I will start off today’s Sunday Night Coffee post by getting a handle on the broader indexes and I will get more narrow in scope from there. I’ll be discussing the major indexes, the dollar, yen, some long ideas, the European banks, Las Vegas and my general trading plan for the week.
The first chart is the long term $SPX chart. We must keep our eye on the ball in order not to get caught up in the short term noise.
I think the long term chart supports that the long term double top has been completed with the breach of the 2003 lows. Busting through 2003 levels sets the table for prices to head back to 1995 levels. With this in mind, I will put myself out there by saying that my long term view is that the primary downward trend will continue.
Friday’s action on the short term SPY chart was quite helpful. First, we now have 4 closes beneath the previous 805-880 range. This makes me comfortable that the breakdown below 805 ($80.5 SPY) was not a “false breakdown.” Second, Friday’s price action respected the fib lines on the short term chart. My new trading range on SPY is now 750-805. I will be looking to trade this range and will short SPY near 80. Depending on the balance of my portfolio, I might be looking to cover if we get close to 75. I’m more inclined to short the top of the range than to cover or go long at the bottom simply because it is easier to make money with the primary trend and we have a 10 year double top pattern on the index which puts the wind at the back of the shorts.
The short term chart of the Dow shows the break of the beautiful descending triangle. I think a conservative estimate shows a drop on the Dow to 6000 (1996-1997 prices).
The 6000 target is based on the size of the triangle combined with the support levels shown on the long term DJI chart. While this is the long term target, I also would not be surprised to see the Dow run back up and retest 8000 if there is a rally. I would be looking to add to my short position on DIA if there is a retracement to 8000.
The QQQQs have been holding up the best of the major indexes. RSI in the lows 40s means there is plenty of price momentum left for a fall. If the short term double top confirms, I think we could see $25.50 pretty quickly. If the other indexes move back up to resistance, I would expect the QQQQs to retest $31.7 and I would be looking to add to my short position playing it as a short term triple top instead of a double top.
Adding to the short case, is the fact that $DJT (trade via IYT) also breached long term support. For those that believe in “Dow Theory”, new lows on both $DJI and $DJT is considered a significant confirmation of a bear market.
It looks to me that $DJT has a lot of room to fall. I think the potential of both IYT and XLE to fall even with the banks close to $0 is what could provide the juice for DIA and SPY to hit new lows.
Integrated oil has to be the index with the most to lose. If it joins its brothers at 2003 prices (don’t even need to go back to the 1990s), the price on this will be cut in half. If the DIA and SPY do go back to 1995 prices, it will definitely mean that Exxon Mobil and Chevron (among others) will be a great part of that decline. I’m licking my chops to see if XLE breaks $40. Nothing would be more interesting than seeing the oil companies looking for a handout from Washington 6 months from now (only 1 year after Hillary asked for a profits tax on the oil companies).
Take a look at the CVX chart and the recent break of this symmetrical triangle:
I am also keeping a watchful eye on commercial real estate via IYR. ICF is also a good index but IYR tends to be a little more liquid so I tend to use it more than ICF. I am waiting to see if this breaches $25. My hunch is that residential real estate problems may start moving to the back page and that the problems of commercial real estate might be moving to the front page.
I’m not going to short them, but the bond funds also seem to forecast that the initial hope of recovery in December-January has failed. These all look like they will at least retest their prior lows.
In my opinion, nothing to trade, but useful to watch the dollar via UUP.
As I mentioned previously, I think the market wants to see a stable dollar. If this is just a retest and the dollar breaks above $26, commodities other than the precious metals will continue to decline which is likely bad for the market. If the dollar drops a lot, it could re-inflate commodities but it could also be viewed as a loss of confidence in the dollar as a money store. This is why I think the best situation for the market is a stable dollar.
Also, I’m still waiting for FXY to break $106. We closed below $106 earlier in the week but it than rallied up to $107. I have a small short position in FXY and I will not be adding to it until FXY confirms a breakdown.
Speaking of commodities, let’s see if GLD can take out the previous high of $100. I believe this will happen. I base this not on my view of the GLD chart but based on reading the chart of its brothers SLV and PTM. I would expect a small pullback to burn off some of this momentum before it finally punches through $1000, but I’m currently believing in this move up.
For the bulls or for those looking for some bull plays to offset the shorts, I’m either currently in or looking to get into the following stocks:
PEGA – Enter $15 or $13.75 – stop $13.7 (I entered at $15)
MANT – Enter upon breakout of $61.50 (waiting for earnings on 2/25)
HMSY – Waiting for breakout above $36 to enter.
GME – Waiting upon breakout above $28.
You can click on the labels to see the charts posted previously. They are still applicable.
ESI is looking like it could be a great short opportunity again. I am hoping to short this in the $117-$118 range and ride it down to $98. The chart looks beautiful. The only thing that I do not love is the risk/reward if a stop is set at the next fib line at about $127-128. This means you only get a 2 for 1 risk/reward. That kind of risk/reward doesn’t work for me meaning that I will enter and set my stop about 4% higher at $122.50.
Moving onto European Banks, I will touch on my prior post comparing the European banks and the American banks. I had mentioned that during the past week the European banks seemed to be out performing the American banks. News is out in Europe that RBS and likely LYG will be split up into good banks and bad banks. It will be interesting to see if this news was the reason for the divergence in price between the European banks and the American banks.
I will be interested to see how the European bank stocks digest this news. My best guess is that this will actually be good news because my hunch is that this news was in the rumor mill during the week causing a bid under the European bank stocks (at least compared to the US bank stocks). Of course, this new setup in Europe could have implications here if Bernanke and Geitner decide to follow Europe.
Moving onto Las Vegas, going by the charts, it looks like Las Vegas might be going completely bankrupt. It doesn’t look good for my junk longs MGM, LVS and BYD:
My conclusion is that trading the bear market continues to require a lot of work. Both the long term charts and short term charts seem to show the probability of a move towards 1995 prices after breaking critical support. Moreover, I consider the long term double top on $SPX to have confirmed. I feel good that the primary trend down continues.
What makes the bear market so hard is that you always have to respect the possibility of an aggressive countertrend rally. A rally that behaves and just rallies up to resistance would be easy to handle. We can plan for this. But what if the market rallies past resistance voiding out the recent patterns that have confirmed and we then get talk of a “double bottom” forming?
Yet, at some point you have to take off the training wheels (your hedge) if you want to make real money during the year. For those waiting on the move to 600 on $SPX, you don’t want to miss it because you were worried at every moment of a countertrend rally. One of the worst things for a trader is to be right about the market or a stock and not to profit off of it.
My plan is to stick with playing the primary trend when the opportunity arises. This translates to shorting SPY on a rally back to 80 and covering SPY at 75 and moving back to a more neutral portfolio until it breaches its current trading range. Meanwhile, I’ll be looking to add some long positions in specific stocks and short positions in a few specific stocks. I also have my junk long portfolio which I would expect to rally hard in any countertrend rally. I would then be trimming these whenever a junk long moves a decent amount above its original position size.
Good skill to everyone this week.