November 2009

An 1113.00 target that should have been easy is taking weeks to achieve, but it remains valid nonetheless. Shorts should risk no more than a 1114.25 stop, but don't attempt the trade in the final hour, since you want to be out before the close.  Friday's action was just "dueling impulse legs" on the hourly chart, but the futures will have a chance to create a strong impulse leg today with a short push exceeding 1103.25.

Various news sources reported last week that the sovereign banks of the world were intent on supporting the dollar, so worried have they evidently become that the U.S. currency's weakness will kill their already frail export economies. With the dollar falling anew anyway, the question is  whether it may have become unsupportable -- and what a pity that would be, since it would be the beginning of the end for the global financial system. As of Sunday night, weakness was eroding the last vestige of last week's sharp but probably gratuitous gains, challenging the central banks to put their money where their big fat mouths are. If they're planning on a support operation, we'd suggest using the Hidden Pivot support at 74.625 to pop a short squeeze. Any lower, though, and the futures will be warning of the futility of trying to get a dead duck to fly.

We’ve got a nickname for the bear rally begun last March on Wall Street:  the “Red Shoes Market”. The metaphor alludes to the classic 1948 British film based on Hans Christian Andersen’s dark fairy tale. Every cinema buff knows the story of the ballerina, played by Moira Shearer, who couldn’t stop dancing after she put on a pair of enchanted crimson ballet slippers. Eventually she danced herself to death. That’s exactly what we foresee for the stock market once the mad energy that has powered the rally has been spent. That this will occur is all but certain, since the economy, green shoots and phony recovery statistics aside, is edging toward Depression.    Like the ballerina, frenzied investors have no control over their actions. Even though many portfolio managers evidently believe it will all end badly, they cannot move to the sidelines for a breather while stocks continue to move relentlessly higher, as they have been for the last eight months. Shares have soared mainly because of the government’s innumerable bailout programs. The giveaways have produced a glut of liquidity in the financial sector that has nowhere to go but into stocks and bonds. Business loans are shrinking because both borrowers and lenders alike are skittish about taking on more debt as the economy has continued to weaken. The result is that lendable reserves have found their way into the securities markets, pushing valuations to historical extremes.  Amazing Rally  What amazes most about the rally is that it keeps on going even as the country’s economic and political future grow murkier each day. It is said that the stock market abhors uncertainty, but we can’t recall a time in the U.S. when there was more of it than now. We’ve got a dithering President whose radical domestic agenda has bogged down

There were some minor rally targets just above Friday's highs, among which 1126.00 looks to be the most useful.  This is not a number to short; rather, we should look for an unlabored move through it to confirm that the futures are still tracking a course to at least 1134.50, a Hidden Pivot that was narrowly missed last week.  Above it sits another, more important, target at 1174.90 that will be the most crucial gold has faced in a long while.  I do expect it to be reached, but we should monitor the hourly chart closely nonetheless, since a trend failure that falls shy of it (or shy of 1134.50, for that matter) could have bearish implications for the intermediate-  to long-term. I have included a chart that shows how both targets were derived.

I am in San Francisco to speak at the annual conference of the  Technical Securities Analysis Association. The theme of this year's event is stock options, and my talk has focused on an approach to trading options that is more street-smarts than rocket science.  To download the actual Powerpoint presentation, click here.

Someone mentioned in the chat room that Armstrong had advertised yesterday as a reversal date -- and good for him!  It sure as heck felt like one, what with the dollar barnstorming higher, stocks falling after a six-day short-squeeze, and precious metals taking a dive. I've provided some benchmarks that will help us judge whether the turn is likely to be short-lived, but bulls could be pardoned if they start the day with Friday the 13th jitters.

The stock has pulled back without having achieved the 15.85 rally target where we'd planned to lighten up. We still hold eight Dec 12.5-15.0 call spreads for an average CREDIT of 0.15., and I'll suggest sitting with it for now.  My expectation is to let the spread expire into stock, giving us an 800-share position with a cost basis of 12.35.  One reason we shouldn't be too eager to cover the short Dec 15 at the moment is that they are trading with an implied volatility of close to 60 -- quite juicy.  If we weren't short them already, we'd be looking for a way to do so.

At the close, the futures bounced from a low that lay two ticks above a minor Hidden Pivot support at 1082.00.  Anything beneath that would portend 1079.00, which can be bottom-fished with a 1079.25 bid and a 1.00-point stop-loss. The trade will remain valid as long as 1091.00, the point 'C' of  the pattern, has not been exceeded to the upside.  Looking at a somewhat bigger picture, the hourly chart would become worrisome (or perhaps encouraging if you are of the bearish persuasion) if the futures dip below 1074.00.

The minor trend -- all we've got to work with so far -- projected to 75.92 at the close, and that would be enough to refresh the bullish impulse on the 30-minute chart. More important to our assessment of the strength behind this push, or lack thereof, is the way in which buyers handle the three peaks labeled in the accompanying chart.  An unpaused thrust past any pair of them would reinforce the assumption that the outlook for the  intermediate term (i.e., 3-5 weeks) had turned bullish.