Primed for the new year - UPDATED 1/6/09

Gold saw a little spike that has a lot of people wondering "is this the run to $2000 that everyone is clamoring about"? While I expect gold to reach those levels eventually I believe it is premature right now. The $40 move in Gold was due to increased tension between Pakistan and India following the Mumbia attacks. Pakistan has canceled military leave for it's soldiers and has began moving them to the border with India. Not a good sign but the connection to Gold is tenuous at best.

What we see in the Gold chart is telling. There are 3 bad omens arguing against further appreciation.

1) Not only did it fail to exceed the 12/17 high but it reacted obediently to it's overhead descending trend line AND the 200 day moving average (red line).

2) The RSI and MACD oscillators are at levels that have proved insurmountable in recent history.

3) There is a lot of "overhead supply" Gold must contend with here.

So a long entry here would carry lot's of risk with the odds against you. What is more likely is that gold will retrace to support levels in the $780-800 range before making a new attempt higher.

GOLD

TRADE UPDATE 1/6/09: Getting ready for a Gold trade http://screencast.com/t/xaPo29F3BY

TRADE UPDATE 1/2/09: The Gold chart still warrants caution. See updated chart http://screencast.com/t/NBBzZ3L8TF

Crude on the other hand should be watched closely. It has made an awesome descent from its July high of $148. Commodity traders, hedge funds and investment banks have faced catastrophic deleveraging causing margin calls, panic and implosions. The trend has turned parabolic as waves of redemption calls from frightened fund stakeholders force funds to relinquish positions. The Maddoff scandal only heightened their fears.

As mentioned before deleveraging cares not for value but for survival. In the process markets almost always over correct. I believe that is what we've seen here, but the old adage "never catch a falling knife" applies. The chart offers no constructive price patterns but a bullish retracement is certainly due.

CRUDE OIL

TRADE UPDATE 1/6/09: 30% Gain - taking profits. See updated chart http://screencast.com/t/I9TS6x7FMl

TRADE UPDATE 1/2/09: 25% gain and growing! See updated chart http://screencast.com/t/VQja00kaT

With the foregoing in mind Oil drillers are showing positive divergence from the crude price. These are likely to respond nicely to a crude bounce with limited downside should we not see it.

CLR is one such stock currently showing a 4 week cup with handle. This is certainly not the only play in this segment. WTI is almost as a good with other drillers also showing resilience. Notice the difference between the crude chart above and CLR's chart below. CLR has refused to drop even as crude probes new lows. This is one to have on a watch list waiting for a green light from crude oil.

CLR

TRADE UPDATE 1/6/09: 20% Gain. This trade still looks strong.

The link to the updated chart shows 3 areas of price interest. We are at one of them now, however I am reluctant to take profits here as I suspect it can meet the next targets in the weeks/months ahead. This one requires the "Art of the Trade". Some may wish to scale back their position here letting the rest of their profits run. I will simply watch it for a few more days. I suspect crude oil may take a breather from its run of late. This is likely to cause a retracement in CLR. Both I consider buying opportunities. Trailing Stops are also an effective alternative here. A 2.5 pt trailing stop would make sense here. See the chart link for the next target levels: http://screencast.com/t/AfJ1yP2sJhT

TRADE UPDATE 1/02/09: Breakout from Cup w/ Handle base. See chart w/ targets http://screencast.com/t/nusqWMFlCds

Pivotal Juncture

The Market is at a pivotal juncture. So far it has failed to break through overhead resistance and is approaching important support levels. A decisive move in either direction will set the tone for the new year. Indications are that we will head lower which will enhance our short positions.

Some Shorts

UPDATE: All shorts scrapped for now. The market has broken out or resistance and is in Rally Mode! Keep an eye on the Radar. These will be back!

Autozone (AZO)(Hat tip Tim)

• Initial target $120, secondary target $113, $139 Stop

Notice the convergance of indicators around $112-115. We have a 50% retracement corresponding with former resistance and the 50 DMA. This makes for a great target.

Gold (GC)

• $780 Tartget, $880 Stop

Coach (COH)

• $16 Target, $22 Stop

Announcing Disqus Comments

Now featuring Disqus comments!

Dollar Update - How low will it go?

12/18 UPDATE:
1st Target $77.81 met! We bounced off of a low yesterday of $77.69 and are seeing strength. This provides an early cue to trim or hedge commodity related positions. See updated chart at http://screencast.com/t/VgLFKk1AN9v

Implications? Commodity related positions (Gold, fertilizer and oil stocks) will likely deteriorate with Dollar strength. ***************************************************************************************

The object of technical analysis is not to simply to forecast but to identify attractive risk/reward opportunities. In previous posts we highlighted the Dollars peak and its subsequent slice through major support. In the process it flashed a textbook signal - a Head and Shoulders pattern. This signaled an intermediate trend change.

If you been reading and have taken advantage of this signal with appropriate currency pairs or going long commodities you should now be wondering how far will the slide last? More appropriately you should be asking at what point does the Dollar short cease be an attractive risk/reward? The chart below provides some helpful clues.

There is a convergence of indicators pointing to a near term target of $76-78 for the US Dollar index.

• Head and Shoulders: First we see a clear representation of a Head and Shoulders pattern expressed on the US Dollar Index. A rule of thumb for H&S patterns is the height above the neckline is often matched by an equal depth below the neckline. Using a Fibonacci tool this implies a target of $77.81
  
• Moving Average: The 200 DMA is nearing $77

• Support levels: We see prior support coming in at $76. A prior resistance level at $80 was never tested and probably won't be much of a factor.

Alternate indicators: The RSI and Stochastics (highlighted in red) are entering oversold values. Simply reaching these values is not an automatic signal to cover (or buy long), but you should be paying close attention here.

The MACD is still very much bearish and persisting in that trend, but should be watched closely as well. This indicator will most likely provide the earliest signal for a rebound. A great tutorial on this important tool can be found here. I will be looking for an early divergence in the histogram followed by a crossover of the moving averages.


Why is the US Dollar so important? Take a look at the inverse relationship of the US Dollar and Commodities. Commodity related stocks have been coming to life, notably Gold and miners (GG, ABX) and to lesser extent Fertilizer stocks (CF, MOS, POT) and still lesser oil. Their performance is magnified by the action in the dollar.

In the Macro economic picture we experienced violent deleveraging. We continue to experience deflation as a result of credit contraction. There is a massive effort to offset the destructive effects of these by the Fed. The result has been a sharp increase in money supply -see "Bernanke's game plan" in the side bar. This new money is still being hoarded by banks seeking to shore up their balance sheets, but eventually it will make it's way into the market.

Long term it is clear the FED views a depreciation of the US dollar and even a sharp devaluation as an attractive monetary policy. Europe, Latin America and most notable China have all began to loosen (depreciate) monetary policy in a tactic know a "Beggar thy Neighbor" economics. Investors now should be worried about the value of the dollar going forward. A short term rebound of the dollar as indicated in the first chart may provide an second opportunity to enter commodity related issues at a discount or make follow-up buys.

Not all commodities are created equal. While commodities in general will "benefit" from a depreciating Dollar the world economy is deteriorating. Demand destruction remains a factor in energy related commodities, less so in Agricultural, and least so in precious metals. Gold in particular is faring nicely despite deleveraging, deflation and demand destruction (jewelry). The main reason is monetary uncertainty creates demand in Gold and to a lesser extent Silver.

It's time to pay attention.

100% Gain in 1 week

With DRYS trading in near $11.00 we have realized over a 100% gain from our previous post. At this point there are 3 things that can be done:

1) Move up your stops
2) Take 1/2 your position off
3) Sell

I have highlighted developments that warrant caution.
First, price is retreating from a significant moving average.

Second, the MACD shows a momentum plateau.

Last, Stochastics peaked above 80 and are descending.









The current price is at our target (see previous post). The current chart no longer represents a definable edge and in fact shows potential deterioration. So when faced with a situation like this a trader must weigh risk vs. reward. 100% gains are rare. However big gains are made when you let your winners run. This is where Stops can be particularly useful.

Tale of two charts

When looking for potential long candidates there are many things to consider. If you feel you must buy something then you are essentially gambling. As traders we are looking for opportunity buys only. Below are two charts that show two potential buys. Both have conducive price patterns as they have bounced off support. But only one is a worthy buy. Here is why.

In addition to price we look for other confirming indicators before we make a buy.

GG Goldcorp.

Goldcorp has been showing strength in our latest rally and has pulled back to support. So is it a safe entry? To answer that we can look at alternate indicators.


RSI is in the middle of the band. This is not itself bad, but it does not scream opportunity.

The MACD looks bad. We accumulation slowing and it drifting away from it's MA.

The Stochastic oscillator is also bad signaling more downside ahead.

External Factors: Goldcorp is a Gold mining company whose results are heavily dependant on the Price of Gold. Although not shown here, a chart of Gold show a bearish trend that is only begining to show signs of reversing. So Goldcorp is not an opportunity for us... yet. It may indeed go up. Strange things are happening in the Gold futures market that could have an effect on the future price of Gold. However until we see a more positive picture we'll pass on GG.



DRYS
Dryships is a bulk dry goods shipper who has gotten slaughtered. It has taken a 96% whack from well over $100 few months ago to $4.50 as of this writing. It's action lately though may provide a low risk buying opportunity. Like GG above we see DRYS bouncing off of support. We notice alternate indicators complement a bullish view.

RSI is coming off the sub 30 level which indicates support.

It's current price is low in the Bollinger Band

MACD indicators are drifting up


Stochastics indicate oversold levels


External Factors: This stock shows an excellent correlation to the Baltic Dry Index (not shown). This is an index of average shipping rates that shipping companies can charge for shipping goods. Shipping rates have plummeted over 90% taking all of the shipping companies with it. The massive slide in shipping rates seems to have found support as well. This is necessary for bulk shippers to rebound. Unless rates find a bottom there is risk of further downside. So it seems all factors point to a nice bounce from here providing the general market cooperates.

Always look for a low risk high reward entry.

Finally a confirmed turn up

Our indicators began their turn positive at the close of Friday's trading. Actually intraday Friday if you were watching. I've been too busy positioning to update before now but here it is. We finally have a turn that's confirmed by 3 other indicators. Based on the dramatic plunge of late, we anticipate this run lasting weeks-months retracing close to 50% of the Oct/Nov plunge.

More Pain

Broken!

Today was significant. We broke through key support with decent volume. All indicators point down. DON'T BE FOOLED by a sucker rally.

Dollar Watch

In a previous post I noted coorelation between commodity deleveraging and it's affect on the Dollar and Stocks - link . With that theory as a basis I believe the action in the dollar will have implications in commodities, namely a weakening dollar should accompany stronger commodity prices. The descent of commodities (in general) seems to have stalled although no tradable pattern has emerged yet. However the short term action in the dollar is flashing sell signals.

Dec Dollar futures, DZX8 as a proxy for the Dollar:

Ag commodities look poised to fare best in this scenario (hat tip to Tim). The pattern is not fully formed nor confirmed by volume, but promising and one to watch nonetheless.

I would like to see a reversal in the commodities index as well.

To summarize, I'm looking for the dollar to lead commodities. The dollar may be topping. I think AG commodities may be a better play than say oil or precious metals. The latter still have a bearish look to them.

Gut check

Sorry folks, not every setup provides a clear indication. We are again at support. At this point its probably best to sit back and let the market speak. If we break support we could look to 2002 for our next support level.


Putting the chart aside, my gut is telling me this market still has some issues to resolve. It's inability to sustain a rally and move off of support is bothersome to the bull case. Although I reticent to short at these levels. In fact if we do break support my gut also tells me it will be shallow and fleeting. I am carrying a med-small long position based solely on the fact that we have fallen so far so quickly. The successful tests of support are looking less relevant as time goes on. The next few days are important.

Bullish hopes abound - is it a trap?

The four major indexes are flashing bullish signs right now. We successfully tested the bottom last week with a hard bounce. The next day's profit taking resulted in a higher low - not unexpected and still positive.


Let's review some facts affecting biases. Selling in the past month has been violently amplified by deleveraging across all asset classes. Deleveraging cares not for valuation, but survival. We know in every case market plunges produced powerful rebounds that revert to or near the mean. We are dramatically off significant moving averages. However, aside from these developments alternate indicators cannot rule out the potential for more downside.





The dramatic fall in commodities seems to have caused a rise of the US Dollar and a fall in stocks. This is most likely due to the unwinding of leveraged bets back into cash, i.e Dollars.



The chart below indicates the Dollar's rise may not be over implying the potential for more pain in asset classes. I say this tenatively because I believe the Dollars rise is an "effect" not the "cause". The tail doesn't wag the dog, but the chart should nonetheless considered in our decision making.





So is it safe to go back into the pool? Maybe. I sense we're close if not there. The Hedge fund redemption window closed this Saturday. This could signal an end to deleveraging. I'll be watchting the performance of commodities for clues. But let's not get lulled into thinking all lights are green. They are not.

Intraday Alert

Exiting AAPL short @ $91.55

INTRADAY ALERT

Positive reversal in progress (2:30pm). This is a very bullish sign. The market bounced hard off of support (DOW 8000 see previous post/chart) and is poised to finish 100+ today. Trimming shorts, adding longs. i.e IWM

After Close Update

Bloodbath!

The market has rewarded short positions and is likely to continue to do so in the days ahead. And while individual stock charts may be attractive (to short) in their own right, they should also be viewed in the context of the overall market. We are at very oversold conditions. We may go lower, in fact with the new wrinkle provided by Paulson et al, we will likely probe new lows. The market loaths uncertainty and the turn about has raised more questions than it answers. Longterm the market will likely go MUCH lower. However, risk based trading demands favorable odds. Shorts (and longs) should be kept with tight stops and positions scrutinized before the end of each trading day.

Breakout! and charts of interest

GXDX

A thin stock on the cusp of a new 52 week high showing impressive strength on a down day and managed to pierce a new high (intraday) off of a Cup and Handle. Volume was light so look for continued strength and increase in volume at or above $40 for buys or followups.

From a fundementals standpoint the recent move is not a fluke. The last two quarters show accelerating earnings growth in a leading sector (medical services) with an increase in sales.


EBS

Also making new all time highs with strong fundementals to back them. This one demands patience though.

And a short candidate - FSLR

I'm inclined toward a general market rally from here which makes me cautious with shorts right now. But....

PMG's

An interesting divergance may be occuring in the Platinum Metals Group (PMG's). Palladium appears to have bounced off a bottom while Platinum looks poised for another leg down. These typically trend together so it will be interesting to see if the divergance persists. Both are at very oversold levels so I suspect Platinum breaks from tradition.

Charts of interest

Our current stock market is in a secondary up trend. This is a counter move to the primary down trend and may last a few months. I expect bullish activity to prevail until the primary trend resumes. The movement of the US dollar has been effecting the markets of late so a chart is also included.

USD






SYNA





APEI

Some Short ideas:

Mastercard

Google

Apple

Rally Update

S&P



DOW

A study of Market plunges

1987 Big plunge amidst a bull market. A rally ensues right after the plunge but that isn't entirely useful since economic conditions are much different than they are now.

1973 A double bottom and then a rally making up the entire plunge.

Two plunges from the late 30's, two rally's ensure - eventually making up more than half of the plunge.

Of course no plunge study would be complete without the infamous 1929

And now a look at our current market.

It's difficult to make an absolute conclusion, but after a plunge the bias is clearly upward. The risks are in the potential for retracements. The 1937-1938 chart shows one possible pitfall. What looks like a bottom is in actuality a pause before making a new low. One comfort is that this new low is not much below the initial plunge and recovers very quickly and eventually follows with a legitimate rally that makes up more than half the plunge.

One clear warning eminates from the 1929 era. Although the market went on to rally for a few months, it then launched a long, slow brutal bear market that erased over 80% of market value. Buyer beware.

Market update and a few charts

DOW - One possible outcome.....


PCG - Thanks for the ride... it's been a gas.

FDO - Hey buddy, spare a Dollar?