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Aaron Basile
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Contrarian Investor, Commodities Speculator, Technical Trader.
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Aaron Basile
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  • Markets Float Up Again On Low Volume

    Following up with yesterday’s move the SPY traded $1.67 higher on extremely thin volume. This is typical of the market during a week that leads into a holiday, and is even more so the case during the 4th of July weekend as so many people are on vacation and not executing trades. The 1250 level on the S&P is one of the most critical levels on the charts in the last 3 years and it is no surprise that the market is not letting that level go easily. I would be amazed if the banks let that level break the week before 4th of July, the markets are enjoying the little news out of Greece, and the favorable housing data we received this morning.

    Next week may be a different story as everyone will come back from the holiday and may attempt to take profits off of the floating rally we’re having this week. Also, don’t think that the market won’t fall next week because it’s a shortened week, the last time we had a four day trading week, the SPY went from 134 to 128 which was one of the only sharp down moves we’ve had all year.

    The SPY closed above minor resistance at the 20 MA on just 165M shares. It is still in a box between $129.80 and $126.70 but I think it will get up to $130 by the end of the week before stalling out in that area. If you are waiting to short the market, Friday could be the best day to look for a setup because we could gap much lower next Tuesday on news over the weekend regarding Greece, or just sheer profit taking. If you allow the market to gap lower you may lose your entry point and will have to start over so look for opportunities Friday afternoon.

    GLD finished marginally higher on light volume after selling off hard for three consecutive days. The top has been put in at $152, though it could rally back to $148 on a bounce off of the lows. Currently, there is a bear flag in play which could take it down to $142 though a fall that sharp would be surprising.

    As I explained a few days ago, you don’t need to know what the news is to know how the market will react, the reason I decided to call the top in gold for that exact day was because the chart had telegraphed it, and the IMF deal with Greece coincided perfectly with gold’s market cycles.

    The top call in silver has worked out exactly the same and SLV bounced off of $32.50 which was a support level that I had provided when I made that call. I think if it goes a little bit higher this week I’ll buy ZSL for a swing trade.

    I will probably be looking to enter ZSL when SLV gets near $33.15 – $33.20 because the depreciation of the leveraged ETF’s can sometimes cause an incorrect correlation which is why it’s sometimes best to use the original ETF as a model for entry and exit points. In any case, SLV is headed in the $30 area and a pierce of the 200 MA. After that, I’ll look to go long AGQ as a swing.

    Jun 28 7:26 PM | Link | Comment!
  • Gold Snaps Uptrend After Top Call As Markets Fall Into Support

    The S&P fell to 1268 on Friday which marks the 7th negative close in the last 8 weeks. Volume on the major indices was substantial as the it reached a 3 month high on the SPX and a 11 month high on the Nasdaq. The SPX is 7.5% off of the peak in May and the high volume selling that took place yesterday despite the market being down so much already supports my forecast for next week which is that we rally off of the lows into the holiday weekend. Always remember that there is always an upside bias going into a holiday as there is light volume and the Fed likes to use to holiday as an opportunity to encourage spending. With the market as oversold as it is and the light volume that we’ll likely see next week, I think it’s safe to speculate that the market floats off of the lows but I’m personally not expecting anything robust.

    The volume on the SPX was at a 3 month high on a huge down day in an already huge downtrend. Despite the massive move down and the high volume behind it, a contrarian should look at this type of activity as a bullish indicator. I’ve spoken about this before, but we’re going back to the same methods that I used to call the top in silver just days before it peaked. Whenever you have everyone on one side of the trade after a trend has already largely played out, it’s usually a good indicator of an upcoming reversal.

    Those who sold after the FOMC announcement and after news of Greece’s deal with the IMF, were extremely late to the party. The news that came out in those instances that induced a selloff, did not contain information that told us anything we did not know already, and it was all priced in to the market before the news hit the wire. Just go back to the analysis I did on Thursday and look at how the market reacted when QE II was announced. The ones who bought QE II on the announcement and not beforehand, lost tremendously in the weeks following.

    The volume after the 33 point selloff on the composite was an 11 month high and beat the volume on the March 16th capitulation during the Earthquake and Tsunami crisis in Japan. The Nasdaq also held the 2650 and the 200 MA support. If it closes below 2640 it’s going to be in trouble again but I think a rally the 2700 this week is the more likely scenario given the other reasons I have listed for the S&P.

    Another important point about this chart is that the volume and the price action signals capitulation, but the composite did not make a new low, which means that during all of the selling, there was some buying going on (most likely institutional) at the bottom that gave support to the market.

    One more chart that seems to support a rally next week is the XLF. The financials usually lead the market and over the last week to two weeks, they have begun to make a series of higher lows and the XLF still hasn’t confirmed below $14.70 which tells us that this is a critical support level. If the XLF moves back up to $15.20, it will likely carry the market higher as the financials make up a large part of the index weighting and typically trade up or down with the market.

    SLV fell again Friday and closed down over 4% on the week. This weekly chart tells more than the daily and another close below $33.36 next Friday will confirm the bear flag and SLV will go to $32.50, if not before then. Once again, it will be a buy after a pierce of $30.

    GLD has been slammed over the past two days and my top call on Wednesday is so far so good. The trendline and the 50 MA coincide with each other and while it has confirmed below the trendline, it has not technically confirmed below the 50, but one more close lower on Monday will most certainly confirm it. It has decent support at $146 and I expect it to retest that trendline and the 50 MA, but failure to make confirmation above either of them means that this thing is going lower.

    Now, some might ask how I come to this conclusion that gold is going lower but the market is going to rally because the market and gold typically rally together on a strong Euro. Well, the reason the market is going to rally and gold is headed lower is because the market is oversold while gold has held up over the last 2 months. Gold has held up better than silver, oil, and other commodities that got crushed in April because gold is a hedge against the European debt crisis which has been front and center for the last several weeks. However, now that Greece has accepted a package from the IMF and all of the bad news is out there, it appears that the headlines coming out of the EU may quiet down if only briefly which bodes well for equities, but is negative for gold because gold does well when there is fear in general but particularly well when policy makers use currencies as a tool to combat sovereign credit issues.

    So, how did I know that gold was going to top out and go lower weeks in advance? Do I know members of the IMF and Greek Parliament who told me that they would reach a deal beforehand? Of course not. I touched on this earlier but if you buy after the news comes out, you are unbelievably late to the party. I knew gold was topping because of its historical market cycles and because contrary to popular belief, the charts lead the news. The price pattern, the volume, the alloted time, and a little wisdom is how to beat the news, and the market. And with that, I’ll wrap up this commentary and I’ll see you next week.

    Jun 25 1:30 PM | Link | Comment!
  • Markets Finish Slightly Negative After Volatile Day

    The S&P was down over 20 points this morning after opening lower with a weak jobless claims number and hangover from yesterday’s FOMC meeting. I would be surprised to see a significant amount of selling tomorrow and into next week. The Fed, though bearish did not say anything new that we did not know already. We also know that the jobless claims numbers and economic data is going to be weak so the market has already priced that in, which is why the lows were rejected with a robust rally intraday today. Despite this, I was expecting a selloff today and got it.

    I used this chart last week as an example of what happened the last time the market expected news from the Fed and received it. We were expecting QE II to come and when it was announced, the market had a normal positive day, followed by a huge move higher the next day, but topped out just one day after. The exact same pattern has developed in this case only to the inverse since the market was expecting QE II to end.

    Like what the expectations were in November, the market expected QE II to end as scheduled without further stimulus. The announcement was made and despite the consensus being met, the market sold off sharply regardless. Today was a big reversal day as the market tagged the 200 MA and finished well off of the lows. Next week is also a holiday trading week which usually comes with an upside bias as of right now it appears that the market has yet again put in a short term bottom.

    On the weekly chart of the S&P, you can see the beginning of a bear flag which if it plays out, will take us close to the 50 MA. A favorable bear flag has three bars so another close higher on the weekly chart for next week would be a nice setup for a breakdown of this pattern. I think the market has put in a short term bottom but my mentality here is to not count on one and only stay in trades while there is still momentum in them. The bulls have made it clear that they will not give up $1260 without a fight and there is not a clear side that is in control of the market at this point so once again, protect your profits and refuse to give back gains to the market.

    On to some more specific plays, I sold out of TZA at $40.86 for over 7% gains in less than an hour of holding it as I bought near the close yesterday at $38.04. TZA fell sharply afterwards and actually finished negative. I will continue to stress this, but this is why it is important to protect your gains and be in and out of trades. If I had held this for just one day, I would be negative on this trade and would have given about 8% in gains back to the market.

    Perfect 3 bar bear flag played out today on the USO. I nailed this in yesterday’s commentary though my price target of $35.20 missed the lows by a penny. I wasn’t planning on entering it as a trade anyway as the upside is only about 5% over the next week, which isn’t bad by any standard, but there have been better setups that I have been watching so I decided not to place an order. Look for this to top out around $37.50.

    I won’t claim victory on this after one day but there’s no doubt that this was a huge move and I’ll even be impressed with myself if $152 does turn out to be the medium term top. GLD tested the trendline that goes back to March but managed to reject a break of that and the 50 MA. I think that after today’s monster selloff it will at least rally to the 20 MA but a second test of that lower trendline might send this thing lower and confirm a medium term top.

    Jun 23 8:35 PM | Link | Comment!
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