Yesterday it was Greece, today it’s Ben Bernanke and the FED. What is really going on with the equity market is that no one has strong feelings either on the upside or downside . This neutrality is reflected in our +55 reading indicating that the market remains in a trading range. Today we want to do something a little bit different, I am going to go through each of the markets quickly, and then zoom in and focus on two markets crude oil and silver. I think you’ll find our analysis quite interesting and informative.
Now let’s take a look at what’s happening in the markets....
S&P 500: +65. The market action continues to reflect a trading range. Major downside support is at $1,250. Upside resistance begins at $1,300.
Silver: +75. We talk about this market in more detail in the video, so tune in!
Gold: +100. All systems are go for gold but the market appears to be going up grudgingly. The weekly Donchian channel has resistance at $1,575 today. Major support at $1,513.
Crude Oil: -75. We also cover this with more detail in today’s video.
The Dollar Index: -80. Our indicators are still negative longer-term for the dollar. Minor support at $74.00. Major support at $73.00. Look for a test of the lower line of the Donchian channel which comes in at $73.54.
The Thomson Reuters/Jefferies CRB Commodity Index: +55. We are at the lower range of the Donchian channel and the market is oversold. We would not rule out some sort of bounce from current levels. Market remains in a broad trading range.
Unlimited access to this and other videos FREE! Click Here!
The big news over the weekend was Greece and the 17 nations were unable to come to an agreement to put together a package for that beleaguered country. This agreement has been pushed off yet again until July. Markets both here and Europe initially reacted in a negative fashion but have come back and appear to be regrouping and rethinking the implications of this delay.
The bank stocks however still look sick and the trends are clearly down in this sector.
The Shanghai and Hong Kong indexes are also looking very negative as are most equity indexes around the world. The only index that is looking positive using our trade triangle technology is the Malaysian index.
Let’s take a look at the major markets now.....
S&P 500: -60. The market action continues to reflect a trading range. The market is at the lower end of the Donchian channel and is oversold so we may see a rally to resistance around $1,300. Major downside support is at $1,250.
Silver: +55. I would watch this market very carefully as I feel that it is probably at the lower end of its range. We would use the Donchian channel as support. We may bounce around for another couple of weeks but come July I think we’ll see this market on the move. Market is oversold and expect to see a bounce from current levels. Near term resistance at $36.00. Support at $34.00.
Gold: +90. All systems are go for gold and we expect this market to do better. The Donchian channel has resistance at $1,353 today. Major support at $1,513.
Crude Oil: -90. The trend in crude oil is clearly down with all of our Trade Triangles in a negative position. The market is however heavily oversold and at the lower end of the Donchian channel. We would expect to see a bounce from current levels but would like to see more positive action.
The Dollar Index: -65. Our indicators are still negative longer term for the dollar. Minor support at $74.00. Major support at $73.00. Big resistance at $76.00.
The Thomson Reuters/Jefferies CRB Commodity Index: -70. We are at the lower end of the Donchian channel and the market is oversold. We would not rule out some sort of bounce from current levels. Market still appears to be in a broad trading range.
Since the first trading session in May we have seen the stock market sell off. The old saying “sell in May and go away” was dead on again this year. Here we are 7 weeks later with the stock market continuing to lose ground. This extended sell off has everyone all worked up that this is the beginning of another market collapse.
Let’s take a quick look at the SP500 hourly chart covering the month of June.
As you can see, price is still falling but every couple of trading sessions we get some big money players nibbling on stocks accumulating shares and running the market higher. This type of price action is typically an early signal that the market is trying to bottom.
There are two key ingredients for a higher stock market and both have been missing from the mix for a couple months. The two key sectors which have a significant weighting in terms of the broader market are the financial and technology stocks.
Let’s take a look at the financial sector:
As you can see on the bottom of this chart, financials started to lag the market in late January. Ever since then this sector has been in a strong downtrend pulling the broad market averages lower with it. The good news is that this sector has just reached a major support zone and is looking ripe for a bounce and possible rally.
The other main ingredient to a higher stock market is the technology sector.
Looking at the technology sector:
Here we can see technology stocks have been pulling back for several weeks. Tech stocks are now trading down at a major support zone and they look oversold. A bounce from this level is very likely in the coming week.
Weekend Trading Conclusion:
In short, I continue to feel the market is trying to bottom here and we are at the tipping point when things get volatile and choppy just before we get a trend reversal in the S&P 500. Keep an eye on the short term charts of financials and technology sectors. Once they start making higher highs and higher lows on the 60 minute charts I believe it will be the start of a nice bounce and possible rally.
J.W. Jones is waiting patiently for signs that price action is going to reverse before getting involved, then what?.......
The price action in U.S. financial markets on Wednesday was the culmination of fear and disease. Fear was represented by a breakout in the Volatility Index (VIX) and the disease was related to the sovereign debt crisis unfolding in the Eurozone. The violent reaction by the Greek citizenry to proposed austerity measures paired with grumblings coming from multiple Eurozone nations ignited fear among traders and investors alike.
I am not an expert on debt instruments, but it seems that there is a considerable amount of systemic risk within the debt structure of the Eurozone. When the notional derivatives such as credit default swaps are factored into the equation the risk to the global financial system intensifies significantly. The real question is who is holding the counterparty risk on the other side of the Greek debt? Even if the Greek situation is resolved without default, what is going to happen to Spain and Portugal’s debt?
The solvency of many of the Eurozone nations has come under question and the price action in the Euro currency is indicative of the fear present among market participants. I believe that the economic disaster that is unfolding in Europe currently will eventually manifest itself stateside. Austerity measures either through higher taxes, monetization of our public debt, and a complete restructuring of entitlement programs is likely to occur. However, in the meantime domestic markets will struggle to gain their footings in the face of a strong U.S. Dollar. The strength of the U.S. Dollar Index represented by the ETF UUP on Wednesday helped place selling pressure on U.S. equities and commodities alike. The daily chart of UUP is shown below:
If the U.S. Dollar continues to rise, the impact the increase in value of the Dollar will have on U.S. financial markets could be debilitating for equities. Poor economic data, continued housing problems, and the political uncertainty surrounding the debt ceiling all make for a potentially dangerous situation for U.S. capital markets. With this much fear and uncertainty in the marketplace and volatility stemming from a variety of issues related to the Eurozone, investors are fearful. The spreading disease of the sovereign debt contagion is rapidly infecting global financial markets and if handled inappropriately could drastically alter the entire capital market construct.
Instead of worrying about all of the fear and uncertainty in the market place, I look at market internals, market cycles, fundamentals, and technical analysis as guides for shaping my approach to trading. We are on the verge of a major inflection point for financial markets, specifically equities. While it might surprise readers to know, I am leaning towards a near term bottom in the S&P 500. The S&P 500 could rally to the 1,305 (SPX) price level (20 Period Simple Moving Average) which represents an increase of 3%. It is also feasible that we may witness a test of the 50 period moving average on the daily chart of the S&P 500 (SPX)which would represent an increase from Wednesday’s close of over 5%. Markets do not move in a straight line. While investors and traders may expect a breakdown in price action, rarely is the crowd correct.
The daily chart of the S&P 500 with its annotations shown below illustrates my thought process as it relates to near term price action for the index:
If price action breaks below the March pivot lows a panic induced selloff could begin and the next leg of the secular bear market will likely be underway. We may have already initiated the secular bear with the recent downturn, but I will remain neutral until the March pivot lows are broken. If price action breaks through the March lows and we see multiple days with daily closes below the 1,250 (SPX) price level I will become very bearish. The chart below illustrates the key price levels if the SPX breaks down:
While many readers may find this interesting, today members of my service at OptionsTradingSignals.com were able to lock in gains on an SPY position we initiated late last week. I initiated a SPY 125 Put Calendar spread which I converted to a double calendar spread on Tuesday. The position will produce profits if price action on the SPY remains between around $123.50 / share and $130.21 / share at the close this Friday (June Expiration).
During the nasty selloff today, the implied volatility of the SPY Double Calendar Spread was juiced and we were able to take profits on the position and lock in a 13% gross return based on maximum risk. We have the remainder of the position on currently with stop levels in place. If price cooperates, the trade offers a potential return of around 20% near the close this Friday.
Calendar spreads work great in an environment where volatility levels are rising and they profit from time decay (Theta) which is a mathematical certainty. Recently the service has been producing solid gains for members using calendar spreads during this choppy price action. While I like to use other trade constructions, calendar spreads have produced outstanding risk / reward opportunities for astute option traders and I will not hesitate to use any tool that is working in a particular market climate.
A Brief Trading Lesson
Members of my service know that I regularly watch a variety of underlying indices and sectors to get a feel for the broad market. Besides the VIX, one of the most critical ETF’s for traders to monitor is the financials. If you are new to trading or are trying to learn, it is critically important to understand that the S&P 500 has an arduous time rallying if banks are selling off.
In contrast, when the financials are holding up well or are working higher and the broader tape is trading flat or slightly in the red it offers a clue that the broader market may be preparing to move higher later that session or the following day. Yesterday (Tuesday) the financials were warning traders and investors into the close that today could be troublesome. The daily chart at the close on Tuesday shows the financial ETF XLF’s recent price action:
The ugly close for financials was a warning and investors and traders who did not pay attention to the financials had a rough day today. The only long position that I was holding today was a long GLD position. Gold held up nicely today and we have some nice gains for the trade, but the key point to make is that by noticing the price action in the financials late Tuesday afternoon prevented me from initiating a poorly timed long trade.
Given the amount of uncertainty and risk associated with current price action in the S&P 500, I would urge readers to monitor risk closely and review open positions. While I do not necessarily believe a horrific selloff or a Black Swan event is waiting in the shadows for unsuspecting traders and investors, it is impossible to rule out a breakdown of the key pivot lows from March of this year. I am leaning toward the mindset that a short to intermediate term bottom may be forming, but I will not be doing any of the heavy lifting.
I will wait patiently for signs that price action is going to reverse before getting involved. Trying to pick tops and bottoms is a fool’s game, particularly when the game is changing rapidly based on news coming from Europe which can dramatically alter the tape. Risk is extremely high at inflection points such as the one we are currently near. Some of the best traders I know are successful because they refrain from trading when price action is volatile and risk is abnormally high. Sometimes sitting on the sidelines and listening to Mr. Market talk can be the best trade of all!
If you would like to be informed on SP 500, Volatility Index, Gold, and Silver intermediate direction and option trade alerts several times per week… take a look at Options Trading Signals.Com today for a 24 hour 66% off coupon, and/or sign up for J.W.'s occasional free updates.
Here's a brief summary of what's in today's video and what's happening right now in the major markets:
- SP 500: -70. The market action today can only be described as negative. A score is now -70 and our downside target for this market is 1250. Major downside support is at 1250.
- Silver: -70. I would watch this market very carefully today as I feel that it is probably at the lower end of its range. We would use the Donchian Channels along with the fact that this market is oversold and expect to see a bounce from current levels. Major Support at 34.00.
- Gold: +70. Gold is currently oversold and we expect to see this market balance sometime in the near future. We would not be surprised to see further sideways action but we want to be long this market as the Donchian channel comes in at 1503. Major support at 1,500.
- Crude Oil: +55 Trading range. This market continues to pound out a base to go higher. Long term indicator remains positive. Support coming into this market at $96/barrel. This market is currently oversold and choppy.
- The Dollar Index: -55. Despite today's strong dollar rally in the index, the longer term and mid-term Trade Triangles remain negative. Resistance now at 76.50. The dollar index is now in overbought territory. Minor support at 73.50 and major support at 73.00.
- Reuters/Jefferies CRB Commodity Index: +55. This index is now beginning to reach an oversold condition and we may see further backing and filling-in softness. Near-term resistance at 350.00. Minor support at 340. Major support at 335.00. Trading range.
The big question is are we going to close lower seven weeks in a row in the major indexes. Many people trading the markets now have not seen the classic bear market which does not give you a chance to get out. Several of our major long-term indicators are close to turning negative and when they do we would recommend moving into an all cash position for hitting any portfolio you might have in stocks.
The buzz around the blogosphere and in the media is that Quantitative Easing II is scheduled to end in around 3 weeks. Already pundits are asking about Quantitative Easing III as a matter of when, not if. In reality a QE III Lite version is already in the cards as the Federal Reserve has stated they will be buying Treasuries and Mortgage Backed Securities (MBS) with maturing issues. The Fed also plans on reinvesting the interest earned from the existing portfolio (Roughly $15 billion/monthly).
When it comes to the application of financial principles, doing the opposite of what everyone else does generally leads to an extreme variation in the overall results. While the results are not always better, they are at the very least significantly different from what most lemmings within the group experience. In every aspect of my financial life I try to do the opposite of what the herd is doing. It takes experience and a significant level of discipline, but buying from the herd when they are selling and being willing to sell into a crowd when they are buying is a great way to trade. It sounds easy, but for most people it is not, myself included.
Right now financial markets are uncertain. I would be remiss if I did not point out the recent strength in the U.S. Dollar Index and the potential higher low that it has carved out on the daily and weekly charts. The weekly chart of the U.S. Dollar Index is shown below:
The current pattern on the U.S. Dollar Weekly chart is bullish. We could see the U.S. Dollar Index trade significantly higher from here as it has been under severe selling pressure for an extended period of time. While I believe technical analysis is just one context through which to view financial markets, it is uncanny how often market cycles and headline events line up. Is it merely a coincidence that the U.S. Dollar is potentially bottoming around the same time the Federal Reserve is ending the QE II asset purchase program?
Regardless of what camp economists are in, we presently live in a strange time for financial markets and capitalism in general. One of the more interesting charts to study is the Euro currency, which in contrast to the U.S. Dollar Index appears to have a more bearish pattern. Could it be that the U.S. Dollar is setting up to rally because of the perceived weakness of the Eurozone? The daily chart of the Euro ETF is shown below:
The Dollar may be firming up here based on the Euro’s weakness and it may have absolutely nothing to do with QE II ending. I always refer to price action and never question Mr. Market’s directional bias. If the U.S. Dollar begins to work higher what impact will it have on equities?
A stronger U.S. Dollar would certainly put pressure on risk assets, specifically equity and commodity prices. As it turns out, we are at an interesting juncture in financial markets at this point in time.
The 4 year stock market cycle is nearing an end, a presidential election will take place in less than 18 months, the U.S. government has a massive debt crisis developing, and the European debt crisis continues to mature in what will likely be a microcosm of what we will face here in the United States. The Middle East remains tense at the very least and the recent OPEC announcement to maintain supply levels has helped support oil prices.
Higher oil prices have obviously slowed down the U.S. economy as the consumer is strapped with higher costs on nearly everything, specifically food and energy. In addition, the unemployment numbers are seemingly not improving and housing appears to be rolling over . . . again.
Almost everywhere we look the news is bleak. Mr. Market has shrugged off bad news time and time again since the March 2009 lows. The long term shorts remain frustrated to say the least and those who were actively shorting along the way have likely been stopped out multiple times. Everywhere I look market commentary is bearish and pundits are talking about additional weakness as they point to a rallying Dollar and multiple economic headwinds facing domestic markets.
Traders and investors should be focused on a few specific price levels on the S&P 500. With the Dollar rallying, the S&P 500 index has remained under extreme selling pressure for multiple weeks. The S&P 500 (SPX) is likely going to test its 200 period moving average. From there I am expecting a bounce higher, although the bounce may be nothing more than a Dead Cat Bounce.
As always, time and price will be the final arbiter but if the Dollar continues to trade higher we could see the S&P 500 lose its 200 period moving average and eventually test a major support level which needs to hold up for the bulls. If the March 16, 2011 pivot lows are taken out to the downside, the next leg of the secular bear market may be under way. The daily chart of the SPX illustrated below shows the key price levels and the potential price action that may lead up to a key test of the March 2011 pivot lows:
Very rarely does the first mouse get the cheese, so I would anticipate a bounce off of the 200 period moving average which currently coincides with the March pivot lows. With not only the pivot lows but the 200 period moving average offering support a breakdown lower will be a large tell about the health and future price action of the S&P 500.
Right now I am just going to focus on how the S&P 500 handles the key support zone illustrated above. The forthcoming price action will tell traders everything we need to know about the health of financial markets. I have no idea if we are about to enter a double dip recession nor do I know whether price action will even test the March pivot lows.
What I do know is that price action in coming days around key support areas is going to be critical. I am convinced that Mr. Market will tell us whether the bullish party will continue or come to an end in the next few weeks/months. A breakdown of the March pivot lows in the future will likely initiate the launch sequence for the next secular bear market. I would keep the S&P 500 1,250 price level on the radar going forward. Risk remains high.
If you would like to receive J.W. Jones emails several times per week on SP 500, Volatility Index, Gold, and Silver intermediate direction and option trade alerts… take a look at Options Trading Signals.com today for a 24 hour 66% off coupon, and/or sign up for his occasional free updates.
David Banister has been a Gold Bull since November 2001 based on Elliott Wave patterns and currency concerns as well. Since that period nearly ten years ago, he has followed and forecasted the patterns in gold and has been amazed at the clearly definable trends both for large moves to the upside as well as corrective patterns. Here is what David is saying he sees happening to gold.......
Most recently we had the last pivot bottom in January at 1310 areas, which I labeled as a “Wave 4 bottom” with regards to the most recent 5 wave pattern to the upside. In the longer term view, Gold has been in a long uptrend since the October 2008 crash lows of $681 an ounce, and I have it now in the final 5th wave up of a larger degree 5 wave move since that time. Nearly 32 months of general uptrend with the occasional corrective pattern to the downside to kick the bulls off.
The issue now though, is that 5th waves in a final 5th wave pattern are very difficult to predict and they can extend and run higher than usual, or they can “truncate”, which means they are shortened much more than usual. In the near term, gold investors want to see Gold break out over $1551 in order to avoid what looks like a potential “truncated” top in Gold at that level. What happens is the Bulls run out of gas, and the final 5th wave up gets tired and stops short of the normal destination, catching both bulls and bears off guard at the same time.
Below is a graphic of what this would look like in the current Gold Bull Market with the recent top at 1577 as wave 3, and the 1551 area as a truncated wave 5 top:
I recently wrote about this for my paying subscribers at TMTF in order to make sure they are “prepared like a Boy Scout” for a possible large correction. The other view I have had for a while is that we would surpass the 1577 highs and run up to a minimum of 1627 for the top of this 5th wave, with potential to run another $40-$70 higher in a throw over top pattern. The bottom line though is you need to be prepared for a coming top in Gold, which will be followed by a multi-month correction that most will not see coming. As it stands now, I can’t find too many Bears on Gold anywhere on the planet…and that is typical of 5 wave tops.
If you would like to be kept abreast of intermediate Gold pattern forecasts, (As well as SP 500 and Silver) take a look at Market Trend Forecast.com today and get a 33% coupon discount to subscribe good for 24 hours. Or, you can sign up for the occasional free reports as well.
During the past 4 months we have seen the financial sector (banks) under selling pressure. With real estate prices continuing to fall and foreclosures picking up speed again investors have not been that interested in holding bank stocks. And we all know that without the financial sector moving higher we cannot expect the broad market to make any significant moves higher either.
If you take a look at the financial sector ETF XLF you will notice that it’s now trading near a major support level (fair value) where most shares changed hands in the past. With this sector sliding 13% from the highs in February and the fact that it’s making a parabolic drop into a support zone I can’t help but think a bounce is very likely to form soon.
XLF Financial Sector ETF – Daily Chart
SP500 Futures – 10 Minute Chart
With the financial sector nearing major support and the SP500 staring to show signs of a bottom forming I will admit my heart is starting to pound in excitement for an entry point. I am really hoping that this week we see another sharp drop in the stocks which should spikes the volatility index up (VIX) to 21 or higher. If we can see this take place, then I will be taking a long position to catch a 2-15 days bounce in the broad market.
The chart of the past 10 trading sessions below shows a price and volume pattern which typically leads market bottoms. I’m keeping a close eye on things these days…...
Silver 2 Hour Chart
Silver took a big hair cut last month falling from $50 down to $33 per ounce. Ever since then it has been trying to form a base which will act as the next launch pad for higher prices. So far it is looking good but there is a key resistance level to breakthrough before fireworks. Keep your eye on the silver bullet.
Gold 2 Hour Chart
Gold is back trading up near its high but is starting to struggle with resistance (sellers). We could easily see gold pullback to the $1520 area before taking another run at resistance.
Mid-Week Update Conclusion:
In short, I feel investors are getting very nervous because of the 6 week sell off in stocks. There have been some technical support levels broken on the SP500 and other indexes and its these broken levels which have investors running for the door. The thing is, this type of selling happens every year and generally 2 -3 times. During a bull market I like to see fear in the eyes of investors. Until we are proven wrong about buying extreme oversold dips, they continue to be my focus.
Also if the financial sector can find a bottom and start to rally, then we will see higher stock prices across the board in the coming weeks. I am currently neutral on metals, oil and the dollar. But am getting bullish on financials and the SP500 as they move lower.
My most recent analysis regarding the S&P 500 has been proven to be inaccurate as a failed breakout has transpired on the S&P 500 this past week. While there is no such thing as a perfect analyst, I will openly admit that my most recent article proved to be wrong. After I watched as the S&P 500 broke out above the upper channel resistance area I was expecting continuation. What transpired the following day was absolute carnage in the marketplace.
Immediately after breaking out to the upside, the S&P 500 sold off sharply and by the end of the day on Wednesday a failed breakout was obvious. The failed breakout trapped momentum traders as well as those watching and waiting for the breakout to occur. The chart below illustrates the failed breakout and the subsequent sell off that transpired the rest of the week.
Most readers likely believe that I went long when the breakout was imminent before Tuesday’s close. However, over the years I rarely chase breakouts unless I see multiple days of price stabilization above breakout levels. Generally a consolidation zone above a key breakout level is bullish. However, in recent months it seems that standard technical patterns have not been working well. In fact, chasing breakouts over the past few years could have produced some ugly losses depending on the underlying and the timing of the breakout.
Armed with recent price action and concern for the S&P 500 giving back gains, I did not get long the S&P 500 for members of my service at OptionsTradingSignals.com. On Wednesday morning, I was leaning long because price action overnight was confirming the breakout. However, when preparing my morning post for members I noted the apathy in the financial complex.
I am constantly monitoring price action in the XLF and Wednesday morning was no exception. The ugly price action in XLF kept me from getting involved in a long S&P 500 trade for members. By late in the day Wednesday, the XLF ETF had proven to be accurate and prevented losses for myself and for members of my service. The chart of XLF at the close on Wednesday looked like this:
The point of the article is not to pat myself on the back for avoiding catastrophe, but to illustrate to readers how important it is to monitor various aspects of the marketplace. I generally focus on the S&P 500, the Volatility Index (VIX), the financial complex (XLF), Russell 2000 (IWM), and the Dow Jones Transports (IYT). Generally speaking a trader can learn a lot about the broad marketplace by monitoring the price action in the underlying assets mentioned above. Often times the Russell 2000 or the financial complex will throw off clues about which direction price action favors.
At first glance, we could see the S&P 500 bounce higher in coming days as it is coming into a key pivot low that dates back to April 18th. I am expecting some buying support to step in around that price level as it also corresponds with the lower bound of the recent descending channel the S&P 500 has been trading in.
While we may see further downside, the April 18th pivot low should offer a solid risk definition area for traders. If prices push lower, a short trade using a stop somewhere around or above the key 1,295 price level would make sense. Those looking to take the S&P 500 long could place a stop order below the key 1,295 price level to define risk.
Regardless of where one believes the S&P 500 is headed, using a key support/resistance level to place trades with limited risk makes a lot of sense currently. I will be patient and wait for the market to throw off clues as to which direction it favors before accepting additional risk. The primary focus for traders during periods of wild price action should be to concentrate on reducing risk and allowing others to do the heavy lifting. A trader or an investor can learn a lot about the strength of an underlying asset or index by simply watching the price action while sitting on the sidelines. The daily chart of the S&P 500 Index below illustrates the key pivot level:
Obviously the S&P 500 is coming into a key support zone, but another factor which cannot be ignored at this point in time is the U.S. Dollar Index. On Friday, the U.S. Dollar pushed significantly lower and most of the key commodities such as gold, silver, and oil all closed the day near day highs and well off of intraday lows. The U.S. Dollar Index looks vulnerable currently as its recent rally seems to be short lived and it appears to be poised to retest the recent lows. The daily chart of the U.S. Dollar ETF (UUP) is shown below:
The first 2 – 3 trading days of this week should provide us with clues in terms of price action in the S&P 500 and the U.S. Dollar. If the U.S. Dollar continues to weaken it should help support the S&P 500 and the commodity complex. For right now I’m going to sit on the sidelines and wait for the price action to setup before taking on additional risk. The key level to watch is the 1,295 level on the S&P 500 and recent lows on the U.S. Dollar Index.
With QE II winding down and price action starting off the month relatively ugly, June could shape up to be a very interesting month for investors and traders alike. I will be out later this week with an updated analysis after I see the price action the next few days. Until then, I would keep positions smaller than normal and protect capital using stop orders. Anything could happen, but this is the closest we have been to rolling over in the S&P 500 for months. I do not have my helmet on yet, but in a couple of weeks depending on price action I might have to wipe the dust off of it.
Everyone knows people make mistakes when rushed to do something or if they are scared of something bad happening. We also know fear and greed is what moves the market each month, week, day and tick… So when the majority of investors are selling their shares at the same time you must recognize the psychology behind it and prepare for a low risk trading opportunity in the days that follow.
Stepping back and looking at the general vibe in the financial arena we hear about Quantitative Easing II coming to an end which should help the dollar gain strength again. A rising dollar means lower stock and commodity prices. Also keep in mind the United States is in so much trouble they will always have quantitative easing even if they are not calling it QE, that’s my opinion anyways…
In addition, everyone was talking about the saying “sell in May and go away”. Take a look at the chart of the SP500. The first session in May was the highest point and the SP500 has only gone down since then. The chart below shows my fear indicator and with the masses all selling in the month of May I have to think it’s getting ready to bottom and start another 5-6% rally from down here. Keep in mind I am more neutral on the overall market for the longer term. In the next month or two I figure we see higher prices from here but come August we could see the dollar bottom and stocks sell off in a more significant manner.
Last but not least, gold and silver…
Looking back in time and reviewing inter-market relationships with gold and silver I feel more and more investors are becoming bearish and moving their money into safe havens like gold and silver. Recently we saw a sharp pullback in both gold and silver. The price and volume action that took place was a clear sign of distribution selling meaning big money players taking money out of those investments. I see this pattern happen in stocks, indexes and commodities all the time and it generally warrants caution!
My trading buddy JW Jones over at OptionsTradingSignals.com has some very exciting ways to profit from these choppy market conditions with limited risk. If you are into options then check it out.
Typically we will see a few more new highs being reached which are quickly followed with strong selling. What happens is that the big money players allow the price to make a new high and that hits the headline news, CNBC, BNN etc…. drawing in new buyers and a surge of volume for the big money guys to sell into and exit their positions at the top. It also helps cover up their large volume selling.
Below is what I am thinking will take place in gold this summer.
Weekend Trend Conclusion:
In short, I feel the dollar will continue to slide lower, both stocks and commodities should have some strength over the next 1-2 months but after that all bets are off and it will be time to re-evaluate things.
The next week in the market will most likely make or break this outlook as the overall market is trading at a tipping point. Let’s see how this week pans out then take another look at the charts.
It would seem as though the financial markets, particularly certain financial stocks, are incredibly vulnerable. The erratic recovery we saw from the lows in March of 2009 maybe in jeopardy. In fact, with many financial stocks making new lows for the year, it does not argue well for the future.
Also, there's been a lot of prognostication about the end of America as you know it. "Kiss America Goodbye," and "The Death of America," are just a few of the wild headlines that are out there. This video takes you to the next level and offers you a concrete path on what to do to protect your capital and nest egg.
This video is available for viewing free of charge with no registration requirements. I highly recommend you take just a few minutes of your day to watch this video. Save yourself from a tremendous amount of frustration and loss of capital with these easy to understand steps.
It was a crazy session as the stock market slid over 2% on heavy volume. This type of price action means fear has taken control of masses and they are unloading (selling their stocks) in anticipation of much lower prices.
Trading off extreme levels of fear can be very rewarding if done right. That’s because fear is the most powerful reaction we as humans have and it’s somewhat predictable. Fear can make people do crazy and or stupid things and it’s these extreme reaction which investors do in the market that lead to great trading opportunities. Buying into fear and selling into greed is what I focus on.
Gold and Silver Showing Greed and Fear
For example, if we take a look at the 4 hour chart of gold and silver you will see how investments which have a large amount of speculation like Silver move the opposite to what other related investments like gold are doing.
The first chart which is gold, shows how today’s fear had investors moving into this shiny safe haven. Silver on the other hand has been the investment of choice for every Tom, Dick and Harry trying to play the popular headline investment. So on a day like today when prices start to slide in the stock market these speculative holders of silver get scared and dump (sell) their position in stocks and silver.
The problem with silver is that the market is still small and its does not take many people hitting the sell button to send it 5% lower which is what took place today. This is one sign which is telling me traders are getting scared of a market sell off.
Evidence #2 Showing Signs Of Fear
These data points below clearly show sellers were in control today. I like to look at the NYSE because it holds all the big brand name stocks which the masses like to buy when they feel lucky. So when I see this many traders selling and so few buying I know the masses are dumping shares and going to a cash.
The NASDAQ had 10 shares being sold to every one share being bought which is half the fear level of what the NYSE and that makes good sense. The NASDAQ has many smaller companies which the masses just don’t know about or own so there was not as much selling taking place on that exchange. So brand name stocks getting dumped all at once is another sign of extreme fear hitting the market.
Evidence #3 Showing Signs Of Fear
This chart below provides the momentum of the market. I think of it as the rubber band effect. If the market selling momentum is strong enough then it pulls this indicator down to a level which it cannot go much further before it gives way and moves back a neutral or positive extreme level. This little hidden gem of an indicator can help time entry and exit points with ease once you understand it. Currently its telling us that a pause or bounce is likely to happen tomorrow.
Evidence #4 Showing Signs of Fear and an Oversold Market Condition
Take a look at the 10 minute SPY (SP500) chart below. Simple visual analysis shows that today’s strong selling which has brought the market down into a support zone should provide a pause or a bounce very soon. The question is how big will the bounce or rally be?
Given all the confirming is looking ready for a bounce and I feel we could be nearing not a bounce but an intermediate bottom and higher prices going forward. But if we break strongly below this support level then all bets are off and much lower prices should occur.
Mid-Week Trading Conclusion:
In short, today’s sharp move lower has put the market in a short term oversold condition. Meaning, a bounce is very likely to take place within the next 1-3 sessions. With the masses selling all their positions in stocks and commodities it generally takes 1-3 days after a day like this for the selling pressure to dissipate and for value buyers to step back into the market providing support.
I think both stocks and commodities will strengthen in the next few days and we will see if the market can get some traction and start a new rally. But until everyone has sold out of the market giving their shares to the big money (smart money) at a sharp discount I feel we have a rough road ahead.