BestOnlineTrades

The Relentless Pursuit of the Perfect Trade

There is a very large move coming in the SPDR Gold Trust (ETF) .  It looks like this move will occur Friday September 3, 2010 right near the USA government employment report. 

There are several factors leading me to the conclusion that a huge move will occur. We have the SPDR Gold Trust (ETF) trading in a small rising wedge right near topside all time high resistance.  We have the US Dollar Index trading in a stance that suggests to me it is ready to break down badly.  We also have the GDX gold miners ETF trading at the top of its large swing trading range as well.

I have to be honest with you.  I have a lot of confusion about which way the SPDR Gold Trust (ETF) is going to break tomorrow.  My initial thought is that it will be a huge topside breakout to new life time highs based on my read of the charts, but there are some problems with that theory.

One problem is the light volume rally we have had in the SPDR Gold Trust (ETF) since the early August 2010 low.  I just think we should have had much more robust volume on the advance towards the life time highs.

The second issue is the GDX.  It did a very large bearish engulfing candlestick yesterday of a previous doji.  The GDX is playing head games right now and is teasing an indication of a possible move lower.  The engulfing setup has not however been confirmed yet.

The weekly histogram of the SPDR Gold Trust (ETF) looks quite bullish and says a huge topside move should occur next week.  September bullish seasonality kicks in now or more towards the first third of September.

So I am getting some mixed signals right now.  I suspect those mixed signals will turn into confident signals after tomorrow morning…

This is definitely a very interesting setup here.  If forced to pick a direction I would have to say up at this  point based on the way the US Dollar Index is setup. 

Today we saw big price destruction in the sp500 which gave back a good portion of the hard earned gains of last Friday’s reversal.  I was looking for a confirmation of last Friday’s bullish reversal today but clearly we did not get anything close to a confirmation today.  Instead we got a deep retracement that has to be truly testing the resolve of any bullish opinions.

Today the ARMS index closed at 3.8.  Not a record closing number but still in the high range of recent months.  And despite today’s high reading I do not see any new lows being taken out, not yet at least.

I have been trying to get into the mind of the market so I can figure out what it has in store for us this week to close the week  out going into Labor Day Weekend.  I am suspicious that today’s big drop and ‘give back’ of the action from last Friday is the beginning of another big down leg.  It just seems too convenient to give the bears everything they hoped for right on a low volume Monday to start this week.

The summation index still looks bearish and is in a downtrend but has not crossed below the zero line again (not yet at least).  The volume today was very light across the board which is part of the reason I am skeptical of the bearish action today.  Yes, we had plenty of price destruction, but where is the beef ?  The volume was absolutely pathetic today.

The volume analysis I did before still stands and is one of the main criteria that is keeping me bullish right now.  If this volume analysis does not work and not show some more bullish price action the rest of this week I might have to throw it under the bus.

Both the XLF, the SPY and the IJR did recent volume rests and reversals on 44 to 54% LESS volume and then closed back higher into the range.  So despite today’s big points drop, the volume analysis still holds in my book.  I have seen volume tests on 10% lighter volume that lead to big reversals.  But 50% volume reversals are rare and usually very strong signals.

The sp500 needs to bust through 1040.12 with strong conviction to flip me over to the bearish side again.  The XLF needs to bust down through 13.29 on a closing basis and the IJR (The S&P 600 small cap ETF) needs to close below 52.01.  If all three of these events occur during this week sometime then I will have to raise the white flag and declare the volume analysis a complete failure.

These volume reversals to me suggest that we should be heading back up to the top of the swing trading range.  The swing trading range is so large at this point that it could mean quite a large upside move.  The IJR chart is below:

I realize that is seems unthinkable that the indices could move back to the top of the range from a fundamental standpoint.  I too have a hard time believing that such a thing could be possible at this point.  Still, I am a very fearful long right now, but I will pull in my horns should the market tell me to do so in the days ahead.

But for now I am sticking to this forecast.  The IJR really looks quite strong to me in the chart above.  These small caps can show earlier signals than other large indices.  I am thinking the IJR will show the way for us.

The XLF daily chart below shows the same type of situation.

If I am correct then we should start to see some big signs of strength soon this week in the form of 20/20 candlestick bars also known as ‘belt hold candlesticks (wide price spread and closings near the highs).

A close look at the longer term sp500 chart shows that the sp500 really needs to start going up very soon otherwise it will be at risk of breaking the long term up trend line since the March 2009 low.  We are touching this long term up trendline for the third time which makes it significant.  We rejected it last Friday and bounced off of it sharply previous to that.  But this time we are hitting it on light volume and we have yet to see a strong reaction topside off of this line.  I have to admit that a big down week this week is going to bust this final bull market trend line and could perhaps seal the bear case.   On the other hand a strong topside reaction off of this trend line once again will confirm its strength and bode well for higher prices in September.

My biggest confusion over the years has to do with being able to separate the technical aspect of the market with the fundamental and news side of the market.  The news out there right now makes me feel like the market should drop 2000 points this week.  But the chart is telling me the exact opposite… and so the journey continues…

P.S.  My posting this week may be somewhat lighter than is usually the case.  Expect posting to be at regular speed after the Labor day holiday weekend.

This may be one of the most important posts I have ever written here at BOT.

There is a key technical analysis event taking place RIGHT NOW in the markets that forces me to tip my hat to the bullish side right now and advise extreme caution on any bearish bets going into next week.

Recently I did a volume analysis of the SPY ETF and it was flashing signals to me that the downward force in terms of volume was not enough to get the job done for the bearish case.

Today we are seeing the market rally and assuming the IWM closes above 60.68 then we will have a confirmed bullish buy signal in the IWM ETF daily price chart versus the MACD Histogram.

Best Online Trades is going long here based on the current setup and our indication before that we would do so assuming a confirmed MACD Histogram buy signal on the IWM.  It is not confirmed as of a closing price but I am speculating that it will be by end of day.

There are other things going on as well.  The volume today.  It is not even mid day or end of day.  But I can tell you right now that the volume on the SPY is already 140 million shares which is very heavy before mid day.  Whether or not we are able to get double this amount by end of day or close to 300 million shares remains to be seen, but it would be a very significant event if we do in my opinion.

The other important analysis has to do with the IWM Russell 2000 ETF chart structure.  Look at the chart below and notice a few important points about this chart structure:

If you look at the IWM chart there is an important context with which to understand the recent action in my opinion.  We have the long term bear market resistance line from the April 2010 highs.  This line was BUSTED with a price breakout on 7/23/2010 with two price bars and a sign of strength.  Volume was robust but not blockbuster volume.

So you had that initial breakout north from the bear market down trend line in late July 2010.  Then, the IWM drifted down lower in a retracement back down to the recent lows on LOW VOLUME in the form of a slow retest.

This drift down created a pattern that looks like a falling wedge formation (shaded in red).  Now today we are only slightly busting the top of this falling wedge formation on very robust volume.  This is an indication to me combined with the MACD histogram buy signal that we are going to bust through this falling wedge and head for the 66 range on the IWM which is the measured target.

The fact that we have fallen back down in the form of a double bottom and falling wedge on low volume is important.  I have seen many stocks behave this way at bear market bottoms.  They do an initial thrust higher trying to break out topside from bear market trend but then do a 100% retracement and double bottom retest on light volume.  Many times this type of market setup leads to a big topside move.

This post was written at 12 noon Eastern Time today.  It remains to be seen still how the market closes and whether or not it can close near the top of the range and on the robust volumes I am predicting for end of day.  A lot can happen during the second half of the market day, but based on this new look and interpretation of the IWM I have to take the bullish side here and go with it.  The IWM chart is speaking to me very loudly today and it is not looking bearish at all right now. 

The big money will be back in September to take this market in a determined direction.  It is still early, but I think they want to take it higher from here and current prices may be the final bear market lows right now.

Could it actually be possible that Glenn Beck, with his Hindenburg Omen talk on 8/25/2010 has actually nailed the final low in this market ????

The market today was unable to confirm yesterday’s candlestick reversal pattern on all the popular indices and the IWM Russell 2000 ETF was unable to confirm the potential bullish triple P  pattern on the MACD histogram.

The sp500 is showing that the histogram continues to show downward momentum and does not have any clear signs of reversal yet.

For the bullish case one can point out the relatively light volume today on the SPY ETF of only 224 million shares.  But a bearish case can still be made in that we don’t have any confirmed reversal and also that we are hugging the bottom of the swing trading range without a decisive downward break.

This hugging of the bottom of the swing trading range (and also very near support levels) is still potentially very bearish because it could set the market up for a ‘jumping of the creek’ tomorrow on the GDP report where the market busts through support after the recent 3 day build up.

It could go either way tomorrow.  I did not like the close today either.  I hate to say it, but this one is a coin toss.  I have evidence that seems about equal on both sides of the market.  So it would seem the GDP report in the morning is either going to gap and go this market up in the morning. Or gap it down below very key support.

The SMH in particular looks like it is hanging on by a thread.  It closed right at the bottom range of its supporting channel line.  But the volume today was really light on the SMH. 

I really thought we would not get a clear break up or break down signal until the next two weeks.  But there exists the possibility (based on today’s close and lack of confirmation of yesterday’s bullish candlestick and MACD Histogram setup) that we could get a significant break down signal tomorrow morning with the GDP.

Yesterday we touched a very important long term up trend line.  The up trend line that has been in force since the March 6, 2009 low.  This long term up trend line has now been touched 3 times including yesterday. 

The line represents the bullish trend.  Despite all the sideways price action over the last several months the fact remains that we are still trading above this key longer term up trend line.

I usually like to see a strong reaction up from a trend line to show that there is real demand in the market.  We already had a  strong bounce up off of this trend line after July 1st, 2010.  Whether we get another one during the next week or two remains to be seen.

A pretty simple chart but important to watch closely because if the bears are not able to bust below this up trend line with conviction during the next two weeks then it is going to significantly weaken the longer term bearish scenario. . .

I went long ARM Holdings plc August 25 near the close for a momentum trade.  This stock has what looks like superhuman strength given the lousy bear market trend of the indices in recent months.  ARMH is a monster.

I have a protective stop just under today’s low at 15.24 and think this could get another thrust higher given its current strong momentum.  Even during the recent drop in the market ARMH went higher.  The stock has some amazing relative strength.  It has what seems to be a small head and shoulders bottom that formed after filling the recent big gap higher.

Apparently they have a big order backlog and fat profit margins from license revenue (they are in the semiconductor sector and benefiting from move to mobile gadgets and devices).

The MACD is moving into a buy signal and RSI may get a move into the power zone above the 70 range next week.  I am looking for an exit if and when ARMH can get its RSI (relative strength index between 70 and 75).

If I am right about the market bouncing higher then it might help ARMH make a new 52 week high in the weeks ahead.

ARMH is a pretty classic uptrend and since the May 6, 2010 flash crash has never looked back. . .

Just to provide a little bit more context I think it is good to look at the Russell 2000 support and resistance levels because they are so important for future possible trend direction.

When looking at the chart below of the Russell 2000 I try to be as open minded as possible. I realize that there is large group that is looking for a head and shoulders break down.  There is another group that is looking for an Elliott wave break down out of this pattern.  There are probably some bulls too that are looking for a second leg of bull market run that started in March 2009.

The bottom line is that we will not have true clarity on the next new major trend direction until we either break below support on the Russell 2000 or break above the down trend line (the white one).

It is also unlikely that this definitive market direction decision will be made until the first or second week of September on the theory that the big money crowd does not arrive back in town until that time frame.

In my previous post I talked about how it looks like we could move topside again.  Even if we do, it does not prove that much until a break above the white down trend line occurs, or we fall back down and break through support (590 on the Russell 2000 ).

The big money is going to be made on the clear identification of the new trend out of this large pattern (the pattern is the descending triangle or the larger head and shoulders topping pattern).  It is worth mentioning that both a head and shoulders top and a descending triangle pattern can fail.  Their reliability is a statistical percentage.  Believe me when I tell you that I have seen these patterns fail before right at the last minute.  The failure or success of the patterns is just a matter of time and patience. . .

We are once again at a crucial juncture in the market and possibly a very significant turning point.

The SPDR S&P 500 ETF SPY today did yet another reversal and showed that the market is lacking enough energy to bust through the very critical lows of the large swing trading range since April 2010.

Today was a very very important day in terms of what the SPDR S&P 500 ETF told us.  Today the SPY tested several very important key swing trading lows going all the way back to March of 2010.  In each instance the lows were tested on substantially lighter volume which is a bullish reversal sign for the market once again.

The ultra bearish scenario may be completely dead as of today and I would say at this point to be extremely careful about being heavily short this market going into September 2010.

We closed out our short trade today on the SPY ETF and intend to go long in the morning with the following two conditions:

• We need a bullish confirmation of the recent two day bullish engulfing candlestick pattern.  This means we need a close above 106.39 in the SPY.
• Secondly, we need a bullish close above 605.71 on the Russell 2000 as a confirmation of a MACD Histogram buy signal.  The Russell can tend to lead the market on both the bearish side and the bullish side of the market.  Right now it seems to be leading and showing a leading bullish possible buy signal on the Histogram

Probably most traders to not pay that much attention to trading volume.  But if you think about it, volume can potentially be the most important clue the market can give us because the volume is essentially the energy that moves markets.  It is the real money, the power that either has the force, or not.

(more…)