Monday, May 31, 2010

Weekly Outlook 6/1

Going into this holiday shortened week I think the first few days are important and could lead the way for the next few weeks. Meaning that if we struggle to get back above 1110-1120 in the early part of this week then we could be headed lower to take out the 'obvious' double bottom lows near 1040. Friday ended on a weak note as the Spain downgrade stopped the market rally cold. However, I think it's impressive that the EUR didn't completely collapse off this news. That could tell us that the EUR might want to pop back to the 1.25 area this week. If the market does get back over 1100 I think resistance will be tough to break thru so upside is probably limited and I would be exiting longs anywhere between 1110-1130 and probably even reloading on some shorts as I think the market could roll over after testing the downtrending 21 and 50 day ema's. I just don't think we get back to the April highs for awhile.

Antother thing to remember is that June 1st is here and long only fund manager's could prop this market up as the first day of the month generally sees large mutual fund inflows of cash. If we see that then I would be taking an opportunity to lighten up on longs into it. There is some ISM and jobs data coming this week as the May unemployment report is released on Friday so that will be the focus this week.

Currencies- The EUR key level of support is 1.215 and that needs to hold or else we will see a quick move to 1.20 followed by 1.1820 based on fib targets of the last retracement. I think playing any bounce could be better done in the GBP as that currency can make it back to 1.48 on a nice bounce. AUD and CAD are still in trouble on the daily but could continue to rally off last week's lows. AUD can bounce back to 0.86 or 0.87 on strength this week. The USD/JPY is holding the 90 level so far and still has work to do until it gets back above resistance at 92. USD/CHF has been super strong as the markets sold off in May this pair climbed more than 1000 pips. It could now retrace back to the 21ema near 1.135.

Commodities- The bounce back in the AUD last week gave oil a nice oversold rally back to the 75 level. I think crude is ready to roll back over this week and we can potentially see a hard selloff if the Aussie dollar confirms the move lower in commodities first. Copper is in the same boat and unless it can break above the 3.25 level then I see it selling off further back to the May lows at least. Gold is looking more bullish and a move back to 1250 is possible but I tend to think gold is near the top side of a new trading range going into the summer months so I am not too interested in it here.



Monday, May 24, 2010

Weekly Outlook 5/24

This week the market should stabilize and volatility will probably contract as the SPX bounces back from very oversold conditions. We made it down to 1055 last Friday before closing near 1085. There are 3, count em, 3 upside gaps in the SPY that are unfilled. These gaps sit at SPY 111.76, 115.99, and 120.35. I think the first two  will likely fill on this next relief rally that should begin this week. The market acts like a magnet towards unfilled gaps in the SPX and it should be no different this time. I have an upside bias initially this week in the market and think the 1110 area is a first target of resistance. Above that I see the possibility of 1155 gap being filled.

The correction we have seen in the SPX has been about 13% so far and I think for the time being that is enough to get some value buyers out there and shorts to cover as the fear level got to a palpable level. The sentiment came from an overly bullish angle just a few weeks back to a very sharp reversal into bearish sentiment as the highest put/call ratios were recorded Thursday is some time. Also on Thursday the internals in the market were just about as negative as I've ever seen them. Out of 500 stocks in the SPX, only 3 of them were green. Down volume on the NYSE was 99%.

Going forward the SPX should establish a trading range as we enter the summer doldrums in June-July. This week is the last week of May and next Monday is a holiday so you will usually see reversals of trend during the week prior to a 3 day weekend in the markets. What sectors are best for an oversold bounce? Well, probably energy and materials based on their high betas alone and the potential rebound of the AUD and CAD dollars off support. Also tech stocks look decent for a bounce play this week and banks are overdue as well even though I am not a fan of financials overall.

Currencies- The EUR has stabilized and as long as it holds the 1.23 level it can start to retrace higher and maybe you see some shorts cover into the 1.27-1.28 zone. Like I said above the AUD and CAD dollars have gotten smashed recently as the risk trade came off and traders flock to the JPY. The AUD has a decent chance of bouncing higher this week back to the 0.85 level. Same deal with CAD as it should retrace back to 1.04-1.05 this week. The longer term weekly charts in these commodity currencies look a bit damaged (Aussie more so) and that tells me that they could be in for more downside into summer time and that should put more pressure on commodities like oil and copper. JPY is holding 90 and is due to bounce back to the 91-92 area as long as fear doesn't explode once again short term. The yen is a safe haven and that's why it had such a strong bid the last few weeks as people bought yen and sold EUR.

Commodities- As I mentioned the energy and materials sector is due for snapback rally and I think we will see that this week but going forward in the next few months this sector can see more weakness if the AUD stays under pressure. I think oil can bounce back to the mid 70s before seeing much resistance and copper can come back to 3.20. Gold has pulled back from its insanely overbought state last few weeks and met support at the 1175 area. I think gold quiets down for a while and should just consolidate for a few weeks.


Sell the rips>> AMZN, RIMM, SPG, POT, FLR, BEN

Sunday, May 23, 2010

Why I Think Stocks Are Topping and Headed Much Lower

It's always good to take a step back and look at the forest from the trees when analyzing the stock market. In other words, the longer term timeframe dictates the shorter term movements. The market has been extremely volatile the past month as traders and investors realize that things are in fact, not all right in the world we live in. From countries on the verge of defaulting on their debt in Europe as a result of years of reckless spending and declining productivity to sudden fears of a major slowdown in the global growth leader, China. Financial regulatory reform. A devastating oil spill in the Gulf sure to bring debates against deep water drilling and big oil. Higher taxes courtesy of the Obama administration. And stubbornly high unemployment.

Since the S&P 500 bottomed in March of 09 at 666 the bull market run has taken us up to 1219 as of late April, a move of 83% with other sectors seeing even higher returns during this time. In just the last 4 weeks the SPX has fallen back to 1055, a correction of over 13%. There has been a lot of technical damage to the chart and this is evident across most sectors, especially financials and materials. The technicals have been warning of a correction of this size for awhile now and looking at the longer term weekly charts I think they are starting to point towards a topping pattern that is developing over the course of several months and should drive us into another bear market by the start of Fall 2010, if not sooner. The highs we saw in April at 1219 have a good shot of holding as the highs for the year and if not then only slightly newer highs should be seen and that will be an outstanding selling opportunity before the cake hits the fan.

If you look at the charts shown I believe we are forming a bearish head and shoulders pattern that likely just formed the head and we should see a weak right shoulder form during the next few months going into summertime. The key to this pattern is that the next few months form a weak grind back up similar to March-May of 2008 and not surpass much more than 1180-1200 on the SPX. If we move up with strength and even make new highs for the year then odds are that we simply just formed the left shoulder of this topping formation and the head will take longer and top higher than the 1219 high. Nevertheless I do think the upside for the remainder of 2010 is limited and if we break the 1044 lows from Feb then we should likely see a steep selloff down to 943 which marks the 50% retracement of the entire bull run from March 09. Below that the 61.8% retracement shown in the chart is near the July 09 lows at 875 and would be the ultimate target by the end of 2010. This is not as crazy as it sounds and I fully expect that level to be hit if we do indeed breakdown from 1025.

Zooming in closer on the daily chart I have marked the neckline of the head and shoulders top I believe we are forming and that measured move from the neckline of roughly 1060 to the high of 1219 is about 160 points in the SPX, which brings us to a target of roughly 900. This massive selloff would bring us back to the July lows where we have an unfilled gap at 906 just waiting like a magnet to be filled. I'm a huge believer that all gaps eventually get filled in the SPX, even if sometimes it takes a year. This would be a logical area to see the market trade down to once support is broken at 1025.

This is a longer term 6 month view and I do think that over the next few weeks and months the market actually will rally and begin to start looking more positive and you'll probably even hear it from the media. But underneath the hood I think the health of the market will be deteriorating and fewer stocks and sectors will be making new highs and participating in the potential upside. By the end of summer or early fall I think it will be clear that stocks are in a bear market.

Monday, May 17, 2010

Weekly Outlook 5/17

This week the market is continuing to sell off as almost the entire gap up from last monday is given back. The gap I was looking for in the /ES sits at 1107.75 and we have come within 5 points of that this morning. The slide from 1172 last Thursday has been furious but there was also very little reason we were up last week at all. Oversold bounce and that was completed in three days. That is not bullish. And it looks like this selloff wants to go further than three days so the gap fill is the first target then the 1100 area is home to the 200 day ema which everyone will be expecting to hold. So I wouldn't be surprised if we break it for a day and then suck in a lot of bears and shorts just to see it bounce back up and create a short squeeze.

Things are not good and fear and volatility is reflecting that properly but still I believe we are entering a stretch of sideways trading that should last thru the summer. This could be a wide range though. Measures of risk are still pointing to more downside and the best measures out there have been the EUR/JPY and AUD/JPY as well as the dollar index. The flight to safety is continuing as all industrial commodities get thrown over the cliff. Copper is a leading indicator or the market and it has not stopped selling today which indicates the SPX is not close to bottoming.

Another problem is sentiment. The longer term sentiment has shifted in the public eye with the stock market. Retail Joe has lost trust in the mechanics of the market and the oil spill doesn't help. Just as the recovery was starting to become believable in the eyes of the middle class the market starts to care about the Euro problems. Longer term this doesn't favor terribly higher prices in the market later this year, if at all. Short term however the sentiment is stretching to the fear side as the VIX is at 34 and I would expect that to grind lower into the options expiration this week.

Currencies- It seems that everyone is talking EUR and even is short the EUR and when it feels like this then you gotta be prepared for a short covering rally. One problem. A country defaulting and riots in the streets overshadow that and can take a move much farther than you think. The EUR really doesnt have a lot of support below 1.23 until 1.18 and I would be surprised if we don't see some kind of stabilization at least this week. AUD and CAD look very weak as they have corrected with the price of commodities and show little signs of being ready to bounce yet. AUD has support at .8650 so I would look for that to hold this week.

Commodities- Copper is down 7% today alone and now trading at 2.92, well off the highs over 3.50. This could actually get down to the Feb low of 2.81 or lower if the industrial fears continue and China growth slows. Crude oil is down 20% from the high a few weeks ago and trading with a 69 handle this morning. This chart looks terrible and I think could even retrace to the mid 60s.

Buy the dips>> AKAM, COST, CREE


Monday, May 10, 2010

Weekly Outlook 5/10

Starting this week we have a EURO bailout on our hands that has sent the markets gapping up by about 400 points in the Dow. The ES futures closed friday at 1107.50 and that creates a downside target to fill the gap once it starts to move lower. Also we still have a gap to fill above here from last week at 1198.50. Which gap gets filled first is tough to say so I will let the market tell me but all gaps do get filled in the S&Ps so mark these levels down and watch them.

Our markets are lucky to see a bailout plan for the Euro so drastic in the short term because I think this could have been a very ugly week if something wasn't done. At the same time this is just a short term fix to a long term problem that only buys the ECB more time to come up with something more meaningful. I would not be surprised to see our markets end the week lower from where we are today. It's hard to look to the long side after the market snapped back and gapped higher to retest the 1150 level that was so crucial on the recent move lower. I would expect resistance to take over between 1150-1170 on the SPX.

 I actually think we could settle into a range between 1100-1150 for the next few weeks perhaps. But am starting to see signs the markets eventually will want to retest the lows from last week and even potentially take them out to the downside in the coming month or two. This week will tell us alot about whether the market still wants to head higher in the longer term or if the rapid decline is telling us that the fundamentals do not support higher stock prices going forward into the 2nd half of 2010. Remember the charts ALWAYS foretell the fundamentals.

Currencies- The moves in the Euro and other related currencies have been crazy the past few days and this morning is no different. The EUR hit a low last Thursday of 1.2518 and open this morning at 1.2919 before rallying up to 1.31 and then now selling off below 1.28. These are huge moves. I can't see the EUR heading too much higher from here as it got its initial recovery rally off the bailout. Ultimately I do see the EUR going lower and making new lows below 1.25. Maybe much lower. Also the potential unwind of the carry trade showed up last week as the EUR/JPY and AUD/JPY got the smack down and this showed signs of occurring way before the so called "glitch" in the system. Risk appetite was put off the table for safe haven trades liek gold and US bonds. I see this continuing into the next week at least and it could be warning us of whats coming down the road still ahead of us.

Commodities- Like I said above the risk trade was off last week and after a snapback early this week we could see a continued sell side action in things like copper and oil. Crude had a huge reversal last week as it fell more than 10 dollars to close the week near 75. If this area breaks you will see 70 in crude and potentially even lower as there is plenty of downside since most everyone has been bullish on oil this year and this has room to unwind lower. My short term view on oil would change above about 82. As for gold I still love it long but it has ran quite a bit and could be ready to pull back off the 1215 area. It almost got to 1225 high from November so it may still retest that level but I would think it would struggle to break out to new highs after gold just rallied nearly 100 bucks. Plus, the early summer season is a historically weak time for gold in which it usually pulls back off the spring highs. I do think later this year gold is poised to shoot higher and tag 1350 or higher.

Buy the dips>> AAPL, ICE, SBUX, GLD, COP

Sell the rips>> FCX, HAL, MS, QCOM, APA, ANR, ISRG, HES

Monday, May 3, 2010

Weekly Outlook 5/3

Going into May the market seems a little toppy and could retrace back down to that 1150 area I have mentioned. At the same time if it just consolidates between 1170-1210 then it could just be resting for its next leg higher. I do not think this market has topped out for the year because the internals are just too strong to justify that scenario. While we could see that minor correction in May it would probably just be the start of some range bound trading going into summer. There continues to be sector rotation that allows the broad market to stay afloat at these levels as individual sectors take turns moving higher week after week.

I think the next few weeks could see a nice volatile move in either direction and I tend to think it could be higher as a possible blowoff top move comes into play. After this we should see a correction that lasts more than a few days but so far it seems each pullback cannot last for more than 2 trading days. Which is bullish. Remember that volatility can and does increase in rallying markets that enter a blowoff type move where everyone wants in.

The sentiment is still stretched a bit in the short term surveys that measure bulls and bears. The AAII survey showed only 18% bearish investors which could show a short term top. Overall in the longer term I think we have not seen the euphoria needed to signal the top of a bull market. Still too many top callers and skeptics out there and that defines the middle stages of a bull market.

Commodities- The oil patch is starting to look good as long as you are not exposed to the oil spill in the Gulf. Ouch. Overall I still like the dip buying in crude oil and think it still has a target of 92 by Memorial Day. Commodities in general look good minus the copper and industrial metals that are pulling back. Gold is a rockstar lately and I see 1200 this week on gold. That breakout of 1140 that I mentioned a few weeks back was the signal.

Currencies- Euro is continuing to be a sell the rip candidate as the Greece trouble keeps weighing on the Euro. EUR is actually stabilizing on the daily and even though the momo is down I think a close above 1.34 may actually get some shorts to cover and  you could see it base out at the least. However if it breaks down I see 1.30 quickly. GBP looks ready to rollover to retest the lows near 1.48 as long as it stays below 1.53, the site of the 21 ema. GBP has outperformed the EUR lately so that could continue as well if GBP gets back over 1.53. AUD has been consolidating nicely above 0.91 for weeks and I think it could go either way here but I lean towards an upside breakout of 0.93. The reason I have some caution about AUD is because the other commodity currency the CAD is showing signs of reversing and falling against the dollar. A breakout above 1.02 could show a short term bottom in the USD/CAD. This along with strength in the JPY could show risk appetite coming off and stocks pulling back.

Buy the dips>> OXY, BRY, WFT, KEY, RF, ENP, DNR, GLD, UXG, POT, CRM

Sell the rips>> NTRS, STT, ACH, GOOG, HBC, DB