February 27, 2011
Weekly Market Outlook
By Keith Schneider
It felt like deja vu all over again this week, as the market took a dive then recovered much of the decline on the news of an un-civil war in Libya, only this time a more photogenic potentate got the headlines. Not only is Gaddafi more photogenic, he's a far more interesting character - from his female, machine gun toting (sometimes pregnant) bodyguards, to his claims that Bin Laden is supplying LSD to civilians to start the civil unrest! It makes one wonder how a man like this can stay in power for 42 years. That's a lot of petro- dollar walking-around money for one crazy person. Meanwhile, it's not to hard to understand the civil unrest, as 30% of the country is living below poverty level while Libya ranks in the top ten countries in the world in terms of oil reserves.
SPY (S&P 500), DIA (Dow Jones), IWM (Russell 2000) and QQQQ (NASDQ 100) Indexes
From a short term technical standpoint, the market did a repeat performance (so far) of the initial Egyptian sell-off/panic in late January. We are still in a bullish phase, but this time we tested the 50-Day MA. Also noteworthy is that we are under our fast moving averages as of the close of the week, leaving the market more vulnerable to a decline. We also registered the largest one day sell-off since August of last year.
The big difference now is that oil is clearly heading further north and the markets are finally taking notice of this Mid-East unrest.. If the oil rally sustains, the worldwide economic recovery will be in jeopardy. Recent bullish forecast for oil is $220 per barrel ...ouch! Also worth noting is that some of the leading NASDQ stocks - such as GOOG and AMZN - were not able to make new highs along with the major indexes, even before the swoon.
Market Internals
VIX (sentiment): This sentiment indicator - which was firmly in bullish territory last week - came close to generating an intermediate term sell signal while the market was in its free fall, but buyers came in and this indicator - although trading a bit higher - is back into it trading bands and under the 200 day Moving average. So it's back to bullish. However, we are much closer to that critical moving average, so any continued weakness in the market could trigger a sell signal.
Accumulation/Distribution Volume: With the sharp sell-off (5% in the QQQQ) from top-to-bottom, we now have 4 distribution days: a sell signal. Not surprising, as there was some weakness in some key NASDQ stocks even before the sell-off. However, all the other key indexes are not there yet. So I am putting up a yellow flag here, as we know that when the leaders fail, watch out.
McClellan Oscillator (advancing/declining issues): The market has had trouble confirming new highs, and as we had mentioned last week, it had plenty of room on either side. With the sell-off, this indicator is now bouncing off an area where rallies have started. It's not the extreme level we reached back in November, so we could see another test of these lows.
Sectors
Gold (GLD): The news out of the Mid-East resulted in a rally in oil and precious metals over the past several weeks. However, we are at a critical juncture here, as our chart above clearly shows. We have tried to hit new highs in Gold, but have so far failed. Each time we get above $137-$138 (over $1400 in bullion), we get major selling. Furthermore, we have a confluence of both short term and intermediate term patterns playing out. First, we have yet another bearish engulfing pattern near the all-time highs, followed by an inside day, and this occurring at the high of a clearly defined 5 month channel. Our fast moving average comes in at last Thursday's lows. Additionally, important cyclical highs usually occur around this time of year for Gold and precious metals. So, will the market go counter cyclical and catch the shorts and cause another leg up, or is this an important top? One thing is fairly certain: we are at critical point in time for this market and one can expect some fireworks.
This definitely bears watching as Gold is an important barometer for the markets in general. In this scenario, flexibility is supreme and short term trading tactics rule. Come join us in our Live Trading Room and watch as this critical market plays out!
Opening Range Strategies and Hotscans
SPY (S&P 500) - Short OR Breakdown
This week, our featured trade in our Live Trading Room was the short in the SPY (S&P 500) on the first day of the breaking news out of Libya. We bought the initial panic and lower opening using the 5-minute OR, and sold for a quick profit. However, we reversed and went short on a 30-minute OR reversal and covered much of it on the close. Almost 2 full SPY points, or almost 200 points in the DOW.
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