5/7/2010
PhillyTapeReader
ccapewell@hotmail.com
The market made a historic long awaited correction last week and broke the uptrend we saw starting early February. There has been severe technical damage inflicted on the overall market last week as you will see in the charts below. Since this happened in a matter of 4 days, I believe we are in for a few weeks of choppy /volatile action as the market digests recent events.
Bears are in complete control .
Warning signs this correction was coming:
1. Higher volume long red bars followed by weak higher moves on less volume
2. Exuberance, "frothy" chatter on CNBC and all major media outlets
2. VIX 15-20 area historically low.
4. General complacency, very quite unanswered move higher
SPY (3-month-chart)
The place to go short was the break of 118 on the SPY. If you were like me, your finger was on the trigger but you hesitated because of the unanswered strength of the bulls. I was stopped out of my long positions last Tues 4/27 and have been in 100% cash ever since. It’s too late to go short right now, I will likely stay in cash for a while until dusts settles and patterns emerge.
The market is clearly broken. Notice the massive red volume bars on the SPY. In my opinion I think we need a major news item to stop this selling. Once this happens we can look for a bounce and probably re-short the market or go long GLD, UUP.SDS, DUG or QID after a few days of consolidation.
I don’t think it’s smart to try to catch this upcoming bounce. From a momentum perspective, there is really no trading range to manage risk. The ranges are way too volatile. I will probably wait for a trading range to establish and re-short in a week or 2 on the break of the bottom of the next range. If the market magically turns around, I will change bias to long and look for long set-ups.
Here’s what I expect in next few days/weeks:
1. Wild volatile trading ranges for the next week or two (good for day traders)
2. Rising wedge patterns on all long etfs.
3. Falling wedges on short-biased ETFS UUP, VXX, GLD ETFS
4. Tightening range toward top of rising wedges on long ETFS. When these apex’s get busted I may put on a few shorts.
GLD: If you have to be anywhere, right now, Gold is the place to be, I would buy after a few days of weakness in tandem with a market bounce. This massive cup pattern tells me long-term GLD goes to 135.
GLD target 135:
High of CUP = 119, low of cup = 104
119-104= 16. 16 plus 119 = 135
UUP (Dollar)
Look at the massive move in the dollar! The dollar seems to be overbought, but could continue to be overbought for quite some time. Any pullback in the dollar will add fuel to Gold and Gold miners (GDX). We should also see a bounce in the market. The RSI is registering at 71.5. Obviously traders have pushed this up in the wake of the Europe debt crisis. Look for a pullback, I’m guessing a flag develops.
DIG (Ultra-long Oil and Gas)
Very weak, I would play DUG on the break of the apex of a rising wedge which may form in the next few days/weeks. We are already below the 200-day, the 34-35 range should be resistance.
SMN (double short basic materials)
The massive volume coincides with the sharp downward moves we’ve seen in steel stocks. This ETF is extremely volatile and I would stay away until a tighter range is established to buy from.
GDX: (gold miners)
Out of any Stock based ETF, GDX is probably the strongest, although I would be careful based on the overall market weakness. This is a choppy ETF, recent volume doesn’t paint a clear picture. I’m guessing it will break out above 51 on any market strength due to the strength of gold. Gold stocks have been relatively strong lately.
XRT (Retail)
Major damage was inflicted on the retail sector last week. I would re-short on a bounce/rising wedge pattern
TAN (Solar).
Very weak sector. Look for a rising wedge.
BOTTOM LINE:
Short-term traders should have been stopped out of any longs 3-4 days ago. We could put in a bounce soon, or indexes will bleed further. It will be hard to turn this market around without a news event. Look to re-short the market (SDS, QID, short-XRT) after we see those rising wedges/continuation patterns in long based ETFS. You could also go long GLD, UUP on pull backs. There is nothing to do but sit on cash for now and let things unfold.
