TDEN

Archive for October, 2009

After yesterday’s big run up the market apparently suffered from indigestion and gave a big belch today. A belch is good after a large rally because it relieves the pressure that has been building up inside. Interestingly enough, GLD initially sold off but then recovered to close higher than it opened. The U.S. Dollar rallied but did not make it to the top of it’s downtrend channel as it did yesterday. While the S&P has broken below the bottom of its uptrend channel, the Dow has not quite hit the bottom of its uptrend channel.

Monday is Nov. 2 and the start of positive seasonality for the stock market. Warren Buffet says that you should buy when others are fearful and since the U.S.A. had excellent GDP growth last quarter it appears that the economy is really recovering. There are also plenty of doomers and gloomers who don’t believe the stock market rally is for real but do believe that the economy is actually getting worse. On top of that are the money managers who missed out on the rally and wish to show good performance numbers for the year. Since there is still a gigantic wall of worry to climb, if the VIX stays within its downtrend channel then we should see another big leg up in the markets before years end. While Cramer and some other analysts believe the market has topped for the year, I think there is a strong possiblity that both the S&P and Gold will hit 1200 by year’s end.

Click on pen to

I don’t normally issue a market update 2 days in a row but todays market action warrants it. The U.S. Stock Market, Gold, Oil and the U.S. Dollar are all at critical points on their charts. The S&P500, Gold and Oil are testing the lower limits of their uptrend channels and the U.S. Dollar is testing the upper limit of its downtrend channel. GLD in fact has closed slightly below it’s uptrend channel that has been in place since August. The $64,000. question is which way is the market headed next. For that information we should look at the technical indicators. The stochastics on the S&P, GLD and OIL are all in oversold territory while the stochastic on UUP is in overbought territory. The S&P and OIL are also flagging, another positive sign. While the stochastics have not yet issued a definite buy or sell signal, the levels they have reached appear to indicate that today’s sell off is actually a bear trap and a buying opportunity. The last time the S&P stochastic hit this low was in March 2009 and the market rallied big time. I suspect that the shorts are about to get squeezed hard and the S&P, Gold and Oil will rally to new highs while the U.S. Dollar will resume its downtrend. In the event this turns out not to be the case tight sell stops should be in place on all positions. While a market crash seems very unlikely, an S&P break below its uptrend channel could lead to 1000 or in the worst case a test of its 200 day moving average that currently sits at about 910.

Click on pen to

TBT is an etf that double shorts the 20+ year treasury index. TBT has just broken out to the upside of a downtrend channel that has been forming since May, 2009. Since TBT has been in an overal uptrend since Dec. 2008 this channel is basically an extended bull flag. With the U.S. dollar being devalued by Uncle Sam, treasury interest rates should rise while principal value falls. TBT looks poised to test its previous high of $60.00 that was reached in June, 2009. From its current price of $47.43 this represents about a 30% gain. Options on TBT are reasonably priced but I would not buy any that expire earlier than March 2010.

The U.S. Stock Market as represented by the S&P 500 is again in a bull flag formation indicating higher prices to come. Since July the S&P has been rising in steps: it moves up and then flags, moves up and then flags. This is a highly bullish buying pattern and indicates a market that has been rising in an orderly, sustainable fashion. The S&P is nearing the top of the major bear market downtrend line that now sits at about 1120. In order for the bear market to be over the S&P will either have to break through 1120 and sit above it for at least 6 weeks or make a giant run through 1120 leaving it in the distant past. Based upon the recent price action in Amazon.com and Apple it appears that the U.S. consumer is far from dead. 700 people lined up in advance to enter the new Microsoft store in Nevada. While I can’t figure out why anybody in their right mind would line up to buy yet another operating system that probably has as many security holes as a pound of swiss cheese, this is yet a further indication that Americans love to spend money. It appears that the worldwide economic recovery may turn out to be much stronger than many economists anticipated thereby justifying higher stock prices and an end to the bear market.

Click on pen to

Barrick Gold is the worlds largest gold company. They have just unwound their gold hedges and are expanding their operations worldwide. With the price of Gold hitting new highs it pays to look at the 800 pound gorilla in the room. Here is a 10 year chart of ABX. It looks like a large kite with a tail. ABX uptrended slowly until the middle of 2007 when it took off and ran to a new high of $54.74. It then quickly sold off to a low of $17.27 and has steadily moved up to its current price of $40.12. Since mid 2007 ABX has been trading in a gigantic diamond formation with the lower half almost a mirror image of the upper half. The low to high price of this pattern is $54.74 – $17.27 = $37.47. If we multiply $37.47 by 2 we obtain a price target of $74.94. Since gold miners have been lagging the price of gold they have plenty of room to catch up especially with the price of gold rising. A doubling of ABX in price from current levels does not seem unreasonable.

Click on pen to

Here is a 2 year chart of GDX the etf that tracks gold mining stocks. You will notice that it is almost identical to that of SLV as described in the post below. Since the March top of 2008 GDX has been trading in right triangle and rectangular patterns. It has broken through the hypotenuse of the major right triangle price formation and is in an intermediary uptrend channel. Volume has increased substantially on this ETF and momentum is turning positive on the macd at a high level. It looks like GDX is about to break out of its trend channel and eventually move to new highs. The projected price target of $73. is computed by subtracting $16.33 (the Oct. 2008 low) from the price that is equal to the shortest distance to the hypotenuse and then adding the result to that price. I have marked that distance with a line. That calculates to $45.00 – $16.33 = $28.67. $45.00 + $28.67 = $73.67. If this price calculation works out that equates to approximately a 50% return on GDX from it’s current price of $48.29. It took about 1.5 years for this chart pattern to form. I anticipate the move up to be significantly quicker.

Click on pen to

Here is a 2 year chart of SLV the etf that tracks silver. You will notice that since the March top of 2008 SLV has been trading in right triangle and rectangular patterns. It has broken through the hypotenuse of the major right triangle price formation and is in an intermediary uptrend channel that is now challenging the longer term uptrend channel from the Oct. 2008 lows. The last time SLV hit the top of this channel it pulled back only to the mid-point. In the meantime the macd and momentum appear to be turning positive at this critical juncture and volume appears to be picking up. It looks like SLV is about to break out of its trend channel and eventually move to new highs. The projected price target of $25. is computed by subtracting $8.76 (the Oct. 2008 low) from the price that is equal to the shortest distance to the hypotenuse and then adding the result to that price. I have marked that distance with a line. That calculates to $17.00 – $8.76 = $8.24. $17.00 + $8.24 = $25.24. If this price calculation works out that equates to approximately a 43% return on SLV from it’s current price of $17.44. It took about 1.5 years for this chart pattern to form. I anticipate the move up to be significantly quicker.

Click on pen to

The U.S. stock market, gold and oil are in bull flag correction patterns. A bull flag is a down sloping trend channel in an uptrending market. This is a highly reliable chart pattern and is an indication of higher prices to come. I have outlined these channels in the following charts: 3 month chart of s&p500 , 3 month chart of GLD, 6 month chart of oil. Here is a 1 year chart of the s&p500. As you can see the s&p is still above its uptrend line and is sitting at its 50 day moving average. A break below this uptrend line could signal a further correction to its 200 day moving average at about 900 but that seems very unlikely based upon the bullish charts. Another interesting chart is that of the US dollar. While it has an macd divergence indicating a possible rally, you will also notice that the dollar has been in a well defined downtrend channel that will be difficult to break. The fundamentals for the US dollar stink so in all likelihood this downtrend will continue with sellers coming in at the top of the channel and buyers coming in at the bottom.

You will also notice that the chart of the dollar is a mirror image of the chart of the s&p. Investors have been selling dollars and buying U.S. Stocks, U.S. Bonds, Foreign Stocks, Gold and Commodities. Since this is a good strategy based on fundamental value it will in all likelihood continue for awhile. This could lead to market valuations that appear high when compared to past market valuations at similar junctures in the economy but may nevertheless be supported by the market. In any event a weak dollar right now is good for exports and the U.S. economy as any strengthening of U.S. interest rates could put an immediate crimp in the economic recovery. While we know there has been some economic improvement right now it is unclear how things will unfold. It is possible that all the government spending and stimulus will somehow be worked off and the U.S. economy will start booming again. Or we may just go through a period of slower growth. The worst case scenario is the dreaded double dip recession where the bear market in U.S. Stocks resumes and hits new lows. We will probably have our answer within the next 6-9 months.

Click on pen to