The Repercussions of Political Irresponsibility

If you are not aware of the political debate about the US debt ceiling that has consumed the country, then you’ve more than likely been living in a cave. Our distinguished representatives have debated the possibility of increasing the national debt and solving future deficit problems ad nauseum. Surprise, surprise; we are no closer to a solution with four days until the deadline than we were four months ago. Unfortunately our leadership does not realize the tremendous real life consequences of this political drama.

Aside from the embarrassment of possibly defaulting on our financial obligations as a country for the first time, there is the almost assured downgrade of the national credit rating. This downgrade may well cripple any chance of a recovery in our economy and will have cataclysmic effects in the worldwide equity markets. What does that mean for investors? Any fond memories of 2008?

For traders like me, that would involve shorting the financials, industrials, the dollar index, or anything with interest rate exposure and also hedging myself by buying gold, oil and going long the iPath S&P 500 VIX Short-Term Futures ETN (VXX). But for the average investor, it could mean Financial Armageddon: Part Deux.

Just when the more courageous had sighed in relief at recovering almost everything they had lost in 2008, mother market may just snatch it away again. The weekly chart the S&P has been forming a monsterous head and shoulders pattern. For those of you less apt in technical analysis, the chart below shows the “head” and “shoulders” and the neckline -- the level of support. If that line is broken we may see the S&P fall all the way to 1130.




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What can you do to protect your portfolio? If you didn’t practice risk management in 2008 it may be wise to give it a go now.

SmartStops has the short-term and long-term stops for the SPY at $128.81 and $127.40.

For more, visit SmartStops.net. Also follow Raghu Gullapalli on Twitter @tradergu.

Three Reasons Gold Will Continue on Strong Upward Trajectory

Traders and investors worth their salt will always look to news, fundamentals, trends, and overall market sentiment before entering a position. My bullish take on gold is no different. I will not hypothesize on the precious metal’s year-end destination (I will for silver) as many exalted gold bugs, like John Paulson, have been stymied by the rapid growth in its value.

Check 1: Gold has been in a long-term uptrend and is in no danger of breaking this upward channel. Only a massive increase in supply or an exponential increase in the value of the dollar would knock it off its strong upward trajectory. I know it’s a cliché but when all else fails, the trend is your friend.



But when the trend breaks the cradle will fall, so it’s good to be prepared. With that in mind SmartStops has the short-term and long-term stops for the SPDR Gold Trust (GLD) at $150.55 and $143.12


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Check 2: As anyone who's taken an economics class can tell you, the fundamentals of market dynamics are supply and demand. The simple truth is the demand definitely exceeds the supply. That gap may very well increase substantially in the near future, when the Pan Asia Gold Exchange opens.

Speaking of Asia, the good citizens of China and India historically are buyers of precious metals in the second half of the year for their religious festivals and the height of their wedding seasons; this translates to more demand.

Check 3: On Tuesday, President Obama suggested that the “Gang of Six” US senators had created a plan that may be the way we overcome our debt ceiling impasse. I am a bit more skeptical, but regardless, the recent surge in gold prices has less to do with our debt and more to with the sorry state of affairs in southern Europe. As long as Italy, Spain, Greece, Ireland, and Portugal teeter on the abyss of default, this upward trend may well continue.

Editor's Note: For more, visit SmartStops.net.

Gold Speculators Lead Yellow Metal to New Highs, Gold and Silver Miners Surge

This past weekend I was watching Wall Street 2 on HBO. During the course of one of his monologues Gordon Gekko, played by Michael Douglas, said, “Bulls make money, Bears make money and Pigs get slaughtered.”

Did Gekko spell pigs P-I-I-G-S?

Over the past several months the world markets have closely watched the soap opera regarding European debt play out. Perhaps we have mistakenly fixated on the Greek and Portuguese characters when we should have focused on the 800-pound gorilla, Italy.

One group of people who did have their eyes on developments in Italy were safe haven investors, i.e., gold speculators. Physical gold and its exchange-traded funds had a strong surge, pushing gold above an important resistance level at $1,550.

This group of investors led gold to new euro/gold highs (something I mentioned previously in Silver Is Now a Value Buy). This was all before Tuesday’s news of the downgrade of Ireland and the possibility of another round of quantitative easing by the Fed. That's when the whole world started piling in.

Gold surged again, seeking out the all-time highs of $1,577.40 and falling just $10 short.


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SPDR Gold Shares (GLD) saw a similar surge, which may well continue in the days to come as the market begins to price in the Irish default and a possible QE3. The ETF is forming a short-term bull flag and holding well above the 210-day moving average. But with rapid price spikes come rapid declines. SmartStops has the short-term and long-term stops for GLD at $147.52 and $142.55. It is very likely GLD will take out the all-time highs of $153.61.


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A surprise development from Tuesday’s news was the revival of the gold and silver miners. For several weeks, during the commodity sell-off, which was sparked by increased margin requirements for precious metals, the miners were in decline and then range-bound. Silver Wheaton (SLW) was trading below its 210-day moving average, a fairly bearish indicator, as was the Market Vectors Gold Miners ETF (GDX). But on Tuesday that pattern may have changed. If SLW continues to rise it may keep going till the next resistance point at $42. SmartStops has the short-term and long-terms stops for SLW at $33.16 and $29.94.


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I’m less confident about GDX as it still below the 210 moving average but a few component stocks of the ETF, Goldcorp (GG) and Barrick Gold (ABX), saw impressive runs on Tuesday.

Editor's Note: For more, visit SmartStops.net.

Actionable Trades: SPY, DIA, OIH, AAPL, AMZN, GLD,

Yesterdays reversal trade was nothing more than a relief of some oversold pressure.  The Head and Shoulders Pattern in SPY took 8 months to build, but is achieving the measured move in just 3 trading sessions.  WOW!  This down move is fast and furious with weakness and technical damage across the board. This move is due to a combination of factors, with deteriorating economic numbers, escalating problems in Europe, and an absence of Quantitative Easing. Many pundits have opined that stimulus packages and QE artificially inflated the market, and now it appears the chickens are coming home to roost.  Tomorrow is the Jobs Number, and we will be watching close to see how the market reacts.

 

Below is a weekly chart of the S&P.  This week the S&P broke a multi-year trendline.  Composure has definitely changed in the market.  It is good to know retracement levels, so you can be prepared to test major support areas for oversold bounces.  From the lows of March 2009 to the highs of May in 2011, the 25% retracement level is 1195, and the 38.2% retracement level is 1102.

The DOW closed down more than 500 points today and had the biggest 10 session loss since March 2009 lows.  Below is the weekly chart of the DIA, the Dow Jones Industrial average.  This also broke a multi-year trendline.             

The OIH's, previously a market leader, has had a major composure change in the last couple of trading sessions.  It is now trading below key moving averages and traded with force through the 200-day moving average and closed on the lows.  Today, the OIH closed -8.81%, showing relative weakness to SPY, which closed the day -4.8%.    

   

Below is a weekly chart of the OIH.  It is good to look at weekly charts when daily time frames become invalidated by large price movements and extreme volatility.  When looking at a longer time frame of the OIH, something interesting to note is the the highs of April 2011 was the 61.8% retracement from the highs of June 2008 to the lows of December 2009.  

 

    

AAPL broke the earnings low today, not surprising when the market is under extreme pressure.  For the active investor, the next compelling level to test a buy is a retest of prior highs, $365 area.  For the active trader, continue to scalp AAPL for cash flow.

    

After the push through failure in AMZN on Monday (8/1), it was noted that it would be best to avoid AMZN for now as it would need more time to build a base.  If you did not lighten up on your position then, the next out was once it broke bigger support of $215.  Now AMZN is approaching more compelling levels to test an oversold bounce.  First level, $201.  If that does not hold, $195 is more compelling.  

Yesterday, it was noted that there could be a possible reversal trade in GLD as it failed to hold new highs.  The strategy used for this trade was an 80/20 reversal trade, which uses a calculated entry and stop.  This morning GLD gapped up, but gave a way out of the trade and set-up a new 80/20 trade.  Entry: $162.86, Stop: today's high: $163.83.  GLD could see a move down to $155.40, the 21-day moving average, without causing any technical damage to the recent move.

Are Molycorp, Newmont, and Other Miners Too Risky Now?

I don't like telling people, “I told you so." But when it comes to the crash in commodity prices, especially the rare earth sector... well, I told you so.

Given the recent rumbling in commodities as a whole, this may come off as a time-machine call-out. But I can honestly say I’ve been talking about this for days. I shared my opinion with all of you on May 10 in my article Is the Rare Earth Bubble Ready to Pop?

This is a great lesson in risk management.Molycorp (MCP), the leader in the sector, had nothing less than a stunning run-over the past year, increasing more than 500%, fueled by news from China, speculation in the industry, speculation in other metals, and low margin costs. The stock just a week ago looked like it was priming for another run, possibly all the way to $100.



It’s at times like these, when the rest of the investing world gets frothy at the mouth, that the smart money starts looking for the exits. It’s a poor cliché but to paraphrase it, “the rich don’t go broke taking profits.” The first catalyst to kick off the rapid downtrend was the poor earnings report issued on the morning of May 11 and then the weakness of the overall sector and commodity market.

Yet if you were following SmartStops, then your first exit trigger occurred on May 11 at $62.45 which lead you to protecting your profits. The latest and third exit trigger in this series occurred on May 16 at $58.69.

The stock may continue downward seeking heavy support. My firm's current short-term stop is at $56.96 and the long-term stop is at $50.17.

Molycorp’s mining peers have not fared much better. If miners truly are a leading indicator of what is to come, it may be well past time to exit any short- and medium-term positions in a slew of metals.

Freeport McMoRan (FCX), Newmont Mining (NEM) and Silver Wheaton (SLW) to name a prominent few are all flagged in “above normal risk." FCX has a short-term stop at $45.66 and the long-term stop is $44.52. NEM’s short-term stop is $50.97 and long-term stop is $49.75. SLW’s short-term stop is $31.47 and the long-term stop is $30.31.

If the S&P continues yesterday's down move and breaks the 50-day moving average at 1325, the index could very well find 1300 soon after. This market is shaking out most of the speculators and will soon allow value investors who practice good risk management an opportunity to enter growth stocks at advantageous prices.

Russian Roulette Anyone?

By Raghu Gullapalli 



After an extremely volatile week, what can we expect from silver in the week ahead? If you’ve read some of the same reports in the blogosphere as I have, you may want to try your chances at Russian Roulette -- your odds of success are higher.

There are a couple of metaphors I especially enjoyed:

• “Dead Cat Bounce”
• “Gap and Crap”
• “Silver takes the stairs up and the elevator down”

At the end of its move up, silver was on a rocket. The entire world was in a frenzy, from the taxi drivers to my mother. That was the big clue.

“Sell on excitement”

That’s exactly what George Soros and Carlos Slim -- among the most notable -- did. They started exiting their silver position when it made new all time highs. In some ways the death of Osama bin Laden may have been the catalyst many experienced investors sought. One last spark to bring the market to a fever pitch.

Now what?

Well after a week where silver lost almost 25% of its value, it's hard not to take the value of Risk Management seriously.

This morning Silver Wheaton (SLW), the miner, came out with its quarterly earnings. According to SmartStops.net, the short-term stop is $33.81 and the long-term stop is $31.73.

iShares Silver Trust (SLV) may experience the aforementioned “Dead Cat Bounce” wherein the price bounces up from last week’s lows, making a woeful attempt to break the downtrend and then continue downward.

Editor's Note: This content was originally posted on SmartStops.net.