Gold and the Deteriorating Dollar

Gold and the deteriorating dollar is the story of the week. The Fed sat on their hands last week, triggering a strong breakout in gold and further weakness in the dollar. The Fed was so intent on bailing out the banks that they are sticking it to everyone else as they allow inflation to run rampantly out of control.

Stocks got hit hard as oil spiked over $140 and the gold found a serious bid to the upside.

Stocks may head a bit lower here, but they are due for some sort of a bounce, which could occur any day now. Depending on the character of the bounce, it's likely that it should be used as a selling opportunity.

We have a huge list of stocks on our shorting watch list that we are looking to enter under the right circumstances.

The SPY is likely doomed to take out $125 eventually and this bear market is likely to head much lower as the Fed finds itself stuck between a rock and a hard place.

Strangely enough, sentiment didn't budge on Friday even as stocks washed out throughout the week. Without fear there is just no way this market is going to offer a tradable bounce. It's likely we will see a waterfall-like decline before fear actually spikes enough to create another buying opportunity.

This market is setting up for a trader's paradise.

Your Name:
Your E-Mail:

Get Free Gold Picks Today. Just provide your name and address in the form above for this free offer.

Juxtapose the 50-week average and B Band price today against recent reports. You will notice that the 50-week is turning lower and the lower B Band is spreading out to lower prices. This is a strong weekly sell signal. Again though, this market is due for some type of bounce before prices head significantly lower.

The Real Danger Traders Face

Yesterday the Fed did nothing and as such, so did the market.

Over the past week what have appeared to be good trade set ups have crumbled as the market has moved from a trending environment (bull trend in commodities and bear trend in the broader market) to an environment where random moves reign supreme.

Bull markets offer definable risk and careful planning allows good traders to eke out a tradable advantage; likewise, bear markets. Random markets, however, are very tough to trade and depend more on luck and risk can not be quantifiable. That doesn't mean that traders don't try though.

This is the danger that traders face. They do well for a period of time when markets are trending, but when the character of the market changes, and it usually does so almost imperceptivity, trades start getting chewed up.

It's difficult to know when this phenomenon will occur. It happened to us this week. And herein lay the crux of what separates successful traders from unsuccessful traders.

When trades that were working stop working, successful traders take the hint and move to cash until a true tradable advantage reemerges. Everyone else continues to fight with the market, good trade set ups keep getting chewed up by random one day up, one day down swings, and along with them, so does their profits earned when the market actually was offering valid trade set ups.

This bears repeating:

WHEN TRADES THAT WERE WORKING STOP WORKING, SUCCESSFUL TRADERS TAKE THE HINT AND MOVE TO CASH UNTIL A TRUE TRADABLE ADVANTAGE REEMERGES.

We have entered that period where true tradable advantages are few and far between. Today few trade good set ups are presenting themselves and those few set ups are highly questionable. Some may work, but getting into the one that will work while avoiding those that won't is purely a gamble.

SUCCESSFUL TRADERS DO NOT GAMBLE.

This situation might last a day or two while the market feels its way through the meaning of yesterday's Fed release. Or, this situation could last a bit longer. Until the market finds its direction again, however, cash is king.

Is a Short Squeeze Setting Up?

The financials, which generally dictate the direction of the market may be heading lower here, but we offer that there is no tradable advantage in opening short positions and of course opening a countertrend long position is akin to playing Russian roulette.

Take a look at the huge short squeezes that have occurred since the XLF turned sharply lower a year ago:

There is a bit of downside potential here but at any moment the XLF could turn sharply higher squeezing short positions. Institutions with deep pockets are likely buying weakness here for a potential squeeze. We do not recommend joining them as the potential to get caught in a sharp swing lower before the probable upside move occurs is a real danger.

Potential Trade

If the market does indeed panic like it did in December and again in March buying into that weakness might offer a tremendous opportunity. If the SPY were to wash out to $125 in a sharp bold move, we would be buying in hand over fist for what has a lot of promise for a great bounce. Just don't try to buy if and until that washout move occurs.

Fed Decision Today Makes Market A Gamble

The market has experienced extreme levels of volatility in front of today's Fed decision. If the Fed should hike rates today look for commodities stocks to take a huge hit and watch for shorts to get squeezed hard in the broader market.

The prudent course of action in front of what could be a wild afternoon session is to just close up all trading positions and get out of the way. There are no advantages to be had in a random and wild trading environment. Smart traders take calculated risks. There is just no way to calculate the risks facing the market following today's Fed release.

Levels of Support

The market sold off hard last week but the short side is getting riskier here. Today we are going to look at a few potential scenarios that could unfold from here and also at a few levels of support that may be important in the weeks to come.

After last week's hard sell off, the market is oversold. Oversold conditions can certainly remain that way for much longer than seems reasonable during a sharp downtrend, but the potential for short squeezes along the way down are always a risk when short positions are not timed well.

After an initial bumpy start, we timed our SPY short well and plan to hold here for the March lows, which should act as a magnet for the market over coming weeks.

Nevertheless, entering new shorts in this area are risky. We mentioned last week a study which showed that 40-45% of all bear market moves are bounces; some of them quite strong. After last week's sell off, a bounce up to the $135.25 area would be an attractive entry point to put on new positions, but we wouldn't add here.

One scenario to look for this week would be further declines that take the SPY temporarily below its 200-week average at $129.90. This would set up an excellent short squeeze bounce, which fits nicely into the timeframe of end of the month window dressing, which will start to take effect later in the week.

Longer term we would expect, however, that prices will work their way to the $125.50 area where support has been established both in March and late last year. It remains to be seen whether or not that support area will hold, so we won't get ahead of ourselves here.

Your Name:
Your E-Mail:

Keeping An Eye On Energy

The news of the day is taking place in the energy sector. The broader market is in a slow drift lower as prices slide down a slope of hope. From a trading perspective, however, the fast money is flowing into energy.

The price of oil looks sketchy here, but over the past couple of days energy stocks have broken sharply higher out of good, solid continuation patterns. Institutions appear to be in a mad scramble to put money to work in this sector, which appears to be headed for a blow off event of some sort.

Mixed Market

The SPY broke through the neckline of a head and shoulders top pattern last week. During the break, sentiment turned extremely bearish on both a long term and near term basis. We argued that sentiment would necessarily encourage contrarians to buy the weakness, which indeed, on Thursday and Friday, they did.

The SPY is now positioned for a test of the $137.50 area where it could potentially run into severe resistance.

Meanwhile, our scans show that the bull run in commodities is not slowing down. In fact, on Friday a large number of stocks in the metals and agricultural sectors caught a strong bid.

Oil has formed a pennant pattern, and while it looks to us as if there has been a bit of selling in the sector, it appears that a large battle is being fought in this area and the outcome of this battle is not yet known. If the pennant breaks higher, then oil could be headed for some sort of a blow off top. Otherwise, oil may be due for an orderly correction, which would set up another buying opportunity. Oil sector stocks are mixed; some set up very bullishly, while others are diverging negatively against the price of oil.

Summary: The SPY continues to suffer distribution, and while it is poised for a higher bounce at the beginning of the week, the likelihood that it will fail at $137.50 is reasonably high. As we have oft repeated, just because one part of the market is bearish does not mean that all stocks must go down. Indeed, there are a lot of bullish set ups out there for those who carefully pick and choose.

How To Trade A Bear Market

In today's report we would like to examine two issues important to the markets today that should have an impact on trading in a bear market environment.

Short Entry Points

In bull markets prices tend to inch their way higher, continuing on much further than one could reasonably expect they should. In bull market environments breakouts tend to perform well and strength begets strength, oftentimes making it a good idea to chase the bid and buy at a premium. that should have an impact on trading in a bear market environment.

Bear markets are a different animal. that should have an impact on trading in a bear market environment.

Bear markets are wrought with short squeezes as prices tend to drip lower followed by sharp price spikes that make it difficult to find valid entry points. Chasing weakness may work for a day or two, but when sentiment levels reach extremes, like they are now for example, those who entered too late end up getting squeezed out of their positions. that should have an impact on trading in a bear market environment.

Yesterday Worden reports posted an inexact, unscientific study, but an interesting one nonetheless. The study showed that in a down trending environment the market experienced up days between 40% and 45% of the time. that should have an impact on trading in a bear market environment.

What does this mean for short traders? It means that chasing weakness is not a good trading strategy. Rather, entries should be made during the squeeze days, not during the breakdown days. that should have an impact on trading in a bear market environment.

The current market is in a huge sell off and that sell off could theoretically send prices ever lower leaving patient traders behind. Historically, however, those served best over time are those who have waited for the squeeze play before adding to their positions. that should have an impact on trading in a bear market environment.

Near term sentiment is now at utmost extremes. Furthermore, we are now entering a period of triple witching options expiration. that should have an impact on trading in a bear market environment.

Trends are down, but concentrate on falling 10-day averages for your entry points here, otherwise you risk getting caught in a squeeze. that should have an impact on trading in a bear market environment.

Oil Inventory Report

In yesterday's report we focused on the potential, emphasis on potential, that commodities were close to a point where they would correct. Then came the oil inventory report and oil prices spiked once again as inventory levels were much lower than projected. that should have an impact on trading in a bear market environment.

Does this mean that oil will shrug off resistance here and go parabolic? Maybe. that should have an impact on trading in a bear market environment.

But keep in mind that yesterday was possibly, again, stressing the word possibly, just another one day event that will quickly erode. that should have an impact on trading in a bear market environment.

According to the popular financial blog Seeking Alpha, there is currently no correlation between the inventory report and the price of oil beyond one day events like the one experienced yesterday. Don't get us wrong here. Oil may indeed be headed higher without a major correction. All we are saying is that it is unlikely that yesterday's inventory report will be the event that spurs prices on toward a parabolic run. that should have an impact on trading in a bear market environment.

In fact, overnight oil futures are already trading lower. that should have an impact on trading in a bear market environment.

What to pay attention to here now is the dip. If oil opens lower today and dip buyers once again buy aggressively, then we could see the oil trend continue on its merry way. But if buyers start to ease away, oil could be ready to experience a healthy correction as we proposed it might in yesterday's report. So, the next day or two will serve as an important indication of what to expect for oil in the near term.

Summary: While the trend is now sharply down and with support at the lower b-band still quite a distance away, the short side of the trade is where everyone needs to be positioned. However, with sentiment levels at extremes and with triple witching options expiration nearing, sharp upward one or two day bounces are likely. Rather than chasing prices on new short positions, it would be prudent to wait for short squeezes up to the falling 10-day average before adding on here.

Are Commodities Ready to Correct?

The week before last we opened a short position in the USO ETF, feeling rather lucky to grab an entry slightly above $108. What attracted us to short the oil trend was the extreme volume and the fact that the price of oil was trading above its price channel (an indication that it was overbought).

Last Friday we stopped out of our short position for a .20 loss when oil gapped higher and USO marked the highest trading volume on record.

Interestingly enough, USO has not seen follow through since Friday's price spike. In fact, it has been trading down on heavy volume. After a big spike one would expect consolidation, but consolidation should come on low volume. Heavy volume indicates that institutional money is shorting oil here.

Furthermore, oil stocks are heavily diverging negatively against the price of oil; yet another indication that this commodity that is on everyone's radar screen is under distribution.

But it's not just the price of oil that is showing signs of a trend change, gold has been trading in a series of lower highs over the past few months and has now carved out a head and shoulders pattern on its chart. If GLD cracks $84.80 it will break the neckline of this pattern.

What's behind this potential commodities correction?

The dollar.

The beaten down greenback has been diverging positively against the recent commodities run up and, opposite gold, has been trading in a series of higher highs for two months now. It now looks ready to make a run at the all important .74 resistance level.

It's always tough to pick a top in a strong trend and our stop out on Monday just highlights this very fact. But all this volatility, high volume, and widespread occurrence of divergences taking place are good indications that we are at the crux of a commodities correction.

Consolidation

The market averted disaster yesterday, but all is not well with the indices.

The SPY, having soundly broken the neckline of a head and shoulders top pattern, faces formidable resistance at $138.00.

Looking equally ominous is the QQQQ, which broke its uptrend. It bounced late day, and near term sentiment hasn't turned bullish just yet, so there is some chance that it will work its way up to kiss the channel goodbye over the next few days.

A dead cat bounce here would go a long way toward alleviating market fears, setting up a great shorting opportunity.

Black Monday?

For the past two+ months we have been commenting on the idea that the SPY was likely to fail at its 50-week average. Over the past few weeks we have been heavily shorting in that area. The market, however, did a pretty good job putting together a head fake move, and we will be the first to admit that it did a number on our confidence.

Our short trades suffered on Thursday as prices moved sharply higher instead of breaking down as we had been projecting. We are embarrassed to admit that while this move certainly didn't inspire bullish confidence in us, but that we did decide to just cover and step back out of the way as it looked completely plausible at that late stage that the market was ready to shrug off resistance and inch its way further up a wall of worry.

It turns out that we had been 100% right all along, but we ended up dead wrong on the very day that we should have stuck to our guns.

It happens, unfortunately.

Friday the market got slaughtered. Oil prices gapped up and broke out to new highs on volume and the major indices got killed.

The head and shoulders top pattern on the SPY, which faked us and a lot of other traders out, confirmed on Friday with an exclamation point.

After a sell off like we got on Friday, we can now be more than reasonably sure that the SPY is headed lower. In fact, it looks a lot like it did back in 1987 when prices also head faked the pros into thinking that the market was climbing a wall of worry only to open down big time October 19, 1987.

We are not predicting a market crash this week, but it is certainly something that could happen.

While short risk is low here, be careful and listen to the market. It's going to be tough to pick an entry. It may pay to get aggressive here, but then again, it might pay to be patient and look for a bounce. It all depends on how the market opens today and behaves during the first hour. A weak, low volume bounce today should be shorted aggressively. A gap down is going to be a tougher call.

With sentiment at extreme levels, the market favors a bounce here.

Listening to the Market: Character Change Underway?

It's important to listen to what the market is telling you. We have been analyzing the market under the assumption that a bear market is underway and with that assumption probabilities favored a failure at resistance levels we have been outlining for weeks now.

And indeed, the market may yet fail in this area. But again, listening to what the market is telling us here needs to be factored into the equation.

This week the SPY carved out a head and shoulders topping pattern, but what has not happened yet is confirmation of this pattern. Yesterday, instead of breaking down, which appeared to be a promising scenario, it rallied off of support in what turned out to be a major short squeeze.

Meanwhile, the QQQQ and The IWM, which have been diverging higher against the weaker Dow, S&P and the financials, broke out to multi month highs.

So let's consider this for a moment. The QQQQ breakout came on less volume than previous averages, which makes the breakout questionable. Another way to look at this though is to consider the fact that the NASDAQ is climbing a wall of worry here.

Setting aside the major indices here, which remain somewhat murky with the continued divergences mentioned, what is very clear is the fact that commodities, which have led this market, are in fact climbing that wall of worry.

Oil broke free from its pullback with gusto yesterday and oil stocks squeezed shorts hard. Steel and ag broke out to fresh new highs. And all of this occurred on heavy volume. So while the low volume QQQQ breakout is on shaky ground, the commodity breakout is clearly the real thing.

When the market proves your theories wrong listen to what the market is telling you. Right now the market is telling us that market leadership remains firmly in tact. Ignoring this message would be fighting the tape and as everyone knows, the number one carnal sin of stock trading is fighting the tape.

From the weekly view of the SPY we see that two weeks ago the market gave a strong sell signal as it failed at resistance. Last week it appeared to be kissing the trend goodbye as it moved up on low volume. This week, however, the price has refused to break down and is now in a position to shrug off the sell signal. More importantly, this move has come on heavy volume. If it doesn't break down today we must necessarily begin operating under the assumption that a wall of worry is building and that means that it may be time to cover short positions and start looking for longs amongst the market leaders once again.

Note on Support and Resistance: Resistance is an area, not a rigid line drawn in the sand. Oftentimes stocks will test resistance levels, such as the 50-week average by moving slightly above for a week or two before a failure takes place. We saw such a failure two weeks ago.

What has occurred since, however, may be a sign that the character of the market is once again changing. Over the past two weeks the 50-day average has acted as support rather than resistance. More importantly, it has begun to turn higher after a 6-month downturn. If prices can close near or above yesterday's close today we must begin to assess the 50-week average as the new level of support instead.

The Risk Assessor Does Its Job

The SPY has now carved out a right shoulder on a head and shoulders top formation. Note the failure at the 200-day average and now the close back below the 200-day EMA. A close below $137 will confirm the head and shoulders pattern and set up a potential decline back to January and March lows at the $136.00 area.

Your Name:
Your E-Mail:

Meanwhile, note that oil continues to correct after putting in a top at its channel top on the heaviest volume in recent years. The USO target for this correction is the 50-day average at $95.90.

All Mixed Up

The market situation is as mixed as we have seen when compared against recent years.

On Friday the QQQQ rallied up to threaten a breakout, but on weak volume. Meanwhile, the financials remain under distribution and are poised to fall off the cliff again. The SPY may be forming the right shoulder of a head and shoulders pattern, again, on very weak volume, while the small caps represented by IWM, closed above resistance.

The Dow, well, the Dow looks about as ugly as the financials.

Add to this the fact that steel looks poised to break higher, along with some ag stocks, while oil sold off from its highs last week on the heaviest volume recorded by the USO ETF.

Then we have a VIX (fear index) trading back at levels of complacency not seen since last October when the market formed a top.

Add all these factors together and something has to give. Should steel be chased here? Will steel rally while the market slumbers in a trading range? Will the QQQQ break higher, pulling the financial heavy SPY and DIA with it? Will they diverge even more than they already have?

There are a lot of questions without answers here. Frankly, we believe that risk is very high on the long side here, but until confirmation is achieved, it's best to maintain a certain level of agnosticism about what to expect from the market as we move into summer trading.

The risk assessor tells us to remain short SPY here.