Commodities Are Leading The Market Lower

Gold, silver, and copper are lagging the market and could signal a downturn after the light volume holiday period comes to a close. Additionally, the NDX is also lagging the market which is telling us that investors are putting their money into less risky assets like DOW stocks.

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.

DOW Gaps Into Key Trendline Before 300 Point Rally

The US markets opened lower but found support at a key trendline going back to the August lows. The media continues to pump the downside but the levels on the chart have worked phenomenally.

Update August 8th, 2011

Hey everyone, wild week in the market last week. I was stopped out of all positions which is unfortunate, but better than holding through all of the volatility. The key here is to abide by stops and keep positions small. I planned a video for tonight but am having trouble with the software so I was unable to put one up however I wanted to give at least a quick update on the market so I will summarize a few things in this post.

First, I am long Aug 11 MS $19 call @ $1.45 and that position is up about $.15 as of Friday’s close. I like $20 as a support because it is the resistance level going back to the financial crisis and should now act as support, especially since the stock has traded right into that level without first consolidating. A few other plays that are looking cheap or are close to critical support are WMT, F, BAC, AA, and XOM. There are several large cap stocks that have tagged or are currently hovering above support and I think this bodes well for the market.

Regarding the S&P downgrade, none of the reputable minds on Wall Street care much for their ratings. Investment banks pay people hundreds of thousands of dollars to run valuations on stocks and bonds. In other words, the rating given by an agency that has whiffed on so many obvious calls (internet stocks in 2000 and MBS in 2007) means nothing to them. There may be a knee jerk reaction, but don’t expect the downgrade to be the reason the market falls again (if it does). If anything, I think that given the timing, the downgrade is actually a nice contrarian indicator since the market is already down 11% and all of the bad news seems to be out there now. There will be a massive rally, and there will be an opportunity to make huge gains as long as we play it safe.

Currently, everyone is looking for a bounce to short the market. I too am looking for a bounce but I think that it will be bigger than most people expect and some might mistake a bull flag for a rollover, so keep in mind that the institutions will always go the opposite route that the mainstream media has the average investor expecting. Speaking of which, options expiration is this week and we have sold off very hard going into it which leads me to believe that the large funds will be looking to crush the fresh puts that have sprouted up in the last week.

Also in the wake of the debt ceiling, I am a believer that if interest rates fall, yields on US Treasuries will be decimated. Stocks, and, oil, and copper are getting hammered on. These are leading indicators of economic contraction. The US treasury is still the best bond out there and 2.5% yield on US debt still beats -15% equity in the stock market. Again, the rating means nothing and if anything is a contrarian indicator. Most would expect a downgrade to post negative performance but in this case, the fundamentals outweight the hype that the S&P and Moody’s have created.

Moving on to gold. We had a key reversal in GLD on Thursday and Friday’s trading did not get us above that high which means the reversal is still in play. However, it could just turn out to be bullish consolidation. The G-7 has said today that it is ready to act in order to calm global markets. The ECB said on Friday that it would begin purchasing Italian and Spanish bonds, which is essentially a QE program for the EU. And of course, the Fed meets this week at Jackson Hole on the anniversary of QE II. I don’t expect them to announce QE III, but they will certainly have to make themselves sound accommodative. They would make themselves look foolish if they announced a QE III only a month after QE II expired, but remember that Bernanke made his legacy as the guy would wouldn’t let the market collapse and there is no way that he will say anything hawkish while the CNBC camera is on him showing the up-to-the-second tick of the S&P and gold as he speaks. Regarding QE III, I don’t think that a third program will get the market back to the YTD highs. At this point, the fundamentals are so bearish that even a weaker dollar won’t have much effect on the obvious global contraction. The dollar will also feel upward pressure as the ECB purchases european bonds in an effort the stabilize their own markets.

All in all, the above describes my sentiment on the many issues that have developed over the last week. Keep in touch via email and don’t hesitate to ask me to elaborate my opinion. Be careful and keep it short term.

Friday’s Yields Demolished – Perfect Example Of Why News Is Secondary

In yet another example of why the news cannot be trusted, US bonds yields were crushed on Friday even though the headline news that has been at the front of everyone’s minds is the possible default on US debt obligations. So in the face of a possible default yields on the 10 year were down 5% on Friday as equities were also down substantially on the opening bell before recovering throughout the session. The market is so used to bonds being fundamentally linked to monetary pressure that traders may have forgotten that there are several other factors that drive bond prices. Ultimately, the US has the ability to pay off its debt by raising the debt ceiling, but the reason why it wouldn’t be paid (hypothetically) would be to lack of agreement in Congress and the White House. Therefore, it’s not the bond that is insolvent per se, it’s the ineptitude of the clowns in Washington to simply raise the debt ceiling and then debate the budget afterward.

That all being said, one could have come to the conclusion that bonds would rally by observing the bullish consolidation pattern on the chart of TLT.

TLT made a 9 month high Friday and was able to pierce resistance at $98. There is still strong resistance at $98 as it came off of the highs after breaking through them earlier in the session and it is possible that bonds may have put in a short term top since some of the fear should subside after the debt ceiling is agreed upon.

Also, a downgrade is looking more and more likely. Moody’s is either making themselves look more foolish than they already are by constantly attempting to grab attention, or they are actually serious about a downgrade and will do so next week. Moody’s, like S&P have missed many obvious ratings in the past (take MBS for example) and it seems foolish for anyone to care what credit ratings they decide to give out. Additionally, a downgrade of US debt without labeling many others across the globe as junk is hypocritical and adds to the ridiculousness of their image. In any case, I would advise staying out of bonds until the outlook becomes clearer but if I had to choose, I’d have to favor the downside in the near term.

The S&P was down about 20 points by 10 am Friday after the news that Boehner’s bill failed in the House overnight but the market rebounded after Harry Reid announced that his own debt agreement bill would be pushed through the Senate. Not coincidentally, the market initially fell into the 200 MA which also coincides with the trendline going back to March 2009. A confirmed break of this trendline will signal a fundamental change in the market. I do expect this to eventually play out but with yesterday’s price activity, it was obvious that it was not set to happen then and there.

Remember the fundamentals of the chart, any time you gap down into or trade straight into a key level without first consolidating, there is usually a 90% chance of that level holding and it usually results in a bounce. For this reason, I have not sold any of my long positions and you can see the market is already sharply off of the lows and managed to only lose .65% with the close on Friday.

To further support my theory, the weekly chart of the SPX shows an inside bar bull flag off of the sharp move up from the Independence Day rally. The pattern is valid as long as it stays above 1258 on a closing basis though I personally won’t hold long positions if the market moves much lower.

I think the more likely scenario is the market sees some upside next week though it may be a bit of a stretch to think that it will break resistance at 1345 which has been an amazing resistance level so far.

Once again, if the powers that be really believed that there would be a default, gold and silver would have been up 5% yesterday and I believe that gold, like treasury yields, confirm the likelihood of a rally in the equity markets next week. Gold should have traded much higher yesterday if there was a legitimate default risk and like I mentioned earlier, situations like this are why the news is secondary to the chart. I have been talking about this for a few weeks but gold is still very extended which should tell us that any bad news is already baked into the chart – and that is why gold did not explode on Friday.

So, to follow up with Thursday’s analysis on silver and due to requests, gold is still extended and Friday’s close of $1628 was less than impressive considering the noise that was going around regarding the debt ceiling. Gold is up 10% in the last four weeks which is the most it has been up in the shortest amount of time since the bottom in October 2008. I have talked about this many times before, but to summarize once again, gold typically makes two peaks during the bullish moves in its cycles. This here is the making of the second peak and it is no coincidence that it is happening as the debt ceiling is being debated. Any debt ceiling resolution should be negative for the precious metals and should be a catalyst for a correction in both gold and silver.

The bottom line is until I see bottoming patterns that coincide with cycle lows in gold and silver, I won’t spend any investment capital on them and they will remain nothing more than trading vehicles until that time.

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.