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SPY Rallies On Dollar Pullback, Short Setups In Oil

May 10, 2011 12:38 AM ETSPY, UUP, SLV, CVX, XOM, JJCTF
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The S&P rallied after a weak open as the dollar fell from the highs during the afternoon session. I am hoping to ride the S&P higher but I am currently accumulating positions, mainly UUP, which favor an equities correction that will be coming up shortly. The first chart pictured below is the S&P SPDR vs. the Copper ETF JJC.

Copper is called “Dr.Copper” because it often forecasts the near term direction of the equity markets . As you can see above, copper has tanked vs. the SPY and I believe that this divergence is another warning sign that we are close to a correction.

The markets were floating on light volume during today’s trading session. The SPY attempted to fill yesterday’s gap to the downside but ended up rallying higher on low volume. Remember, low volume favors the bulls as POMO has a bigger impact when there are less trades taking place. Today’s session had characteristics of a light volume exhaustion rally that generally takes place before a market top.

When QE 1 expired last year, there was a blowoff rally on light volume before the market crashed to the YTD lows and were saved only when speculation that QE 2 would be announced in November. The only days with high volume during that March-April rally, were selling days, or “distribution” days.

Silver found support at the 100 MA as I suggested it would last Thursday. Friday’s bounce carried on today and may last until it fills the gap at $38 on SLV which will likely be a pivot point as the 50 MA is providing additional resistance. Volume in today’s session was just over 100 million which is relatively light compared to recent trading activity and is not enough to convince me that the correction is all over with.

Like other commodities, oil has had a rough last week of trading though similar to silver it found support at the 100 MA and has since managed to bounce off of those lows. However, there are a couple of resistance levels it must break before confirming anything to the upside and given the recent volatility, today’s 5.87% move to the upside cannot be trusted as a buy signal. I expect oil to correct soon with the rest of the market on euro weakness and dollar strength.

Oil stocks are also showing signs of slowing down. After a monster move, Chevron is overdue for a correction regardless of how the price of oil has performed. The daily chart is showing a bear flag which should be a nice shorting opportunity for anyone who wants to play oil from the sell side. I would put a short term target somewhere between $97.50 and $98.

Confirming weakness in Chevron is Exxon. You can see a bear pennant building up on the daily which goes hand in hand with Chevron’s bear flag. These are two large components of the DJIA and weakness in these stocks puts pressure on the overall market. Short term target for XOM would be in the $80 range.

And finally, on to the dollar index. We’ve seen a but of a pullback today after a strong move in the Thursday and Friday sessions last week. There is a possibility for this to trade into a bull flag or bull pennant and I think that this is an opportunity for investors to accumulate as it is clear that the dollar has put in YTD lows, and conversely, the Euro has put in YTD highs. Jim Rogers recently predicted that the UK will soon need a bailout. If he is correct, that would mean that the fundamentals for the Pound should weaken vs. the dollar. Also, more pressure surrounds Greece and Portugal as their yields have continued to rise and they each have last week accepted bailout packages.

Remember that the dollar index rallied in 2010 along with the market during the equities rally before the flash crash which I have pictured above. In other words, the fact that the dollar AND equites are higher as well as copper being lower against the market, are warning signs that momentum is changing around in the stock market. I have posted several pieces of commentary on this subject in the last 4 months so I won’t delve into it once again but I am in fact arranging my medium term strategy to accomadate what I am seeing the markets. If anyone has questions regarding strategy, feel free to send me an email by clicking on the “about me” section and scrolling down to the contact form.

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