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.

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.

Silver Long Triggered On Pierce Of Trendline

S&P Futures Down Big As European Markets Are Slammed

The futures for tomorrow are down 26 points as the European are getting hammered again. It appeared that the market would get some type of exhaustion gap higher on Friday or tomorrow but this recent development all but ends those hopes. The good news is that copper held up on Friday and there is some potential for another higher low in the market as the institutions pump the downside.

The Copper Divergence And The Fed’s Impact On The Market For Next Week

To follow up on yesterday’s analysis, I’d like to add two key points as to why we’ll get a bounce in the next week to week and a half. The first is point is that copper is yet again diverging from the equity markets. On May 10th, I pointed out the divergence between copper and the SPY as the copper ETF JJC literally tanked versus the SPY in just a few weeks. I noted that every parabolic move in the SPY to JJ ratio was met with another sharp movement downward, meaning that the divergence corrected itself. Coincidentally, or perhaps not, May 10th was the exact peak in which the SPY gained versus JJC and the ratio has fallen from 2.625 to 2.355 since then.

You can see that despite the recent decline the ratio is still in an uptrend and will find support at the 200 MA and the 2.3:1 pivot. What this means for the market in the near term is that copper is going to fall, and the market is going to rally.

Copper has outperformed the market during the market selloff and has actually maintained an uptrend. Copper is a leading indicator and is telling us that the market is about to rally, at least enough to shake off the oversold condition. I think that this also means that copper is about to break down and underperform the market. It is having trouble staying above the MA’s which are tightening, and has major resistance at the $55 pivot. Additionally, the uptrend it has traded in is simply an inside bar bearish consolidation from the move down in late April. I think in the short term JJC is headed to $51 before any major bounce occurs.

You can see above where the ratio began to increase exponentially, and where it peaked. It began right when the market staged a rally from a pullback off of the March lows and it peaked just after the market peaked in May. If the ratio does in fact find support at 2.3:1, then simply put, the market will rally and copper will fall, but ultimately that means that the market is headed lower after the bounce in equities plays out.

The second key point I’d like to make is the end of QE II and the Fed meeting’s impact on the markets. Clearly it is bearish for the market that QE II is coming to an end because POMO will no longer be active and there will not be that extra support for the market during trading hours. However, that is most certainly priced in at this time. Just take a look at the market before QE II was announced:

Immediately after QE II was announced the market got a nice pop but it was an obvious example of buy the rumor, sell the news as the market corrected just days after the gap higher. Don’t use this chart as a model for what will happen next week, just use it as an example. In other words, I’m not saying that we’ll have a rally that is proportionate to the correction we saw in November, just that the same concept applys to the situation we’re in. In any case, as I said yesterday, the market is still extremely oversold going into next week’s fed meeting and the idea that we’ll just crash through support on news that we all already know about is a poor mindset to have.

One last chart supporting an oversold rally is coming is the USO. After the completetion of a perfect bear pennant, oil has fallen dramatically in the last couple of trading sessions. Oil is very oversold and after the gap lower and the spinning top candle, it’s hard to say that this can go much lower especially since it is right above support at $36.

Once again, I’m still generally bearish overall and I am waiting for the next shorting opportunity. I am out of DXD now and may choose to take a long position this week but I am not planning on holding any long positions for more than a few days to a week depending on what the market looks like. My advice for the long side would be to pick extremely oversold stocks that are close to, or have pierced support and be sure to use tight stops on them and be ready and able to exit at any time. From the short side, I would stay out until the market gives you an opportunity. I talked about this yesterday, but you need to let the market come to you and for no reason whatsoever should you be chasing charts.

Markets Fall Again With Volume At A Three Month High

Silver Breaks 20 MA For First Time Since January, Still Not A Correction

Silver is closed today at $41.51, less than a dollar away from the opening price on April 11th, which was the first day that I publicly expressed caution in the silver market. I wrote “Is Silver Approaching Phase 3?” Days later on April 17th, when silver had eclipsed $42. I sold out of most silver positions on the 20th and continued to remain out of the silver market and instead to think about getting into gold, uranium, or rare earth stocks citing large amounts of distribution that were going on in SLW, AG, and SLV.

Silver charged towards $50 but fell just short and is now 20% away from that 30 year high. Meanwhile, gold is only 3% away from its YTD high. Certainly the 3 CME margin hikes had a lot to do with the recent price activity, but they have done us a favor and may have prevented a premature mania phase in silver. As for where the price goes next, I am not looking at silver for an indication of momentum, I am looking at gold, the SPX, The Dollar, and The Euro.

Simply put, I effectively timed the top in the parabolic silver market. Most traders and particularly silver bugs, become extremely defensive when other analysts attempt to call tops, (one I know of was accused of working for JPM) but market analysis can be made easy with plenty of practice and dedication to research. Some of my readers and friends were with me on this trade and I want to say congratulations, this was an extremely big sell that we reeled in.

I am not looking at silver to gauge silver’s next move. It is far too volatile and despite closing below the 20 Day MA in what seems like forever and being roughly 20% from the near $50 top just one week ago, it still maintains that trendline going back to late January. So despite what seems like a massive selloff, silver has still yet to confirm a correction in my mind. A real correction would be a snap of an uptrend and a retracement back to a support level. What we’ve seen over the last week is simply a pullback to a trendline, which is nothing more than a bullish consolidation, unless of course it breaks through trendline support.

If you have read my commentary as of late, you’ll know that I am expecting a reversal between the USD and the Euro which would be bearish for precious metals and cause a consolidation similar to the one we saw last year. However, given the fundamentals of the silver market, maybe you want to enter a long position just to be safe. Well, some of the mining companies are already priced out of $35 silver so averaging into a position would be a smart way to play that from the long side.

Ultimately, I think that it is a mistake to try to trade silver outside of intraday swings at this point. I would stick to the SPDR’s and GLD and stay away from the silver miners and ETF’s on a swing strategy until the market becomes more stable.