( Note: I got these links from supposedly generic image sites, I do not own these images or these likenesses, as I am still under the assumption that Warner Brothers owns them. I am certainly not profiting from them nor intend to do so. I am just using them to illustrate a point. And besides, this is free promotion from some great comic cartoon work from the past. What more apropos way to demonstrate total annilhilation of something is there other than Wyle E. Coyote? )
What just happened? In August we were witnessing what looked like (and could still end up like) a cyclical bull market capitulation from the March 9, 2009 lows. Hedge funds and individuals were hustling to short this market with every kind of option spread, index future, inverted ETF, or direct shorting strategy. Well, the ending of this thing panned out about like the ingenious plans of a cartoon coyote having his munitions shack being dragged onto the railroad tracks by a cartoon rodent. Yes, despite all the algorithmic trading schemes and massive hedging, many “super geniuses” got their anterior ends handed to them. Why is that?
A lot of it was caused by short covering by hedge funds and large investors. Because of their size (and the fact that many were using shorts to improve their already shabby performance versus the indexes this year), the short positions they took got immediately hammered at the beginning of October and that forced the violent rally we saw after one of the most horrible Septembers on record.
Still, as one can see from the monthly, monthly with momentum, weekly, and daily charts, the $SPX momentum remains positive, though the daily and weekly charts are a bit overbought at this point. What do traders and investors do in this environment?
Smart traders do what they always should do:
1) Look for consistent set-ups long and short.
2) Reduce their time frames a bit to reduce risk.
3) Manage your position sizes to reduce risk.
What do I think happens next? You can see the upside targets on the charts with the confluence levels in green. The areas of key confluence (and I am sorry, but Ensign is still giving me password problems or I would show you the full confluence without the confusing lines), but those areas are at 1373 to 1381 and again somewhere near 1576 and 1604. Given the fact that monthly 7-period ATR is 114.62, I think that the 1381 area can be obtained in November, assuming the rush to buy stocks continues among institutions.
Is that a guarantee? Clearly not. The European debt crisis is still not really solved, as the details have not been worked out. There are still far too many negatives in the economy and in markets. (The writer of that last article got mad at me because I sent him in a tweet a more positive version of “Beautiful Day”by U2 to counter the one at the bottom. He was not happy when I did that). I personally think we could be lodged in a box that might have a peak around 1380 to 1497 and a bottom around 1010 for the $SPX. So much trading action is built upon often toxic news flow and rumors that it will take a nimble investor or trader to pick spots.
What about GLD? As long as the dollar weakens (and in the very short run, as long as the temporary euphoria regarding the so-called “European sovereign debt solution” remains in place, GLD likely fills that second gap on the daily chart at 172.20. Put GLD in the search box to the right and you can find my previous posts. As things develop, I will write more. The upside targets are still in place above 210. The road is not going to be smooth, because the news flow is both rocky and rabid. I am still basically bullish on gold for now.
REMEMBER: Stick to your best long and short entry strategies and DO NOT DEVIATE from them regardless of what you hear from news feeds or talking heads. Be sure to manage the risk parameters (volatility stops, targets, and position size). That is the secret to surviving the long run. For the very short run, momentum on the $SPX is positive, but the room above the Friday close is really rather limited. Regardless of that, U.S. equity markets are now held hostage by news not only on this continent, but in Asia and Europe as well.
Inflation-adjusted price/earnings is also extreme by any historical measure, and THAT is not positive for now. Bloomberg also recently commented on this caluclation. Though I am an investor in many time frames, I am first and foremost a Will Rogers-style investor (I am at higher than historically normal values, concerned about the return OF my money, and not just the return ON my money).
That is it for now.
Still working on a proper video location. YouTube does not allow me more than 2 minutes per video and my blog host is very restrictive on what I can store on their servers. I will fix this soon enough. I will be on a bit of holiday this week, but I will have my eye on markets during that time. Hopefully I will have a little more on stocks as well).
