April 10, 2011
Weekly Market Outlook
By Keith Schneider
Even Hollywood could not have written a more convoluted script regarding the current situation in the Mid-East. In case you have been out of touch (like visiting Mars or lost your internet connection) let me bring you up to speed. A Mad Max situation is playing out in the Libyan desert, with the US and NATO bombing our new friend and reformed terrorist, Muammar Gaddafi, to stop him from slaughtering his opponents who are attempting to wrestle him from power.
Libya was recently removed (in 2006) from that rarefied list of countries that sponsor terrorism. After paying billions to the families of those murdered in the Lockerbie bombing in 1988, Libya mounted an effective image makeover with the help of a leading US public relations firm The Monitor Group. It all seems to be for naught now.
Fast forward to 2011 and revolution. In order to quell the revolution, Gaddafi threatened to kill all the occupants of Benghazi where many of the insurgents hail from. Not good from a PR perspective. However, Gaddafi stated not to worry, that these guys are Al-Qaeda, let me at them. The US and NATO not believing him, stepped in to stop the massacre by bombing key military targets and thus created a military stalemate - for now. Now, here is where it gets interesting. Someone in the Pentagon started asking some good questions like who are the insurgents and should we be giving them support and weapons? According to reports, many of the insurgents are indeed former Al-Qaeda fighters. So, strangly enough, Gaddafi was telling the truth, and here we are supporting Al-Qaeda to overthrow Gaddafi. How peverse is that? Tell me it's not true!
Circling back to the markets, with the world a truly bewildering byzatine place to reside in, the only thing to do is cling onto something tangible, like silver, oil and gold.
SPY (S&P 500), DIA (Dow Jones), IWM (Russell 2000) and QQQQ (NASDQ 100) Indexes
With the metals going to a parabolic stage, most of the US Equity markets trimmed just 1% off their recent highs. Also noteworthy is that the dollar got crushed this week and the US equities market sold off, an interesting divergence from recent history. The market phase is bullish for the IWM and the DIA, but the NASDQ 100 (QQQ) is now back to a warning phase, a definite chink in the armor. Last week, we noted that the market was firmly bullish but a bit over extended on some of our internal readings and would need to work off its recent run which was dead on. With the consolidation of this week and tight range, I would expect to see some big moves shortly and would be willing to follow the breakouts either way.
Market Internals
VIX (sentiment): This indicator is trading along the lower edge of its trading bands but not below, which would be a signal of excessive exuberance, and its under the 200 day MA, so its firmly in bullish territory. Considering the overall climate it does seem cheap and is not pricing much risk into the market. Hmmm...
Accumulation/Distribution Volume: We have had a number of distribution days this week and a few more would put this on a sell signal, but we are not there yet.
McClellan Oscillator: This breadth indicator is working off its overbought readings and after the market's recent run, we are now in neutral zone but trending down.
Sectors
Gold (GLD) and Silver (SLV): With a unstable geo-political situation, a potential government shutdown, earthquakes, nuclear meltdown, and insolvent banks, it is no wonder that traders are flocking to commodities and especially metals. Gold broke out of a major 6 month consolidation pattern that looks like an inverted head and shoulders pattern that confounded many professionals looking for a cyclical top. When markets go countercyclical, fireworks can happen. The move in silver is classic parabolic action and there is no telling where it might go or when it might break. The old high was $50 spot comex before they changed the rules and forced liquidation to prevent a market corner attempted by the Hunt brothers in 1980. Take out your scrapbooks and save the charts because this one is a textbook case of a historic parabolic move under way.
Oil (OIL) CRUDE ETN: Crude prices seems to have woken up from its slumber as events in the Mid-East were unfolding, but this chart shows a classic test of the 200 day moving average and an immediate move back to bullish phase in one fell swoop and is now in gear.
Swing Trades
Even with the metals market well underway there were a few sleeping giants which was the case with PAAS. Daily setup shows a pause with an inside day as highlighted in MMM Premium evening watch list Thursday.
Intraday chart below with explosive volume from the get go with entry.
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