Market Myopia

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This week, S&P semi downgraded US sovereign debt and the market panicked for a brief moment. By the weeks end, the Dow closed on 3 year highs. This is first time in over 200 years our credit worthiness was being called into question. S&P still maintained our highest rating AAA, but downgraded our outlook from stable to negative. How's that for logic? Where have been these credit agencies when we needed them, like before the housing mess? In the background, the Obama administration pleaded with S&P not to say what has been obvious to the world. The administration should be pleading with S&P to downgrade our debt and get our government and markets to take this situation seriously. The markets might take a pounding initially, but that what it's going to take to get this under control.

Meanwhile, by the next day, the market tossed off those concerns and focused on earnings. This reaction indicates that either this warning without an actual down grade is already priced into the market, or the Plunge Protection Team was working overtime. Here is a blatant example of a severe case of nearsightness. If you are looking for logic, don't waste your time. The graph below is self-explanatory.

For specifics on our current trading outlook and technical outlook read on.

SPY (S&P 500), DIA (Dow Jones), IWM (Russell 2000) and QQQQ (NASDQ 100) Indexes

We had quite the wacky week with huge gaps either way. However, we closed up a little over 1% for the DIA, SPY, and IWM and over 3% for the QQQ's. All indexes are back in into bullish phases. There is a classic candle formation on the daily SPY chart called a dragonfly die. This short term pattern is showing indecision or a potential reversal pattern but we need Monday's action to resolve this one way or another. The overall technical picture is still bullish, and as always the case one must weigh all the factors. In fact, the Dow closed at new highs for the year, breaking out of a rising wedge on light pre-holiday volume.

Market Internals

VIX (sentiment): This sentiment indicator has now tipped into irrational exuberance range as it closed two days in a row below its trading bands and has hit the lowest levels not seen since 2007. It has not however fired off a sell signal yet, but is in a position to do so. Let's watch this carefully, as this sentiment indicator is often uncanny for spotting tops. Like all indicators or systems nothing is 100%.

Accumulation/Distribution Volume: This week's wacky volatility has been giving off a number of conflicting signals on the different indicators we watch and this indicator was no exception. However, by the end of the week, it was back to neutral or bullish depending on the index.

Up/Down Volume: This short term breath indicator was bouncing off the lower end of the spectrum last week, a buy signal. By the close of this short holiday week is still trading up, with a ways to go before it's overbought. This indicator has strong momentum for now and is bullish.

Sectors

(Auric Goldfinger, slightly ahead of his time)

Gold (GLD) and Silver(SLV): Gold (GLD) and Silver (SLV) Gold and Silver again moved to historic highs. Our favorite famous cycle analyst (Charles Nemmer), formerly the top technical analyst from Goldman Sachs, who has been calling for a top in the precious metals, now has called the whole thing off and is becoming a gold bull. As I have mentioned in prior issues, when market go counter cyclical, watch out! The case for silver has never been stronger and the chart is just a classic parabolic move. Unbelievable! Noteworthy here is that gold's volume and momentum is nothing compared to silver and a break of the short term trendlne on the gold chart should be heeded. If you are not already in silver, managing risk is the issue as parabolic moves are subject to quick and violent corrections.

This month in our MG Prime newsletter, I will be covering why silver is so strong and what you are up against when buying individual stocks to play this historic move in precious metals. Click here and don't miss our next issue of MG Prime and new recommendations coming next week.

Opening Range Strategies and HotScans

The featured trade on Friday was IBM. After a poor reception to the earnings report on Thursday, IBM did not violate the daily chart pattern and the 50 day moving average. As soon as we took out the opening range and R1 (floor trader pivot number), we entered and never had a moment of pain. We got almost a full ATR (average true range) by the end of the day. Join us in our day trading room!