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Aaron Basile
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Contrarian Investor, Commodities Speculator, Technical Trader.
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Aaron Basile
  • The Copper Divergence And The Fed’s Impact On The Market For Next Week 0 comments
    Jun 19, 2011 8:11 PM | about stocks: SPY, USO, JJC
    aaronbasile.wordpress.com/2011/06/19/the-copper-divergence-and-the-feds-impact-on-the-market-for-next-week/

    To follow up on yesterday’s analysis, I’d like to add two key points as to why we’ll get a bounce in the next week to week and a half. The first is point is that copper is yet again diverging from the equity markets. On May 10th, I pointed out the divergence between copper and the SPY as the copper ETF JJC literally tanked versus the SPY in just a few weeks. I noted that every parabolic move in the SPY to JJ ratio was met with another sharp movement downward, meaning that the divergence corrected itself. Coincidentally, or perhaps not, May 10th was the exact peak in which the SPY gained versus JJC and the ratio has fallen from 2.625 to 2.355 since then.

    You can see that despite the recent decline the ratio is still in an uptrend and will find support at the 200 MA and the 2.3:1 pivot. What this means for the market in the near term is that copper is going to fall, and the market is going to rally.

    Copper has outperformed the market during the market selloff and has actually maintained an uptrend. Copper is a leading indicator and is telling us that the market is about to rally, at least enough to shake off the oversold condition. I think that this also means that copper is about to break down and underperform the market. It is having trouble staying above the MA’s which are tightening, and has major resistance at the $55 pivot. Additionally, the uptrend it has traded in is simply an inside bar bearish consolidation from the move down in late April. I think in the short term JJC is headed to $51 before any major bounce occurs.

    You can see above where the ratio began to increase exponentially, and where it peaked. It began right when the market staged a rally from a pullback off of the March lows and it peaked just after the market peaked in May. If the ratio does in fact find support at 2.3:1, then simply put, the market will rally and copper will fall, but ultimately that means that the market is headed lower after the bounce in equities plays out.

    The second key point I’d like to make is the end of QE II and the Fed meeting’s impact on the markets. Clearly it is bearish for the market that QE II is coming to an end because POMO will no longer be active and there will not be that extra support for the market during trading hours. However, that is most certainly priced in at this time. Just take a look at the market before QE II was announced:

    Immediately after QE II was announced the market got a nice pop but it was an obvious example of buy the rumor, sell the news as the market corrected just days after the gap higher. Don’t use this chart as a model for what will happen next week, just use it as an example. In other words, I’m not saying that we’ll have a rally that is proportionate to the correction we saw in November, just that the same concept applys to the situation we’re in. In any case, as I said yesterday, the market is still extremely oversold going into next week’s fed meeting and the idea that we’ll just crash through support on news that we all already know about is a poor mindset to have.

    One last chart supporting an oversold rally is coming is the USO. After the completetion of a perfect bear pennant, oil has fallen dramatically in the last couple of trading sessions. Oil is very oversold and after the gap lower and the spinning top candle, it’s hard to say that this can go much lower especially since it is right above support at $36.

    Once again, I’m still generally bearish overall and I am waiting for the next shorting opportunity. I am out of DXD now and may choose to take a long position this week but I am not planning on holding any long positions for more than a few days to a week depending on what the market looks like. My advice for the long side would be to pick extremely oversold stocks that are close to, or have pierced support and be sure to use tight stops on them and be ready and able to exit at any time. From the short side, I would stay out until the market gives you an opportunity. I talked about this yesterday, but you need to let the market come to you and for no reason whatsoever should you be chasing charts.

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