Last week’s 900-point Dow rally may have stirred up some bullish excitement on the Street and at CNBC, but it looked to us like a fat pitch for anyone who’s been waiting patiently to get short.  We’ll be looking to do so ourselves next week — with as little risk and stress as possible, using index futures and or equity put options – so click here if you want a free pass to Rick’s Picks as we attempt this.  You’ll have access not only to detailed trading recommendations that are updated around-the-clock, but also to a 24/7 chat room that draws experienced traders from all over the world.  We hold no open positions in index futures at the moment, incidentally, although we established a bullish tracking position in gold last week just as Comex futures were starting to take flight.

With regard to the broad averages going bonkers last week, we were merely bemused spectators as Wall Street’s pros squeezed bears within an inch of their sorry lives. Abetting the short-covering stampede was ostensibly “good” news from Europe, some encouraging retail sales data at the outset of the holiday shopping season, and, for good measure, some ginned-up unemployment figures that took hypothetical joblessness down to “8.2%”.  We were surprised that stocks failed to hold onto their gains after the news came out, and that’s one reason why we’re especially eager to establish a short position against the recent trend.

‘Real Damage’

Another, more technical, reason is that the ups and downs of the broad averages since mid-October have created what we call “dueling impulse legs” on the daily chart. This term is specific to our proprietary Hidden Pivot Method, and it implies that each encouraging rally has been followed by an equally discouraging decline. In general, we should expect healthy bull markets to consistently generate rally legs that exceed at least two prior peaks. This creates bullish “impulse legs” such as the one highlighted in green in the chart above. But notice how the last such arrow was followed by an equally impressive red one. Technically speaking, that constitutes a “duel,” and it implies here that buyers lack the gumption to do much more than torment bears. To be sure, they could still do some real damage next week with another massive eruption. Specifically, to create a fresh bullish impulse leg on the daily chart, buyers would need to goose the blue chip average above July’s 12751 peak. However, we seriously doubt that such a rally, amounting to about 730 points, is coming.

Because of this, we are taking a cautious approach in managing the risk of the Comex Gold position recommended last week. Three of four February contracts in our original tracking position have been exited for a theoretical gain that effectively reduced our cost basis to $1708, $43 below Friday’s settlement price. Our rally target for the minor bull cycle still lies well above, at $1870. However, if the stock market were to reverse direction and head south, gold is all but certain to follow.  Under the circumstances, we are managing the risk of our bullish gold position with a stop-loss that is being updated frequently.

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