SDS and General Market Update

The house of reps. did not pass the "bailout" bill. This has obviously created some panic in the market place.

This has been very beneficial to the SDS trade I posted a couple days ago. The short-term model is not oversold on that yet, so stay tight there.

Also, this break of the extreme panic low earlier this month creates a situation that I think could be very dramatic and cause a waterfall type (near vertical) decline in the stock indexes taking them down several more percent over the next few days. At that point, based off of price pattern form and current sentiment, I believe there will be a large reflex reaction in the market causing it to rise sharply, probably for a couple months or more. However, realize that this is still a bear market and this does not mean the worst is over.

For trading purposes I think this will be an excellent trading environment for making money due to extreme volatility in short-term swings. I would suggest anyone reading this blog follow the short-term trades I post on this blog as they will take advantage of these swings.

Pete

New SDS Trade

The short-term model for the S&P 500 has become overbought today. I'll admit a little hesitation on recommending a trade at this juncture, but the overbought signal at a lower high than the prior signal is one thing I look for in recommending an inverse ETF trade. I feel the downside risk to a disappointment in the "bailout" situation is more substantial than the upside potential for any agreement. But that is a wild card that is giving me hesitation right now, in addition to the fact that I believe we are very close to an intermediate term market bottom, or may have seen one already.
Nevertheless..........

Recommendation:

Buy SDS today before the close. The current price is 66.66 (a bad omen....or is that good in this case.....), and that is the price I will use to track this trade.

Pete

Follow Up on Gaps and Short-term Status

Click Chart to Enlarge

I made a post a few weeks ago about looking at gaps on price charts. The summary is that most significant gaps are retraced (meaning price comes back to the gap point) relatively soon. Also, there should be some expectation of pause or reversal at/around significant gaps.

The chart above shows a chart of SPY (S&P 500 ETF) and shows that the massive gap from last Friday has been retraced now. That coincided with short-term oversold conditions on the model I follow. So far it has led to a little bounce in prices which I would expect.

Now the thing to look for is if this gap holds the next couple days. The short-term model is currently nearing overbought peaks that marked reversal points the last couple weeks. No doubt news about "the bailout" will trump most other factors, but I will be looking to recommend a double inverse ETF trade if the model actually reaches overbought territory.

Realize that SPY has a long way to go before moving above the last short-term overbought high which was last Friday. If it gets overbought before that high is breached, my inclination is to stay bearish for at least one more move lower in the markets.

Looking Ahead (Gold and US Stocks)

Click chart to view a larger image

In this blog I have made frequent posts relating to stocks, but also to gold and oil. Oil is what drives our world, and gold is the money of the ages. Oil and gold prices have strong positive correlations, while the correlation between oil and stocks or gold and stocks is not consistent for long periods.

Right now my view is that stocks, oil, and gold are in bear markets. I think all are likely to go down further in the next several months and probably longer. In bear markets, the best opportunities to make money are when the price is falling, because that usually happens at a very fast rate.

Gold and stocks have had a relatively strong negative correlation this year, and I think that is likely to stay for a little while. Gold has made a massive price advance the last couple weeks that has made its momentum based indicators the highest they have been in years. These times tend to correspond with tops in gold prices. I am waiting for a good candlestick pattern to emerge to help recognize any peak in prices soon. I think a little patience will be necessary though. Then, I will advise on buying puts on gold related assets or shorting gold stocks.

I believe that based off of recent correlations that this peak in gold will correspond with a bottom in the stock market that should last several months and produce good price gains off the bottom.

I will be looking to make trades on GLD put options and SPY or QQQQ call options when I feel the market is ready to turn. I will keep you updated.


Pete

Update on Last Post- General Market Stuff

For those who read this consistently, I wanted to clarify and update a few things regarding my outlook and pass along some more information.


First, I don't think that this past week was the end of this bear market. In the last post I mentioned that I think we are near a major bottom in the markets though. In a bear market I would consider this to be a bottom that lasts several months and leads to a relatively large price advance (say....20-30%).


Now I wanted to pass along some information. I read a post on another site today looking at what has happened to markets in the past when they have had short-selling bans imposed by the government. The pattern that seemed to emerge was a severe sharp price gain followed by either some stagnation and then declines, or just gave way right to sharp declines from the end of the sharp price advance.


My thought for the last several months was that the market would go below the July lows, which it did. However, I had thought that this leg down would go deeper than it has so far. I was rethinking that after Thursday Friday (and still am to some degree), but the historical precedent of this type of situation now makes me think it is still possible, and probably somewhat likely that the market will go lower over the next several weeks yet.


Hopefully there will be another clear opportunity for me to recommend a short-term trade soon, so I will keep you posted.


Pete

General Market Update--Looking Ahead

As of Thursday and Friday, it appears most likely that the stock market has made a major bottom. One reason for hesitation is that the panic in the credit markets reached an unseen level, so we are in some sense in uncharted territory. However, form a contrarian perspective, unseen panic is what you look for to initiate a longer term investment. I suggest reading the recent posts from the Useful Trading Blogs section if you want to get further historical reference for the type of price move that has occurred in the last couple days.

The short-term model that I use to recommend index ETF trades on this blog is overbought indicating that the market may see some selling soon. Typically this is what I want to see to recommend an inverse ETF that will appreciate as the market falls. However, with the likelihood of a major trend change occurring, I am not going to recommend anything right now.

If you would have compounded all the gains from those trades I recommended using this model since April, then you would have about 30% gains or so since April. That is very good, and should give you plenty of patience to wait for a more clear market direction to make the next move.

Pete

Panic Building/Climaxing?

In timely response to my last post, all the major indexes broke the July lows and that certainly did send the put/call ratio to levels that could be considered very extreme. However, the 21 day moving average of the put/call ration has ample room to fall to match extremes seen earlier this year, so I think there still exits some argument that we can see lower prices still.

Sentimentrader.com posted some data showing a once in a century type panic in the credit markets occurring right now. Typically this has coincided with important market bottoms and created good investment opportunities. However, I would caution that crash type scenarios have happened before, and something truly extreme could happen gain. I would advise waiting this market out to give it a chance to prove itself to the upside before buying stocks again.

When markets enter climaxing downside moves, it typically occurs swiftly, with little pause, and can often end with a huge price decline unseen in recent days.

I am maintaining some put options but have exited a few losers to decrease exposure in case the market reverses sooner than I expect.

Pete