The equity market dropped sharply last week after the Fed’s “Operation Twist” was not enough to get investors excited about the long side. Bearish technical patterns in key asset classes signaled that a major move down was coming after the month of consolidation following the initial drop in August. The only chance the market had of holding on for a move higher was the fact that too many investors and traders had already fled the market and had begun to overload the sell side. At any rate, the market consolidated long enough for key stocks like AAPL and AMZN to make new all-time highs which may have been enough to get retail longs back into the market.

Regardless, the market has flushed and more downside should follow, most likely sooner rather than later, but I am not so sure that the market will completely crash in the near future as it appears that policy makers in Europe and the US are already preparing the market for a default in Greece. The fact that Ben Bernanke announced policies last week that he must have known would not be enough to prop up the market smells fishy in itself. Without getting too deep into detail, it looks as if the politicians and bankers are attempting to flush the market before Greece officially defaults on the basis that the default would eventually price itself in.

Moving on to the charts, I can finally claim victory in my call for dollar strengthening as price activity has now indisputably completed a reversal and breakout of the previous downtrend. I originally suggested that the dollar and gold would both strengthen versus the Euro back in February and I also successfully called for the bottom in the dollar in May, citing capitulation selling volume on the ETF UUP for multiple days towards the end of April and into early May.

The dollar index had a nice consolidation of the big upmove in early September right beneath the $78 area. There was major resistance at $77 and after consolidating sideways for a week or so, the dollar yet again broke higher after the FOMC policy decision. The USDX paused on Friday to digest the buying pressure, however the next major level is $78.87 and should the dollar consolidate again beneath this level, it may build the momentum to break through that level and confirm.

Coinciding with the dollar, the SPX paused on Friday after the sharp decline last week. The many patterns that I cited in the analysis videos – the bear flag, the M&A reversal/shoulder head shoulder pattern etc, have all begun to play out. The targets for these patterns are in the 1030 – 1050 vicinity on the SPX and 9700-9800 area on the DJIA. There is already support in those areas and the fact that these bearish patterns are targeting them reaffirms my belief that the market will ultimately trade there. My outlook for this market over the medium to long term is that there won’t necessarily be any 2008-esque collapses, but over time it will appear to have been a grind lower with highly volatile swings in both directions, though the possibility of an outright crash is certainly on the table.

Regarding the near term, I shorted ahead of the FOMC decision which turned profits and should the market consolidate for a few days, maybe less, I may take another short with a stop based on a close above Thursday’s high or a fill of the breakaway gap which was the close to open from Wednesday – Thursday. To reiterate again, the only hope the market has of rallying, is that too many retail investors have piled into short positions and the institutions decide to swing the market higher to shake out the weaker players. The problem with this is that this type of outcome is more typical when the market is close to options ex, and currently we are still several weeks away from next month’s expiry.

Over the last couple of weeks, I have cited copper as a potential leading indicator for a selloff in the equity market given that copper is an economic forecaster. That predictaion has also has come to fruition. Copper first broke down in the middle of last week and I posted the trigger of the bear flag which coincided with the break of a three-year trendline on the weekly chart.

There isn’t much to say about this chart from a technical perspective since it has crashed through every single major level of support on the chart since the initial breakdown. However there is a bit of minor support in the area of $3.17-$3.23, though that area was more or less tagged on Friday and any bounce will be due to pure overextension from the 20 MA, which it is currently 16% away from.

Crude oil was another chart I used as a leading indicator for a move lower in the equity market being that crude, like copper, also gauges economic strength. Again, there isn’t much to go over here, other than the chart pattern worked out yet again, there was a bear pennant on the daily chart much like the one that played out from late April – June and it enabled me to forecast a drop in oil prices that would translate into pressure on the stock market.

Gold and silver both dropped after the Fed announcement and entered an oversold condition in an extremely short period of time. The original explanation was that the European banks were taking profits on long gold positions in order to cover margin calls from the equity selloff. This explanation is arguably good enough to cover Thursday’ selling, but not nearly enough to explain the continuation into Friday. It is painfully obvious that Gold and silver collapsed because inside info was leaked prior to the CME’s margin hike on Friday.

Simply put, the fundamental case for selling on Thursday and Friday should have been dead from the beginning. The Fed was/is always in a box when it comes to a policy decision regarding the price performance of precious metals – if the Fed attempts to stimulate, then PM’s rise on inflation expectations and if the Fed does nothing, or not enough, then the metals rise due to uncertainty and sovereign credit risk. Between the dollar index hitting new highs, the stock market bloodbath, and treasury yields reaching record lows, gold and silver should have at the very least, held the flatline last week, and even that would have come as a shock. It’s not to say that the metals will always rally, but the knee-jerk reaction from the Fed should have at least given them an upside bias for the remainder o the week.

My guess is that the CME had scheduled a margin hike for Friday on the idea that the metals would inevitably rise after the FOMC for the reasons listed above. Someone inside the CME then leaked info to institutions but the problem was that the margin hike was never cancelled after the metals collapsed. Interestingly enough, the last time that the CME hiked margins, there was a selloff leading into the margin hike, and a bottom was put in after the announcement which of course makes perfect sense. The same exact thing happened last week and I expect gold and silver to bounce this week as the institutions cover their short positions.

Regarding the chart, notice how gold found nice support near the last area of consolidation around $1662. This is a good level for a bounce given how oversold gold is in the short term.

Another gold chart that often revert back to is the weekly, considering that the three-year trendline is one of the strongest trends ever. Some interesting data about this chart is the most recent peak, is really no more extended than other previous peaks in this cycle. This is significant because though the move looks dramatic in nominal terms, percentage wise the most recent peak was normal, meaning that gold really isn’t that extended in terms of this current bull cycle. The three most extended peaks from this trendline are February 2009, (Peak of $1007 – 23%) November 2009, (peak of $1227 – 19%) and of course August 2011 (peak of 1923 – 23%).

By using this trendline as a basis for gold’s health and as a gauge for its cycles, it would then make sense that over more time (perhaps the next year or so) gold may revert back to this trendline yet again as I called for over the summer. Clearly, that wasn’t the case this summer, but as with the call for a strengthening dollar, I have been early before.

Silver sold into the 200 MA on Thursday which should have been a solid level for at the very least a small bounce. That fact that it did not find any kind of support there confirms my belief that there was inside selling. In any case, I entered silver as a long on Friday after the pierce of $31 ($30 on SLV) which coincided with the 2009 trendline that I have talked about many times in the analysis videos. I originally called for silver to reach this particular trendline after the initial blowoff this Spring and through months of bearish consolidation, it has finally reached that level.

Regarding the trade, I think we’ll see a gap lower on Monday, (but not a new low) followed by a rally throughout the rest of the day and into Tuesday. That is essentially what happened the last time the CME hiked margins after gold and silver were down on high volume. Whoever shorted is likely holding into the weekend given the fact that the metals weren’t able to get much of a bid off of the lows on Friday and that pressure should translate into a gap lower on Monday. After that, I would be surprised to see the metals staying suppressed for long, it just doesn’t make any sense to risk profits when someone is that far in the money.

Also adding to the case for a bounce is that $31 is a major level and as mentioned before, it coincides with the 2009 trendline on the weekly chart. If anything, expect buyers to show up in this area on a gap down on Monday. Also notice how the chart continues to lead the news, the chart tells you what is going to happen, and then the news confirms it! Going into next week, I have no trades other than SLV $30 Q4 calls, but as mentioned before, if the market consolidates sideways, I may use that to look for shorting opportunities.

The EUR/USD collapsed in the shortened holiday week of trading as the dollar index may finally be close to strengthening in the manner that I had originally predicted it would earlier this year. The stock market performed poorly on Friday and did not hold onto to gains made in the beginning of the week. Currently I am almost completely in cash and I have a very neutral stance though things continue to get worse in Europe which gives me a slight bearish bias.

The dollar index is finally beginning to make moves versus the Euro which I had believed to be the fundamentally correct course of action for a while though until now, that scenario had not been the case price-wise. I have previously expressed that the dollar has remained suppressed (particularly over the last 5 months) due to Chinese GSE’s but also because of institutions like Goldman Sachs who have publicly stated that they are increasing long positions in the Euro and short positions in the dollar. It is in their interest to keep the dollar suppressed in order to maintain the illusion of recovery. However, now fresh shorts are already well underwater as the dollar pierced through the 200 MA with conviction this past Friday and a short squeeze could be in play after the dollar consolidates here as the $77 area is a major resistance level.

The 200 MA is obvious resistance, but there is also a pivot low from February at $76.88 which was also pierced and if you use the weekly chart, you will notice that the weekly 50 MA coincides with the 200 MA on the daily. Furthermore, $77.10 is a 50% retrace from the January 2011 high ($81.32) and the May 2011 low ($72.70). Last but not least, $77 is major resistance because the DXY did not consolidate before piercing the level and instead gapped higher in a very short period of time, indicating an overbought condition. Keep in mind though that the dollar was oversold (and suppressed) for a long period of time so despite this short-term overbought condition, any news out of Europe can causes short to cover and the dollar to rip higher yet again.

The bear flag on the SPX has all but broken down though support still remains at the lower trendline. This pattern is not valid until the market can confirm below the support trend and at that point it may be safe to short stocks that are still elevated in price, though I am personally not at all pressured to participate given the increased risk of volatility. The target for this bear flag is 1010, or the June 2010 lows.

If copper decisively closes below $3.99 tomorrow, that would indicate a technical breakdown of the bear flag and the pattern would then be in play. In other words, this chart is indicating a very bearish outlook over the next week to two weeks but again, there are other reasons to not take this as law and short the market.

One of those reasons is because oil held up well on Friday. There is the possibility that oil did not collapse because of the traveling that took place on Labor Day weekend and that it will begin to sell off next week, but that assumption leaves too much in question to base investment decisions on.

Another reason is that the financials have surprisingly held up, relative to the lows put in during the end of August. The pattern on the chart is beginning to look like a potential inverse head and shoulders or perhaps a W-V reversal. The entire situation that we’re in now has everything to do with the financial sector so the fate of financials is tied to the fate of the overall market and additionally, financials are a leading indicator of the market’s performance.

Again, there is no reason to leverage into excessive short positions at this point based on the news. We know Europe is bad, we know financials are a disaster. Every time the media mentions this, the short side looks less and less appealing. Today I saw that Forbes posted a chart of the bear flag on the SPX that I have pictured above. This tells me that retail investors may be looking to short the market. I never want to be on that side of the trade. In any case, be sure to look for oil and financials to confirm the other charts like the SPX, DXY, and Copper before beginning to go short, or long for that matter.

I may take short or long positions next week based on short term momentum but currently I don’t have much of a bias regarding permanent direction. If you do have your mind set on shorting the market in fear of missing the move, use a fractional position to buy November-January out of the money puts that coincide with the strike prices of the June 2010 lows. The small amount of capital committed to the option would not require high risk, and the distance away from the current strike could give you a high reward, regardless of the small capital commitment.

Though most analysts expected a huge drop today after Bernanke was to disappoint the market, the selloff after Bernanke initially said that no new easing was planned for the economy lasted for a whopping 30 minutes and once again the contrarian mindset has paid off. A rally after and during Jackson Hole speech was telegraphed by the copious amounts of negative expectations for the conference. Logically, a rally is the only outcome that makes sense since the market cannot be “disappointed” by anything Bernanke says when every analyst has set the bar as low as possible, predicting everything from let-downs to a double-dip recession to follow the conference.

Copper had given us an early indication of more short term upside as despite the choppy volatility in the stock market, copper had held up well and had actually tagged the 20 MA for a 2% gain on Thursday while the overall market was slammed. Copper is now above the 20 MA and though there is good resistance at $4.13 which may hold strong, the strength in the metal should translate over to the equity market.

Another more recent example of when bearishness was high and puts were heavily outweighing calls was the downturn in June that preceded the epic Independence Day rally. In this scenario copper traded flat to positive while the market looked close to breaking the 200 MA. The strength in copper was a leading indicator for the 100 point rally and the similarities between that move and the one we are currently in are striking.

In both cases so far, bearishness has been off of the charts, copper has held up, and the selloff came before and slightly after a Fed meeting but never made a new low. Also, the June 27th – July 1st
rally happened on low volume and came before the shortened holiday week. The next week of trading will be the week leading into Labor Day. Volume is bound to be low, and we should expect the market to float higher especially later in the week.

The 60 minute chart shows some very nice action as well. A new pivot low has been put in on a pierce of $114 and towards the end of the day, the SPY consolidated in a bullish manner above the 20 MA. The best part about this 60 minute chart is how the market did not get extended enough to reach double top at Thursday’s opening high, which was also a topping tail. The reason why this is bullish is because since the market is now consolidating beneath support, that topping tail now becomes minor resistance and should not be shorted, even for a scalp.

Regarding Irene, I wouldn’t be surprised to see a lower open Monday on a knee jerk reaction however my views on the effects of the Hurricane on the market are actually positive. Try an experiment sometime this weekend – ask one of your friends who does not follow stocks if a hurricane in Manhattan would be good or bad for the stock market. The way I am leaning is the opposite of what their answer will be. Why? Because the fund managers and bankers are staying dry in Florida celebrating Labor Day weekend early which strengthens the case for lighter volume this week.

In the stock market, when the effects of a certain event are obvious to the point where any Joe on the street can tell you the logical outcome, the way those events play out rarely favors the no-brainer scenario. There has been a lot of downside pumping since the SPY bottomed at $110 and the market has not made a new since. In fact it has made two higher lows and as long as that trend stays intact, I will continue to favor the upside.

The market was weak after the comments from Merkel and Sarkozy that were less than accommodative though it seemed that many were expecting the two to not announce any type of new intervention. This may be why the selloff today was short lived and the market recovered for just a 11 point loss. The media may continue to hype the downside but keep in mind that this is an options expiration week and the market is currently showing some resilience after the late day rally so any pullback should be taken as bullish consolidation until 110 is lost on the SPY.

The tail on today’s candle suggests that there are still plenty of buyers out there though I do expect a bit of a pullback this week and perhaps some increased volatility. If you look at the 10 minute chart of the SPY and all of the major sector ETF’s (XLE, XLF, XLU), you can see some major yo-yo action over the last two days that is second only to the 700 point reversal from Tuesday of last week that marked the bottom to date.

If the right patterns presents itself, I’ll be looking for more long positions on a bullish pullback. The SPX should be headed in the range of 1240 to 1260 over the next week to two weeks. Utilities and financials are the sectors that I am watching for possible long swing trades since utilities are the strongest and may outperform based on strength, and financials are the most beaten up and may surge due to technical reasons.

Gold has been one of the barometers for strength or weakness in the market over the last two weeks and though it did have a nice up day, it is still trading within the range of the pivot high of $1817 that was made last Thursday. To put it plainly, if gold does not make a new high, then the markets will get a lift and will convert into a more complacent mood at least in the short term. Also, it’s worth mentioning that short term calls on GLL are looking succulent.

For those still wondering, TBT is still in play. Action over the last three days is nothing more than a bull flag which is something that I predicted would happen last week. The bottoming tail is still holding and any noise about treasuries surging after the Merkel/Sarkozy comments is nonsense. The chart clearly shows bullish consolidation after an oversold bottom and a sharp rally off of the lows. Targets for TBT are $28.50, $29, and $30.75 and stops should be advanced accordingly. Should the bull flag fail, TBT will become a stop-out and yields will fall further.

Despite gold making yet another all time high again today the gold mining stocks have looked weak and are lagging spot price by a wide margin. Part of this is to be explained by the current risk-off nature of the market since investing in a company that owns gold is riskier than just buying the metal. At this point traders aren’t looking for profits as much as they are looking for protection so the lag between the two makes sense. However in the past a sink in the GDX has led previous corrections in gold and given that gold seems to be making a new all time high every time I glance at the chart, it also makes sense to conclude that there has been a sizeable influx of longs in a short period of time which could tell us that gold is getting extended.

I do see short setups in the sector but I won’t be taking any yet as we are a few hours away from the Fed minutes and a day away from a speech that will be made by the Fed chair. As such, shorting into the Fed announcement would be suicide since you can almost guarantee a rally in gold and silver regardless of what is said (lets face it, Bernanke is the ultimate stimulus for PM’s). However, gold is extended farther than it has ever been save the 1970′s going into the Fed announcement and given that everyone seems to be bullish on the metal, the FOMC may be the perfect contrarian indicator in this case.

Gold is up 15% in the last month which tells us that it is extended but that alone is not enough to initiate a short.

The weakness in the GDX tells us that traders are bullish only on the metal and despite all that has happened, they are not completely sold on gold in the long term and translate gold as an investment as a safe haven and not something that will garner profits. There is a bear flag on the daily chart of the GDX and its target is the pivot low of $53.37 that was set in May. Again, until the FOMC statement is made, I wouldn’t advise any type of trade given that the pattern can be easily negated during Bernanke’s speech, but what you need to know is that if it stays below the 200 MA on a closing basis, the pattern is intact.

Some may remember by article on silver’s long term trends from a few weeks ago where I used the charts of several silver miners that were showing head and shoulders tops to bring to light the possibility of a large correction. The head and shoulders pattern is still intact on SIL and price activity is hovering right on the neckline. Confirmation above the 50 and 200 MA would likely negate the pattern but confirmation below the neckline would initiate a target of at least $16.

Moving on to the weekly chart of SLV, the recent consolidation is still an inside bar bear flag. The lower trendline is where I expect silver to ultimately reach at some point in the future and I believe that a tag of that trendline could be the best buying opportunity we’ll have in silver since the 2010 Jackson Hole meeting. Just be sure to keep in mind that the circumstances in which the level is reached will play a huge factor as to whether or not it becomes the ultimate bottom.

The sum up what I’m seeing on the charts above, SIL served as a leading indicator for the drop in silver as it came 7% off of the highs in the weeks leading up to silver’s apex. Currently we’re seeing similar action from the GDX in relation to gold as the GDX is 9% off of its own peak and gold is continuing to make all time highs as more bulls enter the market. Therefore I’m seeing a few red flags pop up and would advise remaining careful until equities find their footing and gold stablizes.

Regarding the precious metals market as a whole, everything has played out as expected. Gold is making all time highs due to the fear of default and financial problems in Europe, poor economic data in the US, and the downgrade of our debt, which is exactly why we all have been bullish on the metals to begin with. The important thing to remember is that although things are playing out as expected and the fundamentals have never been better, the same thing could have been said for silver in April before the collapse, which if you had bought at the top, you would still be underwater and will still have to wait many months for those highs to be reclaimed.

Caution is the best strategy here. The stock market is getting pummeled and there is no reason to be a gunslinger. A pullback or dip is not a 2% drop in gold in one day after a 15% rally. A pullback is a 5-8% correction over a period of time (I.E.) weeks or months. After silver collapsed some of you may remember me saying ‘I don’t care how far silver comes down, what I care about is how long it consolidates for’. What this means is that time plays much more of a role in a market correction than price does so do not feel pressured to buy more shares of your favorite gold stock in fear of being left behind. That kind of mentality is based off of emotional trading and leaves logic behind.

The SPX finished 6 points higher though not before being down 20 points early in the session in another wild and volatile day of trading. The market snapped an eight day losing streak and in that time it had been down almost 10%. Despite the size of the drop, the VIX did not make a new high which was set earlier this year on March 16th even as the S&P had already traded through the low of that same day, which was also the YTD low for the S&P. Nonetheless, there are some key items that have come out of today’s activity.

Firstly, the SPX made an unmistakable bottoming tail on the daily chart. Volume on this reversal is also extremely high and even eclipsed yesterday’s surge in volume. This will not be a long term bottom, but it means that a rally, if only a brief one, is in order. The reason why the bottoming tail is valid and has a high probability of playing out is because the market traded lower for eight consecutive days before making the tail and positive close today. Also, key levels were pierced while making the tail on the chart.

Secondly, MAJOR levels were broken in the last two days, however NONE of them have confirmed – yet. The major levels are the neckline of the shoulder head shoulder top which is a pattern that stretches from the middle of February and was broken through yesterday. The second level is the pivot high from December 29th which was the last high of 2010. The third level is the pivot low of 1249 made on March 16th, and the fourth is the 200 MA. The last and most important level was the trendline going back to the lows of March 2009, which runs through August 2010 and coincides with the 200 MA. Those of you who watch my video analysis will remember the particular trendline I am referring to.

To make myself clear, not ONE of these levels has been confirmed below despite what you may hear on major media outlets.

Ultimately, I do believe we will see a small rally back to at least the 200 MA that should be induced by some short covering. The market has a solid chance of gapping higher tomorrow, perhaps to 1275. If it does so, I would expect it to reach the 200 MA before long but I cannot be certain if that will be strong resistance.

Moving on to TLT, we can see that treasuries have made a topping tail which is inverse to what the equity markets have done. This makes perfect sense as treasuries do well in the risk-off environment and equities do poorly. However, given the overbought nature and the obvious topping tail, a short on TLT (or long TBT if you wish) is there for anyone who wants it. Downside target is $97, stop out is a close above today’s high.

Gold slowed down today after the market reversed but there is still no topping pattern on this chart and despite how extended it is, I would not advise shorting. That said, there is a lot of noise making its way onto mainstream news about how gold is the only safe haven etc. – gold is the best safe haven, but always be a contrarian and follow your gut. When any asset is already up 10% in such a short period of time and it is continually making new all time highs while the mainstream media praises it, it is usually a good idea to start hedging or taking profits. Those of you who have been with me for a while know that I used the same methodology to get out of silver just days before the peak in April.

In any case, this is not a time to be taking risky trades, this is a time to protect and try to make it through this volatile period until the dust settles.