The Week Ahead Key Levels for the SPY

Fedral Reserve Chairman Ben BernankeDon’t fight the Fed!I was watching last week’s action in the SPDR S&P 500 ETF (SPY) very closely as we had reached a critical resistance level. There were a number of technical indicators that were showing weakness and the idea of shorting the market was looking like the best bet out there.pic 5

Last week was a prime example of how fundamentals can override technicals. The momentum was looking negative for stocks going into the week started on the 19th of September and the short mindset was gaining conviction.

I jokingly mentioned that the markets would tank unless some sort of massive fundamental event occurred which would miraculously send stocks soaring out of their recent range. For the markets, the Federal Reserve’s announcement to pump more money into the system seems to have done the trick.

Now, this is not an overnight recovery announcement, but the Fed is certainly one of the most powerful forces driving world markets. One of the most valuable lessons any investor can learn is to NEVER fight the Fed.

Last Monday’s big move was a buy signal for the bulls and the shorts got squeezed out. The $113.30 level in the SPY was the key to the upside and it was breached swiftly following the Fed’s announcement. The following days, we did break below this key level, but we managed to hang on to the $112.20 support nearby and closed nicely at $114.80.

SPDR S&P 500 ETF NYSE:SPY Daily Chart

SPDR S&P 500 ETF NYSE:SPY Daily ChartSPDR S&P 500 ETF NYSE:SPY Daily ChartHolding above support at $112.20 and the $111.90 pivot will be very constructive for the bulls as we need to work off overbought conditions if we are to see a sustained move to the upside. I would hope to see some consolidation on low volume for a few days, which would make a nice base for the next leg up. Minor resistance at $115.50 should not be too difficult to overcome and we could easily see $117.70 beyond that.

There is not much in terms of economic news or data coming out this week, with the exception of the weekly unemployment claims and the ISM manufacturing PMI data on Friday. There is also Bernanke who will be testifying on the Frank-Dodd bill implementation on Thursday morning and an announcement in the afternoon. So I would expect that traders will buy the SPY at near the $112 level if possible and regroup for the next push.

This recent breakout took my a by surprise, but the discipline of being able to recognize a change when it occurs and change gears on a dime is what defines successful traders. This market will wreck you if you try to fight it and you need to keep your wits about you if you don’t to get caught on the wrong side of a trade.

Watch out for the $112 level for support in the SPY and $115.50 for resistance.

Happy trading and stay tuned.

Bullish Sentiment Is Dangerously High

Bullish SentimentThis is an important week for the markets, as we’ve got the Fed and other important economic reports coming out.

As far as the Fed is concerned, it is highly unlikely that they will raise interest rates from the current 0.25%. The statement following the rate announcement is something to pay attention to though. There will probably be some bearish comments which would further justify their easy money policies.

I want to point out how crazy bullish investors are getting right now. There is a survey done by the AAII which measures how bullish or bearish investors are and is conducted on a monthly basis.

The AAII sentiment index is reaching highs seen in three previous market crashes. This is bad news, especially when coupled with bearish technicals. When this sentiment indicator gets this overheated, the markets tend to peak. Just looking at the below chart, we can see that huge drops followed the peaks in bullish sentiment.

AAII Investors Sentiment Survey

AAII Sentiment IndexAAII Sentiment % Bearish Index

I’ve seen first hand how bullish some investors are getting. Whether it’s on well trafficked blogs or on twitter, I keep getting the feeling that there are too many bulls on steroids right now for the current situation we are in from a fundamental and technical standpoint.

October 2007 was when the Dow was trading at it’s peak of 14,200 which has not been reclaimed in the three years since!
May 2008 saw the markets drop by 6,600 points!
January 2010 was when the markets stopped just short of a correction in a few short weeks!
There is no justification for this bullishness. One report or one reading does not make a trend. There have not been any consecutive economic reports showing strong and consistent growth or significant improvement. Investors have become used to “less bad” news and this can be very misleading. If markets rally because the US loses 400,000 jobs instead of losing 460,000, and investors get excited about this, then we have some serious problems coming our way.

In this situation, prudence may be your best bet. Stepping out of the bull pen out of caution sure beats running for the gates with a stampede behind you, or worse, in front of you. Pre-emptive defensive trading is far better than having to scramble to stop the bleeding.

I don’t like being a bear, but when warning signs flash like this, ignoring them would be irresponsible. We will see what happens in the next few weeks. With volume surely to return to the markets, there should be plenty of action to blab about, so stay tuned for updates.

Vale (Public, NYSE:VALE) To Increase Market Share On Record Demand

Hi Traders,

Brazil-based Vale (Public, NYSE:VALE), the world’s largest iron-ore miner, is forecast to regain lost market share as it is able to increase exports of the raw material faster than it’s major competitors BHP Billiton (Public, NYSE:BBL) and Rio Tinto (Public, NYSE:RTP).

Analysts forecast that Vale will boost production by 24% and it’s market share will increase to 28%. Still down from it’s 2007 peak of 31%, the company will reopen shuttered plants and will continue to invest in increasing production capacity.

Record Demandpic6

Chinese demand strong and still growing.As iron-ore demand returns from the US, Japan & Europe in addition to the blistering pace of steel production coming out of China, demand is expected to rise to a record 1 billion tons this year. Global recovery is still in it’s early stages and we will see much more upside in natural resource prices from here.

This year should be an excellent year for natural resources as the commodities giants scramble to meet demand. This is the beginning of one of the greatest bull markets of all time in commodities and the race to see who can grow the fastest.

Strategic Acquisitions

Strategic acquisitions are the fastest way to meet demand.

Investing in capacity expansion and strategic acquisitions are the keys to competitive growth which is now the sole focus of commodities giants. Acquiring smaller producers is the “instant gratification” they are looking for and this trend will only increase it’s pace in 2010 and beyond.

Indexes Testing Key Support, Yet Again.

Tuesday started off with a bang. Some bearish comments out of China (no, not a typo) was enough to send the markets down to the lowest close of 2010 and tested the all important 1040 support level in the S&P 500. While there was no real “news” out, it seems to have spooked investors for now. It kind of reminds me of an elephant being scared of a mouse at this point. Any mildly bearish news seems to be met with heavy selling.

I’ve been keeping my eye on the StockTwits stream, read several blogs and perused the mainstream media and realised something was missing, and it was fear. There was not nearly as much fear as I have seen during each big 2%+ drops in the market. It’s almost become a routine now to just let the bears have their way until they run out of steam and buy the dip. This routine also includes slapping the bulls in the face once they think they’ve made some real progress, followed by chopping around for several days at a time.

Who has time for deficit talks when England is down 1 to 4?Meanwhile, Europe is trying really hard to keep things quiet and stay out of the spotlight. This worries me because they would be the first ones to come out and talk about how much progress they are making towards “reducing their deficits, “stabalizing this” or “securing that”. Maybe I am just paranoid and they’re too busy watching the World Cup… On that note; one thing that I found hilarious from the news coverage of the G20 meetings this past weekend was the part when German Chancellor Angela Merkel and England’s Prime Minister David Cameron “skipped out of the discussions” to watch the Germany VS England soccer game. Keep up the good work!pic 4

Back to what’s important

S&P 500 Daily Chart

Here’s my read of the tape: Tuesday was more of the same kind of reaction to news we’ve seen several times over the past couple of months. The bears have not managed to impress me as they have barely crossed into new territory, however I’m less impressed by the bulls. I do believe that Wednesday will be a decisive day, whether for the bulls or the bears. If there will be sellers stepping in full force, it will have to be here.

This is a headline driven market, but the technicals are showing a divergence on the daily chart. Could be time for a real reversal, again.

Stock Market Death Cross and an Inside Day.

If the title of this post seems strange to you, then you’re about to be enlightened. Last week was the worst week for the stock market since 2008. The Dow lost 4.51%, the S&P lost 5.03% and the Nasdaq lost 5.92%. There were a couple of other interesting things that happened on Friday as well. This includes the dreaded “Death Cross” and it was also what is known as an “Inside day”. Here’s the breakdown of what the heck that means.pic3

First: The Golden Cross

The Golden Cross is when the 50-day simple moving average crosses the 200-day simple moving average. This is considered to be a lagging indicator, meaning that it will occur after a trend change has already begun. The trend that follows after a Golden Cross can be very strong, partly because several institutional investors see this as a buying signal and it gives them the confidence to bring additional funds to the table.

The Golden Cross in June of 2009 was followed by a rally of about 31%.

Then: The Death Cross

The Death Cross is when the 50-day simple moving average crosses below the 200-day moving average, which is exactly the opposite of a Golden Cross. Again, it is considered to be a lagging indicator because it can only happen after a dip, correction or during a longer existing downtrend. Many investors see this as a very bearish sign and they often sell off in anticipation.

Historical performance of Death Crosses is not as bad as one would imagine, given the name and the great performance of Golden Crosses. The 2008 Death Cross was followed by an extraordinary drop of about 50% and is still fresh in people’s minds.

S&P 500 Daily Chart

This does not necessarily mean that we will have another steep drop. Historical performance of the indexes after a Death Cross has had mixed results including market rallies. Such was the case in 2004 when the markets soared 48% after a Death Cross.

Inside Day

Friday’s price action is what is known as an “Inside Day”. This means that the highs and lows of the market on a given day does not exceed the highs and lows of the previous day. In other words, the price action was confined inside the previous day’s range.

This typically signals a trend reversal, which could last or be very short-lived. Since we are clearly in a downtrend now, it could signal a snap-back relief rally fueled mostly by short-covering. The reason I don’t say that it would be fueled by bullish investors is because they have had so many opportunities to jump in and rally but have repeatedly failed to do so. The bulls have given up key support levels and the bears need a rest before they try to take another bite out of the markets.

These are undoubtedly exceptional times. It is futile to try and predict every move the market makes, so I just try to trade the setups that are provided to me. At times this means not trading anything at all until an opportunity presents itself. If you’re looking to buy some stocks for the long-term, I suggest waiting on the sidelines for awhile longer. I say this despite having said that I expect a sharp relief rally earlier because that’s all it will be, a relief rally. Probably not a full-blown bull run and if it is, then you will have plenty of opportunities to get in without taking the risk of potentially steep draw downs.

Leave a comment below and let me know what kind of outlook you have on the markets. I would really like to hear what kind of time horizon you are looking at, whether you’re a day trader or long-term investor.

Stay tuned.

Financial Select Sector SPDR ETF NYSE:XLF Chart

Financial Select Sector SPDR Fund (the Fund) seeks to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index (the Index). The Index includes companies from industries,pic 6such as diversified financial services, insurance, commercial banks, capital markets, real estate investment trusts (REITs), consumer finance, thrifts and mortgage finance, and real estate management and development. The Fund utilizes a passive or indexing investment approach to attempt to approximate the investment performance of the Index. The Fund’s investment advisor is SSgA Funds Management, Inc.

Helpful Analysis for Stocks, Futures, and Forex pairs

Hi Traders,

With all the movements in the market recently, traders and investors are focusing more and more on protecting capital. I’ve found that by properly knowing the trend of the symbols in my portfolio and keeping on top of those moves, I’m able to protect capital and pull profits out of the market when I can.

But staying on top of the changes and momentum shifts often becomes overwhelming, especially if you’re watching a large number of symbols and open positions, like me. One free tool that I utilize to help me keep on top of my portfolio is called Trend Analysis, from the team that runs MarketClub. Trend Analysis is a daily email analysis tool that gives me insight into exactly what my portfolio is doing.

Click here try it out for yourself.

The link above takes you to get your first symbol analyzed and from there you can easily add more symbols to get a daily update, which I find very helpful.

Again thanks go to the MarketClub team for giving free Trend Analysis trials to our readers.

Once you’ve tried it for yourself, let me know what you think!

Stay tuned.