Now What?

With the quadruple witching over, now what?

The market sold off today during options expiration, but it is still holding most of the gains made from the recent up move. Looking at the technicals and the sentiments, I believe there is still more upside to come. The market might pullback to test for support before making its next move up. This test will give us a confirmation on the validity of the next move.

The chart below shows the DJI pulled back from the Nov 2008 low and it could end up at the nearest support level around 7100. If it fails to hold this support, then this relief rally is over and the DJI will be headed down for a new low. If it hold support at 7100, it can move back up to the 7500 level and possibly break above it. This next rally could be the one that will move some of the money on the sideline back into the market. Currently, there are too many people with the mindset that this is a bear market rally. Although we all know that is true. But the market will defy the herd mentally. It will continue to move up to force those non-believers into believing this rally is more than a bear market rally. In order to do this, the DJI will need to move above the 8000 to lure some of those sideline money in. My current scenario is, DJI need to hold 7100, then test 7500 and move toward 8000-8300. Of course, the market will be the ultimate decider on what it will do.



For the SP500, it pulled back from a confluence of resistance. It encountered resistance from two trendlines and the 50 SMA. It needs to hold support at the 750 level in order for the rally to continue. If the rally continue and it breaks above 800, it can potentially hit 870 before this rally come to an end. It is this possible scenario that I am holding off on shorting the market until I see more evidence that this bear market rally is coming to an end.



The Nasdaq 100 is still inside the trading range, and I expect it to continue to bounce around in there until it breaks the 1130 support.



Oil broke above $50 a barrel and heading higher. $55 a barrel is very likely in the near term.



Mid 30s for the ETF, USO is possible.



Gold took a breather today at a relatively low volume comparing to the two previous trading session. I believe it could hit $1000 an ounce and the ETF, GLD will go above 98.




My position on the market is to wait for it to pullback to support level. If the market hold support, then re-initiate longs otherwise renew shorts as the market is still in a bear market. I am continuing to monitor for trading opportunities in gold and oil via their ETF, GLD & USO respectively. These two commodities are now a play on the weak dollars and future inflation. Deflation at the moment is off the table with the latest Fed decision to buy long term treasuries.

Are You Still Skeptical About This Rally?

This is a bear market rally and it will terminate when it reaches its objectives. The objectives are to squeeze all those skeptical bears and trap those anxious bulls. With options expiration occurring this week, a high level of skepticism on the strength of this relief rally, and the latest announcement from the Fed on buying $300B worth of long term treasuries, the market continue to chop higher. As those skeptics sitting on the sideline feeling they might be missing the rally finally dive in and those stubborn bears getting squeeze on their shorts as the market continue to move higher, the rally will then come to an end. From the following charts, I have reiterated the levels I been monitoring. I believe this rally is getting close to the end. Therefore, I will be starting to trim my long equity positions and use tight stops. I will continue to focus on trading opportunities for the gold and oil ETF, GLD & USO respectively.








The Gold Trade

As gold retraced below the trendline and went under $900 an ounce today, a dramatic reversal occurred soon after the Fed announced its intention to buy $300B of treasuries. Gold recovered all its earlier losses and ended up nearly $40 an ounce, a $60 plus intraday reversal. The manner it reversed and that it closed near the high of the day shown the move had strength. Furthermore, its ETF GLD traded with extraordinary high volume. Today's move could be the trigger gold was waiting for to make another attempt at breaking above the $1000 mark. Click on the charts below to see my comments and also read my previous post on gold to see where gold might be headed.






The Oil

Conventional wisdoms would had bet that crude prices will be down since last weekend's OPEC meeting ended with no additional reduction in production output, and with this morning's EIA inventory report showing an increase of 2M barrels. But instead, it held its ground and stayed near the $50 level. Another reminder not to trade based on the obvious because the market will rarely do what is expected. From the chart, one can see the price actions are pointed toward higher prices in the near term. And in the market, price is king.

Chopping Higher

The market has been up four consecutive days, and there are lot of skepticisms for this bear market rally to go higher. With options expiration coming up at the end of the week and a high level of skepticism, the market will continue to chop higher as hedges and protective PUTs are being close out. The SP500 is sitting slightly above the Nov 2008 low and the DJI is still approximately 300 points below its Nov 2008 low and the Nasdaq 100 has moved back into the trading range. The DJI, SP500 and Nasdaq 100 are only approximately 5% away from their next resistance level. The unwinding of the options and hedges will bring these indices to test their resistance level. If you are planning to go long, make sure to use tight stop as we are still in a bear market. I will continue to establish short term longs and hold off on any shorts until the market has reverted back into its down trend.








Gold

Ever since gold gave a false bull flag breakout, it has retraced to the trendline for support and it bounced off from the support level nicely. It is approaching the failed bull flag peak. If it can break above this peak, it could run up to the 1000 mark again.






Oil

The continuous future contract for crude is forming a saucer (rounded) bottom. The price has moved above the 50 SMA and the 50 SMA is sloping upward. The price action seems to indicate oil will go higher. Next resistance level is in the 50-55.

The Rally Everyone Waited For

The rally everyone waited for finally arrived. This has to be one of the most anticipated rally in recent days. Every financial news network, financial program, and talking head are saying how the market is oversold and a relief rally is imminent. I was a bit surprise that it actually occur when such high level of anticipation existed. Normally, the market does not do what is expected. Since it is here, this rally is quite different than the one from last Friday, March 6, 2009. There are much more convictions in today's rally. The advance/decline ratio is more than 10 to 1, and the up/down volume ratio is greater than 20 to 1 in the NYSE. The Nasdaq advance/decline ratio is 5 to 1, and up/down volume ratio is nearly 20 to 1. DJI closed up 379.44, SP500 closed up 43.07, and Nasdaq 100 closed up 68.57.

In order for this rally to be more than a single day event, it needs to demonstrate some sustaining powers by following through with a few more up days and possibly move the DJI back up to test the support it had broken in the 7500 level, and the SP500 back up to test the 750 level. And maybe during this bear market relief rally, some market internals will be strenghten for the market to make a bottom on its next downward move. Lets not lose sight that the bear market is still in force, and a lower low for the DJI is still to come. So let make some money on the longs from this bear market rally while it last, and keep a watchful eye on the market to see if it can put in a bottom in the latter part of March or in the month of April. If a bottom is not made within this time frame, then it will be a long tough year for the economy and a recovery in 2009 will just be a dream.

Here are the charts for the indexes with my commentary embedded, click on the image to get a larger view:








There were two weaknesses today and they were the crude oil and gold. Crude pulled back a bit from its recent run up, but that did not discourage the big oil companies from participating in today's stock market rally.






Gold fell back to under $900 an ounce and exhibited a failed bull flag pattern. The bull flag pattern failure can turn into a bear flag if it break below the trendline support. In the short term, if a position is establish either on the long or the short side, tight stop must be exercise since it is at an inflection point that it can reverse just as quick as it breaks down. But I do share the longer term view that gold will rally back up to test and break the 1000 level before the bull move is over. For now, direction is unclear. Need more confirmations on its intended direction.

Market Extended And Oil Is On The Move

The market on Friday could be seen as a reversal day. It opened up more than 150 points on the Dow, then it drifted below 6500. In the last 30 minutes of trading, it rallied to regain all the losses and closed up little more than 32 points. It doesn't matter what we call it, short covering or bargain hunting. What is clear is the market is too extended on the downside to initiate new short positions, and might be too soon to go long. But the price actions surely indicate a relief rally is in the work. Whether it will come on Monday will be anyone's guess. But I will start cutting back on my shorts and wait for the relief rally to play itself out.









Not only the market might be getting ready for a bounce, the oil has been moving up. Looking at the light crude future contract, it appears oil could move to the 50-55 level in the short term, and the ETF USO could move above 30.

Gold Only

Today, gold and its ETF, GLD broken out the bull flag pattern. Gold future contract went above 940 and closed slightly under 939, and GLD closed above 92. These price actions satisfied the trigger levels for me to go long on GLD. Here are the charts:





I will be trading gold ETF GLD only. Due to the divergence between the mining stocks and the gold future contract price movements, I will not be trading any mining stocks or its ETF, GDX.

Bear Market Rally?

The market failed to follow through yesterday's bounce and closed at another new low. The only positive from today's action is the market appears to be hitting a support level that might result in a bear market rally back to test the previous support level. So far, only the Nasdaq 100 is still holding above the November 2008 low.








Another interesting development from today is gold finally starting to show some signs it is reversing from its recent pullback. It bounced off the 900 an ounce and 50 SMA level.



The pullback has set up a bull flag with a possible breakout around 930-940 on the gold contract price and around 92 for the ETF, GLD.



Is it possible for the stock market to rally while gold is moving up? Strange as it may be, the answer is "yes". Gold has been going down while the stock market also been going down. There seem to be a battle between inflation and deflation. When the market is going up, investors are looking at possible future inflation due to all the TARP and bailout liquidity injections. And when the market is going down, investors is worrying about the recession is worsen and the falling commodities prices potentially lead to deflation. Until the market has determined which scenario is most likely for the economy, I would not be suprise to see gold to rally along with the stock market if the bear market rally does materialize.

Back To 1996?

The SP500 dropped below the April 11, 1997 low today. I have mentioned in one of my earlier post that if the DJI drop to its April 11, 1997 low of 6391.69, the SP500 will be much lower than 737.65. The question is how low? Well, no one know. But looking at the 30 years monthly chart for the market indices, the levels in the month of July to September 1996 could be some possibilities for the DJI & SP500. Although it is too early to draw any conclusion that the SP500 will go down to the range of 625-650, and the DJI to the range of 5300-5600. But those are some of the key range to watch for. Here are the charts. I have circled what I believe are key levels and note how the Fibonacci retracement levels coincide with most of these key levels.

Click on the chart for a larger view.

I'm Still Waiting

The Dow and the SP500 closed at another new low. The DJT continue to make new low and signaling lower low for the DJI. The SP500 closed below the April 11, 1997 low of 737.65 and the DJI is still more than 600 points away from its April 11, 1997 low of 6391.69. Strangely enough, the Nasdaq 100 and the Russell 2000 are still holding above their Nov. 20, 2008 low, but they are drifting toward that mark. With the market going down to a level made more than 10 years ago, one would think gold will be more than $1000 an ounce. Instead, gold has been consolidating from its recent high. It has pulled back below the $1000 mark and has been bouncing around the 970-930 level. Even some of the mining stocks have pulled back from its recent high and testing major support level. What do all these mean?

With the VIX below 50, there is just not enough fear in the market for gold to play its safe haven role. I believe when the DJI break below the 7000 level with increasing uncertainties in the financial system, fears will return and gold will resume its rise to $1000 an ounce and beyond.

The chart on the future contract for gold shows the price for an ounce of gold has pulled back to the 925 support level. If it break this level, then the next key support will be the 50 SMA around the 900 level. These are the key levels to monitor for the future direction in gold.



Similar for the gold ETF, GLD.



In order for gold to continue its rise, it must hold these support levels. For the gold mining stocks, the picture is mixed. When gold went above its July 2008 high, the mining stocks was unable to get close to their July 2008 level. The mining stocks EFT, GDX shows it has pulled back to the trendline and the 50 SMA after reaching its September 2008 level. Furthermore, it has formed an ascending triangle pattern with a possible breakout level of 37.50 on the upside and 32.50 on the downside.



ABX has the most unsettling pullback. It has closed below its January 2009 low with the 50 SMA turning down once again. If this stock break below 30, then GDX will likely to break below the 32.50.



The GG and NEM show a similar price pattern as the GDX.





While the market is trying to find the bottom and gold is getting ready for the next move up, I'm still waiting for them to set up for my next trade to go long on DXD and GLD.