Everyone’s Talking About The SP 500 Symmetrical Wedge – US Total Debt Reaches $15T

If you have not heard by now, the S&P 500 is trading within a symmetrical wedge pattern, which has most in the investing community buzzing. Because symmetrical wedges are generally neutral, they attract quite a bit of attention since no one knows for sure which way it will break. The point I want to make about this wedge is that way too many people are watching this pattern for us to simply buy the first sign of a breakout.

When a more than average amount of people are watching a particular chart pattern, the success rate generally declines. This pattern will play out as a bullish continuation, or a bearish reversal, whichever it is, confirmation must be utilized on any breakout or breakdown of this wedge. Confirmation being a secondary close below the low or above the high of the breakout candle. This method keeps traders out of bad trades, and prevents needless stop outs.

Currently I am short the USO. I took profits on 2/3 of my initial position after the pullback from the 200 MA pierce, and added 2/3 back today after the gap higher. Today’s move looks like an exhaustion gap as it tagged gap window of $39.80 and the pivot high of $39.50. Additionally, the USO hammered into the .618 level before closing lower during today’s 3pm selloff.

USO closed today in a doji formation which leaves the door open for a star or “island” reversal tomorrow. In any case, oil is extremely extended and regardless of the CME margin easing, oil really has no business above $100 in this economy.

In other news, the United States went over $15 trillion in total accounted debt today, a number that is up over 40% in just the last couple of years.

http://www.usdebtclock.org/

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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.

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.

Financials Lead Low Volume Selloff

The market is selling on low volume which leads me to believe that there will not be another flush today. If the market holds up for the next two days expect shorts to cover before Jackson Hole and some relief going into Labor Day weekend.

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.