Friday, April 10, 2009
Gold did nothing today so there's nothing new to report other than yesterday it made a feeble attempt to break above $890 and stay there and has now started to decline towards the next support level at $830. As long as $890 is significantly broken and held, gold is immediately bearish in my view.
I'm still heavily short and will remain short until I'm stopped out or a strong rally changes the outlook of wave and technical structure. As long as the metal remains solidly beneath $890, I fell comfortable holding short. A strong break and close above $890 will bring extreme caution. My initial target is still the $890 area, but possibly much much lower.
The stock market rallied ferociously again today, unexpectedly, on strong breadth and technicals like has been for the past few weeks which supports the idea that a significant bottom is in the stock market (S&P cash 666) and the larger trend is up. But it's way too late in the game to get bullish now and momentum is severely diverging to where a large correction is needed in order to alleviate this overbought condition before it's safe to get in big on the long side. Because the larger trend is up, I dont' want to establish a large short equity position where I can lose my entire position if the market keeps charging higher for some reason. So I'm using SPY bear spreads (buying May $85 put and selling $80 put) on the S&P ETF with a May expiration now as a way to short this market. This way I risk a much smaller amount and just have to sit and wait for the market to correct. Being so aggressive as I am I'm willing to try and catch a top and reversal, even though it's against the larger trend. Someone who is more conservative might just want to wait for the selloff to occur so they can become a buyer at that point. But waiting weeks for that is not my thing. So I'll risk a small amount on bear spreads to try and catch this large selloff that should occur soon. I remain short various tech stocks, the XLF, and the SPY through option bear spreads.
I was asked a question today by a reader which is a very good one. When is it time to get in and get short? Because the larger trend is up, it's very difficult to get a definitive answer because it depends on the person's strategy. If someone's shorting using pure equities or futures, then I would wait for weakness to occur, then short and put a stop loss at the last high. But if using options like I am, it's okay to just short now with bear spreads and wait. When the market reaches a peak and sells off, I can buy back the put options I sold that were in the process and just have a naked put option there to profit from the ensuing decline. So I can profit when it rallies, then close that profitable position and let the other position get into the profit as the market falls. The fact that the S&P broke 850 today and the fact that earnings are going to come out in full force soon, may give a que that this market is ready for some profit taking. I think a lot of this rally is just a buy and hope rally for overly aggressive and hopeful bulls who don't want to miss the next bull market (which we are not in by the way). But with earnings coming out here soon, and having the run up we have already in stocks at this point, it seems fairly obvious to me that the market will selloff as companies report earnings in order to take in profits. So the market is rallying ahead of earnings only to sell off during the actual earnings. That's my view.
Wednesday, April 8, 2009
Well I sound like a broken record in saying the S&P is bearish but I call it like I see and I have to take what the market gives me. Right now I see severely waning upside momentum as there's so much hope that this rally will go straight to 1100 without looking back that people are pushing this thing up with everything they have. But hope will not sustain the rally and the momentum and internal breadth indicators support this as they are severely weakening every day. As of today, the S&P is at almost the exact same level it was at March 23, 2009. So in over two weeks, the index has gone nowhere, even though it seems like it's been so bullish during that time. Again, this is the last bullish hope that this market is going up in a straight line and panic buying is taking place because people are petrified in the missing the bottom. But what they should be worried about is buying at a top, which most people are doing right now. The market may drift higher in the coming days to the 850-860 level, but the evidence is overwhelmingly bearish at this point, and any rallies will only be met with further internal weakness that act as a rubberband that will shoot the market down further. I am short and remain short. I'm watching the expanding trendchannel I drew on the 4 hour S&P futures chart above and am watching for a clear break of the lower end of the channel. This will lead to further telling to at least the 760-780 area of congestion. From there I might turn bullish.
I've rolled my April S&P put options over to the May contracts and remain short the S&P and the XLF (financial ETF) also in the May expiration. I feel strongly that the market will correct downward to my target areas before more significant bullish potential is to be considered. So I wait.
In a previous post I said gold might rally and test the underside of the $890 area before grinding lower and that's exactly what happened in the overnight session. The failure to break through above the $890 level should cause the remaining hopeful bulls wanting gold $2000 to finally give up and sell, sending this metal sharply lower.
I remain heavily short gold, but am watching that $890 level closely.
Monday, April 6, 2009
Of all the trades I've been tracking, gold has been a cash cow and has followed my exact forecast. First, the ascending trendline was broken which I said would lead to an immediate charge and test of $890. I said this level has been formidible in the past, but shouldn't put up much of a fight now because it's been tested so many times that the bullish defenses should be severely eroded by now and the metal should break through the level convincingly. Well it broke through $890 last night and into today convincingly alright as you can see from the daily futures chart above. Now the bulls may push the metal back up to the $890 level to try and bust back through it, but it's not required, and it should be a failed attempt. Once that happens, the bulls should just give up and send this metal down hard........and fast! However, this may not even happen and the metal may just continue lower from here. My initial target to start taking profits is the $830 area, but I'm mindful the metal may make it to the $600s so I'm more interested in dropping my stop losses and letting the market take me out so I don't miss a big move in case it happens.
The metal is bearish and should be headed lower to at least the $830 level in the coming days.
The S&P is showing signs of bullish exhaustion, and after today's action it's now showing internal and external weakness. The rally should exhaust soon, within a few days, and heavy selling should resume taking the index to at least the 800 level, but probably the 760 area before attempting a bottom.
The S&P futures sold off sharply early this morning and pushed the RSI to a new low on the above 4 hr chart which should pull price down hard as well like I've been expecting. Risk is clearly defined at the prior high with a stop at the 849 level. If the expanding channel above holds, then the S&P futures should get to at least the 790 level before bottoming which makes for a good risk/reward trade.
Sunday, April 5, 2009
Gold broke $890 convincingly early in the Asian session early Sunday night US time (see daily gold chart above). We'll see if it holds this time. If it holds, it should lead to a cascade of heavy selling pressure into the low $800s, and possibly the $600s in a week or so.