the Yuppie Pig

Today's start to the week was rather uninspiring for the bulls. We had a slight positive push out of the gate only to be pushed back with very minor resistance at S&P 1071. The rest of the day was spent drifting down before accelerating into the close. The trend remains down as I've said before, and it will remain so until it isnt. This isn't a time to over think things. My game plan remains the same. I'll look to scale into some short exposure as the market nears the upper channel (falling daily) which should act as major resistance.

With some of the speculation that perhaps the ECB is going to intervene in this latest saga of the global debt crisis, gold has rallied hard. Of course, their ultimate solution will be to print massive amounts of money to inflate the debt away which is going to leave hard assets rising in price which is the premise behind my view of gold's rapid price increase. The first tip off, was that it was actually green while the broader market was in the depths of the intraday lows and once the reversal began, gold stocks never looked back. It's one of those trades where you had to be watching the market intraday to get into. We saw positive price action, momentum indicators begin to trend up, and the ever popular (and still working) GDX:GLD ratio break to the upside on the intraday chart.

Taking a step back, lets examine the daily chart which suggests there is more room to run. If we operate under the premise that the ECB is entertaining the idea to flood the world with more money yet again and thus competitive devaluation of currencies (debt) is taking another step forward, then gold and gold stocks are going to make another advance. For the GDX (the gold stock ETF), we can see that it is going to break out of this descending triangle. I want to note a few technical points on this chart.

1. Massive volume on on the reversal day ending the day up 5% while the market was flat.
2. GDX:GLD ratio broke the downtrend.
3. Positive divergence on the MACD Histogram (not the MACD itself).
4. Stochastics are oversold and beginning to turn up.

Resistance looks to be in the 44-46 price range and would also be the upper channel of the current downtrend. If the market reversal continues over the next few days, I suspect gold and gold stocks will outperform the broader market. Personally, I use the GDX as a hedge to any short stock exposure I might have, as it is now positively correlated with the market.

The market staged a huge late day recovery. Typically, momentum driven declines simply continue until sellers are exhausted or some external force presents itself to alter the psychology of the market. In March 2009, that was the banning of short selling and the coordination of mass liquidity into the market. Basically, the US Government along with efforts by other nations created a multi trillion dollar wave breaker to halt the tsunami of selling. On Friday, the market seemed to consider the possibility of such an event occurring again by a coordinated effort through the ECB to contain the European debt crisis.

Secret summit of top bankers

While I think it is still premature for such a large coordinated effort, one could also expect government officials to act much faster this time compared to last year. A late day surge in gold suggests that more liquidity is on the way. What remains to be seen, is any real action taken on the part of elected officials in the wake of increasing public backlash towards bailouts of financial corporations with taxpayer money.

Looking at the charts, we can see the huge intraday reversal. From the decline which began on Wednesday, this latest move does appear to be a strong impulsive upward move. Thus (on this time frame), I expect some additional upside movement to retrace some or all of this decline. There is some resistance just above these levels but a movement up to 1105 is a definite possibility we must be on the lookout for.

Looking at the short term 60 minute chart, we can really put Friday's reversal into context. In reality, it was quite small, and a market retracement back up to 1085 would be perfectly in line with maintaining this downtrend. Should the market weaken at that level, it is where I would look to layer in some short exposure with tight stops. These are the names I have under consideration. You can also see the most updated charts here. A move up to 1085 would only retrace approximately 38% of the decline. For Fibonacci fans out there, that would suggest a resumption of the decline and lower prices ahead.

Regardless, at this time, the trend is down and we must be weary of any long side positions at this time. The reality is that the market has given up about 8-9% after running about 73% from the March lows last year. Quite a few analysts and fund managers target a fair price of about 850 on the S&P500. While I've found valuation never to be a good reason on its own to go long or short, this could be a longer term target for mean reversion which could easily be overshot.

The uncertainty in Europe is the primary reason for this latest market route (The Obama administration isn't helping either) and as long as it remains, it is going to weigh on the market. There is no definitive timeline for it to end. We'll have to closely monitor world events for such a catalyst to end the uncertainty. (such as a massive intervention by the ECB) Other indicators would include reaction to earnings (CSCO reacted well) and of course - price action. Only then, do I think the decline ends and the potential for new market highs returns.

Here's 5 technical short setups. A few words of warning are warranted here as the market sold off drastically today. A corrective upside bounce could occur at any time and in these situations, it is not uncommon for stocks to make a quick move down, potentially breaking support and then subsequently the market rallies hard in a bounce taking stocks back above the support price. For that reason, either wait for the market to work off its oversold condition before entering these trades, allow them to play out, cognisant that a wide stop may be needed, or if the market rallies here, enter the positions as they reach closer to the suggested stops and scale into these positions. These choices depend on your own portfolio and risk tolerances.

I've put in the target price using calculated measured moves, however some of these are below logical support areas. I would first expect bounces to occur at these areas prior to making the full measured moves. I've also highlighted possible support areas on these charts.

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"Greed is good"

The film is set 23 years after the first film, in June 2008, and Gordon Gekko (Michael Douglas) has just been released from prison. Despite his initial attempts to warn Wall Street of the forthcoming economic downturn and stock market crash, no one believes him due to his reduced standing in the financial world. Gekko decides to re-focus his attention on rebuilding his relationship with his estranged daughter, Winnie (Carey Mulligan). Due to their time apart, and the fact that Winnie blames Gekko for her brother Rudy’s suicide, she avoids any contact with him. At the same time, the mentor (Frank Langella) of young Wall Street trader Jacob (Shia Labeouf) unexpectedly dies, and Jacob suspects his hedge fund manager of being involved in the death. Jacob, who is Winnie’s fiance, seeks revenge and agrees to Gekko’s offer of help, in return for which Jacob agrees to help Gekko with Winnie.



GG

Given the recent weakness in tech, here's an update on my valuations of some of the cloud computing names. Check out my older posts for a full summary of the sector and more on their valuations. Note that this analysis is merely an update of market prices from my last analysis and does not factor in the latest earnings. Google is becoming to offer some attractive valuation, however, its dealings with China will continue to weigh on the stock indefinately until some resolution is found.

1. RAX: valuation $16.37, market price $18.87 -> 15% premium
2. TMRK: valuation $7.56, market price $8.21 -> 9% premium
3. TMRK: alternative valuation $10.15, market price $8.21 -> 19% discount
4. GOOG: valuation $649, market price $540.82 -> 17% discount
5. CRM: valuation $62.25, market price $65.62 -> 5% premium
6. EQIX: valuation $55.59, market price $96 -> 73% premium

So far, we've seen some of the premiums reduce a bit, notably on RAX, now at $18.87. For now, this remains my favored Cloud Computing name.

Pretty quiet day on the markets today. So far, it seems that the corrective upward move to 1115 (potentially to 1130) is still in progress. I don't see many good trade setups so this is one of those times where it's just best to hold positions with appropriate stops according to your risk tolerance.

CHRW is one stock highlighted as a short candidate due to its triangular pattern accompanied by bearish volume. It reported last night and promptly sent the stock down immediately to our target price. It was a great trade, although I will admit that holding stocks through earnings is typically a higher risk maneuver. But in this market, more often that not, even good earnings are sold. I've still got a few long/short setups ready, but you may want to wait to see how this current rally resolves itself depending on your timeframe.

For tomorrow, it looks like the gold ETF (GDX) can be bought as it is forming a small bullish flag. Assuming that the broader market moves higher, I think this one will follow. Perhaps we can still get another couple points out of this stock.

The counter trend rally we have been expecting is now 2 days old. And I still view it as that; a counter trend rally. I would use this as an opportunity to lighten up on long positions and for traders, to look for and position into shorts. Over the next day or so, I expect some type of short pullback, perhaps to the 1090 area. This would add some symmetry and set up a potential inverse head & shoulder breakout pattern to propel the S&P500 to the 1115 area. This should develop over the rest of this week and early into next week.