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.

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.

Buy the dips>> WYNN, AAPL, BIDU, SGG, SPG, CRM, FFIV, AKAM, NFLX, CMG, ALK

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

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.

Buy the dips>> CREE, NFLX, CMI, FXF, PANL, NENG, CMC, WYNN, BIDU, GMCR, VMW

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

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

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.

Buy the dips>> COST, VCI, SNDK, NFLX, CRM, SHLD, MON, NENG

Sell the rips>> GOOG, AMZN, RIMM, GMCR, WYNN, TIF, RINO, FCX, BUCY

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.

Buy the dips>> BIDU, COP, AAPL, INTC, TBT, NFLX, CLF, AMCC, NTRI, MCD

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

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.