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.



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.

Dollar Closing In On Double Bottom As S&P Consolidates

A few days ago I discussed how the failure to come to an agreement regarding the debt ceiling was bad for both the dollar and the market and that the two may lose some of the negative correlation that they have had for some time. The dollar has sold sharply off of the highs of the month and the market has pulled back off of the recent move up and has made a lower high. I think that a pullback is necessary for the market here if it is going to rally after the debt ceiling announcement as there needs to be some doubts as to whether or not it will happen, otherwise the trade will be one-sided.

Once again, 1345 has proved to be a perfect level of resistance for the market. The S&P lost five and a half points today and it is closing in on the 20 MA. I think the 20 MA will be pierced shortly but I do not think that the market gets below 1320 before making another move higher. That would make for a higher low and a higher high leading into the debt ceiling negotiation, should there not be one before then. In any case, the pattern over the last six days is a bull flag and should play out by early next week.

The dollar is closing in on double bottom territory and may get there within the next 4-5 trading sessions. At this point, UUP is so close to $20.84 that it isn’t going to take much to get it there. Remember that a default would equal less spending which would be positive for the dollar, but it ultimately has catastrophic repercussions and is the reason why the dollar is falling and gold is still surging. Note that other currencies aren’t doing all that well either, so the effects of a US default are extended to the rest of the world and in many countries, the outcome for them would be worse than the outcome here.

Resistance Levels For The SPX, Current Long Positions

The stock market had another pause day on Friday after Thursday’s 9 point surge. The SPX finished slightly higher on much lighter volume and the 1345 pivot high has been reliable as a resistance level. So far, the market has traded almost exactly the opposite to what most had expected to happen in the post QE environment. This makes sense given that the market sold sharply off into the end of QE and encountered major support at 1260. The end of QE was priced in to the market and despite this, many still believed that more downside was immediately ahead which is why I was looking for a rally beginning with the 4th of July weekend. I do believe that the market is headed lower over time, but there is still upside left, which is why I am positioned long.

1345 has held up as resistance so far as the market rested after a solid move up off of the 20 and 50 MA’s last week. I see two scenarios for next week, the market either pulls back off of 1345 for a brief consolidation before a move up to 1360, or the market opens higher and runs into 1360 before coming back in for a pullback. Either way, I am still seeing some continued upside in the short term. It is also possible that the SPX makes it back to the 1370 double top, but I doubt that it will not happen until it can at least consolidate above 1345 and 1360.

I am long TNA for this swing higher and I am currently about 4% in the money on the trade. The IWM is the best proxy to use for TNA since IWM is not leveraged and because of that, the levels on the chart are more reliable. The IWM confirmed above $83.25 with Friday’s close and is now headed for $84.61. Confirmation above $84.61 should indicate a move to $85.62 which would translate to the 1360 pivot on the SPX.

Another long I have is Sky-Mobi (MOBI) which is a volatile Chinese tech play. Chinese stocks like MOBI have been decimated after a massive run reminiscent of the move in silver a few months back. MOBI had a nice surge behind good volume 2 weeks back and has since consolidated above the 50 and 20 MA’s. As long as it stays above $8.15 on a closing basis, it can be a long play for a move back to just under $12. Entry for this stock is currently open, so any price above $8.15 on a closing basis is okay to use, so long as it doesn’t gap a dollar or two higher tomorrow, but I don’t think that will happen. Just remember that these Chinese stocks are volatile and carry added risk, but in this case, the chart pattern is very favorable.

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.

SPY & Financials Reverse, Gold Extended But Still Tearing Higher

The SPY is close to a moving higher again after a sharp move down this morning on the back of European bank fears. There are also oppotunities in the financial sector on oversold stocks for long swing trades. Gold and silver are very extended and the trade is becoming short term crowded but shorting them at this level is risky.

Financials Close Off Of The Lows To Make Possible Short Term Bottom

The S&P closed a few points above the even number level of 1300 which is typical of an options expiration week since whole even numbers are closely associated with strike prices, and what better level is there than one that ends with 00? I think the big story for the market’s activity next week will be the financial sector as many of the major banks were beaten down hard last week and are close to the lows of their respective charts. I will most likely play the long side of the financials next week for a short term bounce, and I believe that it is also possible that this translates into a rally in the overall market.

I have a short term level for the S&P at about 1306 which is a level that was tagged on Thursday and one that the market stayed above on Friday. This is by no means a major pivot but I think it may serve as minor support as the market consolidates off of the highs. Additionally, the 20 and 50 MA’s are beginning to scoop underneath the price activity and the 20 MA is already above 1306. This forces me to favor the upside and it is likely that the market is now putting in a higher low.

Using 1258 as the high and 1356 as the high, the market has made a 50% retrace of the Independence Day rally (1258+1356 = 2614/2 = 1307). The close yesterday was 1308 but the low of the day was at 1307.52, which is almost exactly 50% off of the high of 1356.

Bank of America has now pierced the $10 level on the chart and has made a bit of a bottoming tail on the daily. It sold right into this level without previously consolidating which means that it is valid for a long play as long as it stays above yesterday’s low of $9.88.

BAC has earnings on Tuesday so I don’t advise holding the stock into the announcement, however I’d still favor the upside as it has sold into earnings and is already at the bottom of the chart which tells me that any bad news has more or less been priced in already.

GS pierced $130 and has now made a higher low off of the bottom that was set in late June. This looks like a bullish setup for a long play, first target is the 20 MA, I would look for it to hit about $132.50.

Similar to the chart on GS, JPM has made a higher low after a nice double bottom. It closed negative on Friday but made a lengthy tail on the daily chart which suggests that a short term bottom is in as long as it stays above Friday’s lows. The target for a bounce should be about $42.

Probably the best chart so far is the XLF. Good series of higher lows and a possible bottoming tail from Friday’s action. Upside target is the pivot low of $15.34 which would also be a pierce of the 50 MA. There is nothing fancy on any of these charts and none of them should suggest anything more than a one to two day swing trade. For this reason, I like the FAS for added leverage to the possible bounce. Use XLF as a proxy for FAS since FAS is leveraged and does not accurately represent levels on the chart.

I am looking for a gap lower tomorrow that stays above the $14.73 low on XLF, if this happens I will most likely go long the FAS and possibly another sector ETF (maybe QLD, SSO, TNA) that represents the overall market depending on where the SPX ends up after the opening bell.