient because it isn’t time to jump off of the train yet.

Euro Weakness Drives Markets Lower For The Week

The S&P closed down just .18% for the week but the closing number on Friday of 1337.77 was 1.6% off of the highs of the week which were made on Tuesday at 1359.44. The Euro had another week to forget as it fell 1.73% on the week and is close to breaking the 1.40 level vs the dollar. Gold, silver, and PGM’s were also weak, but managed to stall the selling out later in the week and like the Euro, all have held on to critical support levels. Ultimately, I think that it is likely that we see a bounce this week in front of options expiration.

The wedge building on the SPY is in danger of breaking down after the big move to the downside on Friday. The 26 MA is providing support along with the $134 level which is a pivot high. I think that the S&P will continue its 3 week rally next week as there is strong support here and the dollar has covered a lot of ground in a short period of time which may lead to a pullback.

There has been good accumulation volume behind the dollar index’s move over the past two weeks. Yesterday it closed above the 50 MA and engulfed the previous candlestick. I think that the UUP makes a run at $21.80 before the end of the week, but I doubt that it will manage to close above that level. Expect the rally to come early in the week, while it stalls out by Wednesday or Thursday, which should give the markets the lift off of support that they are looking for. Remember that options expiration is Friday and many of the major asset classes are currently right above support or right below resistance going into next week so volatility should be a given.

FXE found support after testing $140 though it is below the 50 MA and selling volume has increased substantially. It is approaching the 30 line on the RSI and appears to be oversold so a bounce may be in order before the next week is over.

Silver re-tested the 100 MA on friday and managed to reject the lows as it closed 2% higher on the day. Horizontal support is at $34 and there have been two cases where it has made bottoming tails on the daily chart. On those days $34 was tested and rejected for a much higher close off of those intraday lows. These bottoming tails are the exact inverse of the topping tails that silver formed when it made a run at $50. However this does not mean that it’s done moving down, it may break support at $34 and test $30 for all anyone knows, or it may trade sideways for a while. Whatever the case may be, it has tested support several times and shown that it is not ready to move lower quite yet. This, in combination with how oversold the Euro is, and how overbought the dollar is (still short term), makes for plenty of sense for it to finish higher next week.

Gold has outperformed silver on the way down and as stated before, I am using gold’s movement as a gauge for the strength in the commodities and precious metals sectors because it is by far the most sober asset of them all. Gold should be the tool investors and traders use as a confirmation of movements in other commodities. As of right now, Gold is the best indicator to use to time the market and to determine if price activity is legitimate or false. When silver made its massive run at $50, gold, and other commodities for that matter, did not confirm the meteoric rise. This and the CME margin hikes prove that the move in silver was mainly due to speculation and overleverage and not physical demand or inflation. This is good news for silver investors because in doing so, the CME averted a premature mania phase in silver and if silver continues to trade sideways or even fall further, more and more pundits will become bored with it and assume that the previous run was the end of it.

Likewise, on the way down gold has outperformed silver and made the same bottoming tails as it has tested support. It closed below the 26 MA on friday but I would need to see another close below the 26 to confirm that as those bottoming tails are signs of a rejection of anything below that level. Gold has support in intervals of $20 ($1460, $1440, $1420), so if at some point it does continue to move lower, those will be the pivot points for traders to scalp, and for investors to potentially accumulate.

Ultimately for next week, be on the lookout for a rally in commodities and equities as the Euro gets out of oversold territory and the dollar takes a breather. I think that the dollar may rally early on in the week, but by options expiration it may come back down to the 50 MA again.