Silver Long Triggered On Pierce Of Trendline

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Equities Float Higher On Low Volume After Irene

As predicted last Friday and over the weekend, Irene has not had a negative effect on the equity market as many analysts had concluded. Manhattan had some outages and most big fund managers flew to Florida late last week, meaning that today only 170M shares traded on the SPY as the market strolled higher for 2%+ gain across the board. The SPX rallied above the highs of last week and paused only at the very end of the day where it found resistance at the $1208 pivot high.

The S&P closed at $1210 which is above the 20 MA and the pivot high of $1208. There appears to be some more upside in the market but given the light volume, just a close above the 20 MA and the pivot high is not enough to buy the market unless it can confirm tomorrow. I do think we’ll see a pullback tomorrow but if that is not the case then $1220-$1240 could be in play by the end of the week especially if volume continues to dry up (which should be the case anyway towards the end of the week).

Also, I’d like to address a news story that I have heard other buzzing about. If you haven’t read it yet, it’s about how bankers are predicting a market crash within weeks.

This whole article sums up my general sentiment on the market, or rather the inverse. Here you have it from the horse’s mouth: buy the market. In my humble opinion, the banks are currently begging retail investors to short the market so they can push it higher into the holiday. The amount of negativity out there has worked well as a contrarian indicator for my analysis recently and this article is more or less the epitome of what I’ve been talking about this whole time.

So now that I’ve gotten that off of my mind, have a great week and stay dry for those of you in Manhattan.

Whippy Action After Fed Meeting Playing Out As Expected

On Wednesday I suggested that the market would sell today but not make a new low and that would turn out to be a buying opportunity. So far the market fell after Bernanke vote of no stimulus but has surged back to the flatline and then some. Lorillard (LO) is one of the stronger plays out there that I am watching for a bounce next week.

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.

Equities Pause On Merkel/Sarkozy Comments

The market was weak after the comments from Merkel and Sarkozy that were less than accommodative though it seemed that many were expecting the two to not announce any type of new intervention. This may be why the selloff today was short lived and the market recovered for just a 11 point loss. The media may continue to hype the downside but keep in mind that this is an options expiration week and the market is currently showing some resilience after the late day rally so any pullback should be taken as bullish consolidation until 110 is lost on the SPY.

The tail on today’s candle suggests that there are still plenty of buyers out there though I do expect a bit of a pullback this week and perhaps some increased volatility. If you look at the 10 minute chart of the SPY and all of the major sector ETF’s (XLE, XLF, XLU), you can see some major yo-yo action over the last two days that is second only to the 700 point reversal from Tuesday of last week that marked the bottom to date.

If the right patterns presents itself, I’ll be looking for more long positions on a bullish pullback. The SPX should be headed in the range of 1240 to 1260 over the next week to two weeks. Utilities and financials are the sectors that I am watching for possible long swing trades since utilities are the strongest and may outperform based on strength, and financials are the most beaten up and may surge due to technical reasons.

Gold has been one of the barometers for strength or weakness in the market over the last two weeks and though it did have a nice up day, it is still trading within the range of the pivot high of $1817 that was made last Thursday. To put it plainly, if gold does not make a new high, then the markets will get a lift and will convert into a more complacent mood at least in the short term. Also, it’s worth mentioning that short term calls on GLL are looking succulent.

For those still wondering, TBT is still in play. Action over the last three days is nothing more than a bull flag which is something that I predicted would happen last week. The bottoming tail is still holding and any noise about treasuries surging after the Merkel/Sarkozy comments is nonsense. The chart clearly shows bullish consolidation after an oversold bottom and a sharp rally off of the lows. Targets for TBT are $28.50, $29, and $30.75 and stops should be advanced accordingly. Should the bull flag fail, TBT will become a stop-out and yields will fall further.

SPX Crushed Early, But Recovers For A Positive Gain

The SPX finished 6 points higher though not before being down 20 points early in the session in another wild and volatile day of trading. The market snapped an eight day losing streak and in that time it had been down almost 10%. Despite the size of the drop, the VIX did not make a new high which was set earlier this year on March 16th even as the S&P had already traded through the low of that same day, which was also the YTD low for the S&P. Nonetheless, there are some key items that have come out of today’s activity.

Firstly, the SPX made an unmistakable bottoming tail on the daily chart. Volume on this reversal is also extremely high and even eclipsed yesterday’s surge in volume. This will not be a long term bottom, but it means that a rally, if only a brief one, is in order. The reason why the bottoming tail is valid and has a high probability of playing out is because the market traded lower for eight consecutive days before making the tail and positive close today. Also, key levels were pierced while making the tail on the chart.

Secondly, MAJOR levels were broken in the last two days, however NONE of them have confirmed – yet. The major levels are the neckline of the shoulder head shoulder top which is a pattern that stretches from the middle of February and was broken through yesterday. The second level is the pivot high from December 29th which was the last high of 2010. The third level is the pivot low of 1249 made on March 16th, and the fourth is the 200 MA. The last and most important level was the trendline going back to the lows of March 2009, which runs through August 2010 and coincides with the 200 MA. Those of you who watch my video analysis will remember the particular trendline I am referring to.

To make myself clear, not ONE of these levels has been confirmed below despite what you may hear on major media outlets.

Ultimately, I do believe we will see a small rally back to at least the 200 MA that should be induced by some short covering. The market has a solid chance of gapping higher tomorrow, perhaps to 1275. If it does so, I would expect it to reach the 200 MA before long but I cannot be certain if that will be strong resistance.

Moving on to TLT, we can see that treasuries have made a topping tail which is inverse to what the equity markets have done. This makes perfect sense as treasuries do well in the risk-off environment and equities do poorly. However, given the overbought nature and the obvious topping tail, a short on TLT (or long TBT if you wish) is there for anyone who wants it. Downside target is $97, stop out is a close above today’s high.

Gold slowed down today after the market reversed but there is still no topping pattern on this chart and despite how extended it is, I would not advise shorting. That said, there is a lot of noise making its way onto mainstream news about how gold is the only safe haven etc. – gold is the best safe haven, but always be a contrarian and follow your gut. When any asset is already up 10% in such a short period of time and it is continually making new all time highs while the mainstream media praises it, it is usually a good idea to start hedging or taking profits. Those of you who have been with me for a while know that I used the same methodology to get out of silver just days before the peak in April.

In any case, this is not a time to be taking risky trades, this is a time to protect and try to make it through this volatile period until the dust settles.