The Muddy Waters of the Market

Today the S&P500 made a new all-time high for the move off March '09.  The way this correction has played out is very similar to the one that occurred in July 2009, and we are seeing some similar upside potential now that could very well take the markets 15 - 20% higher than they are right now.

As such we have closed off our small term shorts with a break-even on the Dow trade, and are going to be looking for some short-term long trades with tight stops.

I'm not going to be taking any immediate long position on the market, as it still looks quite over-bought and should pull-back a few percent over the next while.

A secondary re-enforcer of this potential bull-leg is the most recent Investor's Intelligence Survey.

The latest collapse in the bull:bear ratio on the Investor Intelligence Survey was the largest single move since August of 2007.  The rebound has been lethargic compared to the scope of the rally in stocks, indicating that investors are now back to the "worry" phase of the game.

This, along with the technical moves in the broad markets this week, seem to have finally indicated a short-term direction as the battle between bull and bear was extremely even matched with sideways choppiness all week.

This also changes the mid-term outlook for precious metals - if "Reflation" is still in the books and not quite done its work through the system, then the lower price in gold is still some ways off, and we just witnessed a small A-B-C correction in the metal.

As such, it might be a good idea to start making some small and regular purchases of the yellow metal.  The maximum upside we see in gold is an even shorter price-length rally in the metal that takes it to $1300 - $1325 at most.  However, as the price direction is not currently clear, we are not even a fraction as bullish as we were in fall of 2008 on gold, and even less so on silver at this point.  Small regular purchases of physical are your best bet right now, until some clarity can be had.

The funny thing about the human disposition (most likely excluding our daily-oppressed Dark-Age predecessors, mind you) is that it is so prone to optimism and hope, that despair melts away very quickly.  Even in the face of the largest credit bubble in the history of mankind (although, unlike 100 years ago, most people have no clue about aggregate money and how banking works), the most massive debt implosion that has ever been documented, the future implosion of governments they have come to depend on (as a libertarian I find this sad and thank my lucky stars I get to be alive as this happens, for the betterment of mankind), they can be "optimistically worried".

That's the stuff that drives bull markets, unfortunately (for the perma-bears/shorts).  Even laborious ones, with decreasing trend slopes.  To that, however, it looks like this next break up, if it does happen, could be a significant move in terms of time and breadth.  Backbone indicators (actual buying activity versus selling, breadth and strength) have been getting stronger the last few days which tells me that a big move is in the works.

It looks like the odds are favoring the upside right now, however those odds can quickly change - keep your stops tight and look for good, high-probability setups.

AFTERMARKET UPDATE:

Upon review of today's move, and the continued weakness in the momentum the last few days, I decided to scale down my short positions by 50% in the meantime instead of closing them out completely - the market looks primed for at least a several % correction next week and I will follow its movements closely, as well as the type of patterns that play out.

The VIX has not managed to make another low, despite the sideways-up inclination of prices, and I will hold my position at least until the VIX reaches the downtrend line and further review from there.  I will post an updated VIX chart on Monday.  I have also moved my stop up 50 points (to 10,801) on the Dow as there could be an exhaustion spike up long on Monday morning and I don't want to get printed on volatility.  

Have a great weekend!

Derek.

Update on STD

Markets seem to be breaking to the upside, as we thought would be their bias.  There is still no real strength to this move and the VIX has failed to make a new low thus far with the upside momentum in stocks.

STD gapped down below the gap-fill line we posted with the chart over a month ago.  The stock retraced to our target fill zone and may have turned.  We are holding the remainder of our position (50% left) with anticipated downside below the low clocked in during March '09.

Mystery Week 2010

This point of of a market is always the hardest to conjecture about.  It is the part that either proves or disproves a thesis - in the short-term, which can be a tough pill to swallow.  However, nobody ever knows will full certainty what the future will bring - only which is more likely than the next.

Not to say we're throwing in the towel, or anything.  But, as I have mentioned on here many times, the goal is to provide objective analysis and we are never fully committed (i.e. blinders) to one side of the trade or the other.  The market will do what the market will do.

There are a couple of things to note this morning, though, which are of key interest in terms of our open individual stock positions, and in terms of the broad markets as a whole.

The first is the VIX.  On Friday, it looked like it exhaustion-gapped down to a higher-low from the previous low made on the 11th of January.  The following is a quick look at where the VIX is, which might indicate where it's going.

Furthermore, the highest gaining sector in the S&P500 seems to be forming a very nice rising wedge pattern and is in the terminal phases of it.  Might it be possible that the sector that has led the charge both down and up could still have some say over what's going on?

I was considering one possibility for this move (this would be invalidated by a break to new highs, to get that out of the way first thing), which would fit into the psychology of a multi-year bear market and would draw in the maximum number of long participants.  I have made up a chart as to a possibility of what could play out in the next few weeks.

Again, this chart hinges on the next few days bringing a reversal below the January top.  Our stop is still in place just above the January highs.

As for the precious metals and the dollar, I will post an update in the next couple of hours to these charts.  I want to see if there's any telling action today to give any more clues as to the next few weeks of direction.

As for now, the primary direction for the metals still seems to be down, with gold potentially making a run up to $1,162 before turning and silver potentially running to the mid-high $17.00's before doing the same.

Will post my thoughts and charts soon.

Have a great Monday!

Derek.

P.S.  The new site is coming along and every day brings us close to the launch.  Any questions or thoughts feel free to fire an email to:  Derek@Investophoria.com

END OF DAY UPDATE

Markets are still meandering sideways with almost everything consolidating.  This could lead to another breakout to the upside intraday over the next 1-2 days in the major indices.  

Gold and silver corrected sharply down, with gold breaking outside of a tight trading range that has held them in lock the past few trading days.  The conviction of this break is, as of yet, not strong enough to assume it will lead anywhere, and could just end up recovering through tomorrow.

Again, there is still potential upside in gold, to the $1,163.00 mark, and in silver to the $17.80 - $18.10 range, even higher if enough of a mini-blow-off builds up.  Here's the chart on GLD which, unfortunately, offers little clarity as to the primary direction for the next 2-3 months.  My gut is that its still down as the corrective pattern failed to make a new countertrend high compared to the first leg of the correction.

However we will have to wait for more information to get a clearer directional pattern.

Tomorrow is going to be a tricky day, because the market could easily do anything we expect and don't expect of it - it could run up 100 points, drop 100 points, or trade flat like today.  Either way its looking like a breakout or breakdown is in the works.

We will see if there are any more solid clues as to where the market is headed tomorrow, and see if the Asian markets do any confirming/leading overnight.

Until then,

Derek.