Monday, June 28, 2010

Weekly Outlook 6/28

There are alot more bullish short term patterns in the markets than most people think right now and that's why I have a upside bias for the week. The move higher in copper last week was the key imo and I think copper should lead us higher this week as it broke out above 3 bucks. Also, the EUR/USD is hammering out a nice inverted H&S on the 4 hour chart. The dollar on the opposite side looks to be forming a H&S top short term and could be the catalyst to get commodities bid higher into July and the markets grinding back higher to the 1130 area as a first target.

The resistance above remains the same as last week but now we have a few gaps on each side of the current market. In the $ES futures we have a unfilled gap down at 1055 and also up at 1087. I think the upside gap here is likely to fill this week. I mark down all open gaps on my ES chart as they almost always come back into play and act as a magnet for the market price. Above 1110 I will get even more bullish as that is key resistance and should propel us into the 1140s. On the downside I think we hold the support levels for now until later in the summer but if for some reason we test 1040 again look for a failure and large selloff to own puts for. For now I think the market goes slightly higher.

Sentiment is still tilted to the fear side and this is what I think could unwind the bearish shorts into buyers as they realize the market can't make new lows with every new pieces of bad news hitting the wire lately. Traders are now basically waiting around for earnings season to start in mid July and the market is likely not going to take a deep dive before we hear about earnings from companies, which I think are bound to be negative.

Currencies- EUR is forming that inverted H&S and needs to break 1.25 for a confirmation breakout move to 1.28 and then 1.30. Critical support in the DX is at 85.50 and if that breaks then the dollar index should fall fast down to 83. GBP has been rallying for weeks now and is up about 900 pips since it started a month ago. Impressive move there and I think it could test 1.53 next. The USD/CHF has had an amazing move down and has met support at 1.09 so downside is probably limited here for now. Maybe a bounce back to 1.11 before any continued move. USD/JPY is back down to 89 as the yen gets stronger and this pair is just off recent lows at 88 which was met during the flash crash. Could go either way here longer term it look like it wants to bottom here in the upper 80s on the weekly chart but a break of lows at 84.8 could tell otherwise.

Commodities- Copper is the leader and what I am watching this week. It tested 3.10 after breaking the inverted H&S pattern and looks ready to go to 3.25. Oil is pulling off that 79 level once again today but still looks strong and is likely to test 82 on the upside this week as the next level of resistance on the charts. Gold is being very tricky lately as it keeps on making new highs and then pulling sharply off them almost instantly. Last week it hit 1266 and then closed lower near 1240. Today it rallied in the morning to 1263, a few bucks within that high and then sold off over 20 bucks back to 1239 where it is now. This is not the way a bullish trend should act. If gold continues this pattern this week be careful on the long side because it could be telling us that an important top is just weeks away.


Sell the rips>> AMZN, GOOG, GRMN, QCOM

Sunday, June 27, 2010

Are We In the Summer of 2007?

I was looking at some longer term charts of the markets recently and looked back at the topping formation the SPX saw back in 2007. When I looked closer at the action in the first 6-9 months of the year of 07 I noticed how eerily similar the patterns looked to our current market action which seems to be on thin ice. So I compared the time periods further and was amazed at how identical the top traded 3 years ago versus how the current toppy market is shaping up for the 2nd half of 2010. I believe the markets are telling us something and we should probably listen up because we all know what these topping patterns resulted in back in 2007. Will history repeat itself this year and point towards a double dip recession and prolonged bear market? You be the judge.

The first chart is from 2007 and shows the March 2007 correction was almost exactly the same in size and duration 13 days as the January 2010 correction in the SPX, which is shown in the second chart. The recovery bounce off this correction in 2007 was a melt up straight higher, the same way our Feb-April melt up played out. Both of these rallies lasted just under 3 months in time and extended at least 161.8% higher beyond the correction to make new highs.

The larger correction the SPX saw in July-Aug 07 displays similarities of the selloff we just saw in the month of May 2010. Both of these corrections retraced about 100% of the previous run up but DID NOT violate the previous lows, instead making a double bottom. Also, during these times when the market was at these lows the sentiment in the marketplace was extreme fear such that it was a given that the market would crack and see new lows. The summer 07 correction was 12% while our recent May 2010 selloff was 14%. The other incredible stat is that both corrections lasted EXACTLY 20 days from high to low.

This correction also saw the break of the 200 day ema and lots of folks got bearish when that level broke back in 2007. Of course it was the right move long term but short term it provided for a bear trap in which the shorts got squeezed as the market rebounded into the fall of 2007 and eventually made new highs at 1576 before rolling back over and starting the bear market in early 08. This is the same feeling and behavior the current market is showing as the correction in May saw a break of the 200 day ema and it has stabilized enough to bounce back but has remained volatile.

You see from the summer of 2007 it took a little bit of time backing and filling before we saw the rally to new highs. This is kind of what we are seeing right now in the market as the SPX bounced back to 1130 and then sold off to 1070. Since we made price lows we have traded above those lows for about 22 trading days. The rally in later summer 07 lasted 39 trading days off the low in August and eventual high in October. So if you are a believer in history repeating itself then we could grind up for another 17 days or so before a similar fate for the stock market could be dealt, that being an important high being reached. That timing could come in around mid July.

After that time period if the market does not show considerable strength and bullish price action then it could be in for the start of another bear market going into the fall of 2010. In the third chart you can see where the market went after the summer of 07 and the highlighted portion shows where our current market could be going in the next 12 months.

Fundamentally speaking, the markets topping action in 2007 was as a result of fear of the unwinding of the credit crisis and eventual defaulting of debt by several large banks. The current fear of 2010 in the market is over the unwinding of the sovereign debt crisis in Europe and potential global contagion that sees entire countries defaulting on their debt. It's a very similar and real fear.

The similarities of the SPX in 2007 and 2010 are amazingly glaring so whatever you believe is headed our way you cannot ignore the price action as it is the most unbiased indicator of all aggregate supply and demand in the markets between participants.

Monday, June 21, 2010

Weekly Outlook 6/21

The market is gapping up big on Sunday night and the EUR is rallying towards 1.25. The ES finished last week near the 1110 level as options expiration kept us grinding up all week. The market is bound to have a nice week as we enter the final days of June and the 2nd quarter window dressing comes in. This is why I have maintained a bullish bias for the markets while everyone was so overly bearish this month.

We are retracing a good portion of the selloff so far. The 50% retracement of the recent correction stands at 1136 and we are trading 1126 as I type. We are very likely to see the 1140s this week and is basically my first target of resistance before any kind of pullback. The 61.8% retracement is another area I'm watching with this rally in the next several weeks. That level is 1148 on the ES and about 115 on the SPY. It signifies monster resistance and I think the market will have major trouble getting above it, at least on the first attempt. Above that there is actually an unfilled GAP on the chart from mid May and that mark is about 115.44 on the SPY. That would be my ultimate target on the upside before I start looking for weakness.

We are entering the summer doldrums and this is a time of low volatility and grinding markets with low volume. I could see this market actually grind up or sideways well into July and then maybe we see some kind of correction later in August or early September. On the downside crucial support is at 1110 and 1093.

Currencies- The EUR was up big overnight and has now turned negative back towards 1.23. I think the EUR is still stabilizing and should grind higher in the coming weeks as the relief rally is here. The other foreign currencies from Europe are looking good on a swing basis. The CHF (Swissy) looks better than the others and I think USD/CHF can see 1.08 soon. GBP has retraced 50% of the selloff from late April and unless it can get over 1.50 then it should fall back towards 1.44. Aussie and CAD look strong as AUD has rallied back to 0.88 which is tough resistance. I would not be surprised to see a small pullback to the 0.855 level this week on this and that could put some pressure on the commodities.

Commodities- Crude at nearly 79 bucks seems a bit overdone on the upside, coming from a low of 67 last month. I expect a pullback here back to 75 at least and if the market overall gets weaker and dollar index is storng then oil can easily retest that 67 low. Everyone seems to be so bullish of oil and I am confused because its at the same price it was back in October. The daily chart just looks like on large rollling top pattern to me and if copper is leading the market and other industrial commodities then the weakness there should translate over to crude oil. Copper below 3.20 is bearish and below 2.95 even more bearish. Finally, gold is the most bullish chart in town and I think we see 1300 on gold within a month or so but today it is down pretty good after hitting new highs at 1266. That could pull it back short term to the 1220 level at least. Below that 1200 is your next level of support on gold.


Sell the rips>> FCX, VXX, ARW, WDC, DSX, WFC, EAT, JCP

Monday, June 14, 2010

Weekly Outlook 6/14

This week is triple witching options expiration and that is historically a positive week for the markets with about 71% of the last 17 occasions being in the green. Also last week we ended the week on a nice push higher into the weekend as shorts covered some positions. The markets are facing some overhead resistance near the 1095-1105 zone that we saw right before the jobs report slammed us a week ago.

With only a few weeks left to go in the 2nd quarter and June, we could see a bit of window dressing as managers buy the names that have been working throughout this correction. I think if we close above that 1105 level then we should see some continued decreasing volatility and more upside that could eventually lead us up to that 1150 resistance and form an interesting longer term head and shoulders top in the SPX.

Charts are starting to look more constructive than they have in the past month and strong individual names in the tech sector are my favorites this week. I still don't really like commodity stocks or energy related names. We could get a rebound rally in some of these beaten down oil stocks but I'd rather wait for the bounce and short it on a swing or intermediate term basis.

Currencies- The EUR/USD short covering has begun after hitting a low of 1.1876 last week it is now challenging 1.23 on Monday and I think has a clear path to 1.25 short term. This is going lower long term but for the next month or so can see a nice squeeze perhaps even up to 1.30 without much trouble. This should maintain the current levels in the stock market as well. EUR/JPY is a measure of risk appetite that is also bouncing back as fear comes off the table. EUR/JPY breaking above 113.5 could send it to the 50 day at 116.25. Commodity currencies are back with strength and AUD has made quite a move higher since last week. From 0.81 to 0.8666 in one week. That is an amazing move of 566 pips and has pushed oil and copper prices higher since the bottom last week. I am thinking the majority of the move has been made as the AUD is slamming into the 50 day ema at 0.87 and could actually retrace back to 0.85 before seeing a new leg higher to 0.89.

Commodities- As I said the price of oil and copper was helped by the huge move up in AUD/USD. Crude made it back to 75.50, just shy of the 50 day ema. I think odds favor a pullback or sideways move in crude this week. Perhaps a range between 68-76 is taking hold for now. Copper is still technically downtrending the past few months after topping at 3.68 and the 3.00 mark is a big level that copper is now retesting. The resistance is tough but if it breaks it could easily see 3.15 short term. Gold is pulling back to 1220 this morning and really has not traded well since retesting the highs at 1250 last week. I think gold is starting a sideways trading range into summer time.


Sell the rips>> BP, GS, GOOG, JEC, QCOM

Monday, June 7, 2010

Weekly Outlook 6/7

This week the big level in the SPX I am watching is 1070. This is make or break week for the market. If we can sustain a few days of buying above 1070 then the potential for a short squeeze rally exists into June option expiration--which by the way is next friday already. As for levels on the upside I think 1100 could be the first stop on any sort of strength. Above that resistance is all over the place and 1125, the site of the 50 day ema, would be a logical place for the market to hit the wall. As for if 1070 breaks down then all bets are off and we could see a thrusty move down to 1020 to set up a potential bear trap below the obvious 1040 low that everyone is watching. I do have downside targets of 950 for the next major leg down that should start a bear market and make officially 20% down from the top. However, I do not think we see this major decline in June as the odds are better to see a snapback of some sort to get folks back on the bullish train right before the cake hits the fan later in the summer.

This market is still volatile and that is shown by the 5th straight week that the VIX has closed above 30. That is just an amazing statistic that would have seemed impossible just a few short months ago when VIX was hanging around in the high teen's and daily ranges on the Dow would not exceed 50-60 points. Now we are seeing VIX futures price in a 30 VIX all the way out to October, which is telling us that this recent volatile stretch is not being seen as a blip and should continue into the 2nd half of the year.

Currencies- The dollar index broke out to new highs last Friday off the back of the ugly jobs report that sent stocks lower and the EUR/USD to new lows under 1.20. The dollar remains the strong currency out there but now has gotten strong against the Aussie and Canadian dollars, not just the European currencies. That is a troubling sign longer term as AUD and CAD have been the fuel to the commodity rallies this past year. This could be telling us that market is predicting lower commodity prices going forward. EUR hit a low of 1.1876 overnight and could easily see 1.18 this week. GBP looks even more dicey on the downside if it cannot hold current levels near 1.44. First downside target on GBP would be 1.41 and 1.3950 afterwards. On the upside GBP may retest 1.47 but there is alot of resistance there. AUD and CAD look heavy but are overdue for some basing or even a bounce. AUD needs to hold 0.8075 or else copper and oil will get hit harder.

Commodities- Copper got crushed last week as it broke below 3 and friday hit new lows on the year under 2.81. I think copper is in a longer term topping pattern as China slows but shorter term it is overdone and could start to bounce back this week between 2.66-2.70. Crude oil is fighting the 70 level this morning and has a good shot of breaking down into the mid 60s or even down to 62.50 eventually. Gold and silver look strong this morning and gold should retest the 1250 highs from last month. I do think it now should breakout of 1250 and run higher because the momentum is just so strong and I have a fresh buy signal on the daily chart of gold. First target is 1270 and then 1295.

Buy the dips>> BIDU, SNDK, BBG, NGD, HL, GOLD, MA, DLR, ICE

Sell the rips>> AMZN, GOOG, CREE, FCX, RTP, ANR, MS, HIG