May 8, 2011
Weekly Market Outlook
By Keith Schneider
There were many conflicting reports about Osama bin Laden, the world's most feared terrorist and his death/whereabouts. First, the Colbert Report stated that as a result of his burial at sea, he was promptly eaten by a radioactive great white shark that had been cruising the waters off japan. They have now morphed into a creature called "Finladen". Reliable sources have informed the newsroom at MarketGauge that the story is incorrect. He was actually eaten by Godzilla and morphed into BinZilla (above) and photographed as he wreaked havoc on Washington DC.
The market ignored the news after an initial morning pop by dropping 3.6% in the Russell 2000 (IWM) with smaller but significant declines in other key indexes by the end of the week.
It also added to the gold and silver decline by removing some risk premium. Longer term, the big potential payoff is a re-evaluation of our foreign policy in Pakistan and Afghanistan that could have a real impact on the deficit.
On a personal note, Bin Laden almost got me on Sept 11. Sadly, a great friend and business partner was not as fortunate. Many thanks to our armed forces and President Obama. Although it won't bring back those who were murdered, it is gratifying that he will not be able to do any more harm.
For specifics on our current trading and technical outlook read on.
SPY (S&P 500), DIA (Dow Jones), IWM (Russell 2000) and QQQQ (NASDQ 100) Indexes
What a week for news. It ran the gamut from Silver's collapse, Bin Laden's death, the Dollar's strength, and better than expected unemployment numbers. As we had mentioned in our last edition, the market was looking frothy as the short term indicators were overbought and price momentum a bit extreme. So we got our correction of about 2-3.6% or so this week, not too bad and about in line with our expectations and certainly no repeat of last year's flash crash. Meanwhile, we are still in bullish phases in all key indexes and until we start to see a change in that, we are still longer term positive, although the market internals suggest some continued weakness with this bullish phase, The Dow chart looks a lot stronger and IWM the weakest, testing the 50 day moving average after failing the top of its channel, a bearish engulfing pattern, and a divergence in price momentum. Meanwhile the QQQ's barely budged, continuing its compression at its old highs.
DOW Holds Breakout
Russell 2000 (IWM) Testing 50 day
Market Internals
VIX (sentiment): This short to intermediate sentiment indicator that had signaled irrational exuberance worked like a charm keeping us out of trouble this week and is still on a sell signal. If we can propel past the 200 Day Moving average and stay there, it could upgrade the signal on this indicator to a longer term signal.
Accumulation/Distribution Volume: This week's sustained move down put in four consecutive distribution days in the Russell (IWM) and 3 distribution days in the other indexes, an outright sell for the IWM and a yellow flag for the others. Next week will be critical.
Up/Down Volume: Our short term volume indicator went from overbought and a sell signal to oversold by the end of the week and started to turn up. This is in an area where markets bounce but it is very short term in nature.
Sectors
Gold (GLD) and Silver (SLV): All one can say here is WOW. One for the textbooks. Last week we mentioned that the volatility was out of control and I wrote that the "Silver looked ominous and if you can't stand the heat get out of the kitchen". We had readers thank us as they exited their positions before the 27% correction. The raising of the silver margins, the news that Soros sold his position, the dollar rally and finally the terror premium abated, all contributed to precious metals tanking. The gold chart still looks intact, but the silver chart is damaged for now. We would like to see a period of consolidation before stepping back into silver. Gold is a different story and now has an inside day after Friday's action and looks to be holding its breakout for now.
SLV has 3 levels of likely support, 31-31.50 area, which coincides with weekly support and trendlines, the 26.50 to 28 level which coincides with the 200 Day MA and support on the weekly chart, or a 60% correction from the highs which is the18 to 20 level and massive support on the weekly charts.
Join us at Mish's Market Minute as we have been playing this when we see some low risk setups...
Mini Swing Trade (featured trade from Mish's Market Minute and Complete Swing Trading System)
The featured mini-swing trade this week was TLT (Long 20 Year Bonds). We liked the daily setup as we moved into a recovery phase on this chart and the intraday setup fired off near the closing bell. The intraday-pattern was a classic stacking of the FTP and a breakout of the opening range for a no pain instant gain trade. This trade also made sense from a fundamental picture as the sell-off in metals and stocks forced people into bonds as a flight to safety.
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