Trading the week ahead

It is interesting to read what I wrote in September last year. There were plenty of bearish news, threats of double dips recession. Companies started to warn about results, slashed forecast and missed expectations. Technically, there was the warning of Hindenburg Omen. SPY dropped below 1100 at the end of August. It was gloomy.

We are seeing the same situation now.

- New York Fed index fell to -7.7, the second lowest since November 2010
- New home sales fell for third month in a row while existing home sales dropped 3.5 percent. Purchase mortgage application volume plunged to lowest since Dec 1996
- ECR ( Econonic Cycle Research Institute ) leading index just slipped below the zero line. At -2.1, its growth rate is the lowest in nine months.
- GDP growth in the second quarter was slashed to a meager 1 % from 1.3 %.
- The non farm payroll in Friday showed zero  job creation which is very negative.

Despite the dismal data and technical indicators, I turned bullish on September 2010 as you can read from the posting.

Over the weekend, I saw a comparison of 2010 versus 2010.
Stock market could go up from here.

The trigger point was QE 2 which send stock up another 12% by the end of the year.

Will the stock market history repeat? Will it go up again after Jackson Hole meeting on September 20th and 21st?





However, I am more bearish this time for a number of reasons:

Most important, there was a clear support at 1100 and it bounced from there. But currently, the price trend is negative. We have clearly broken the 200 MA and the long term trend. Shorter price actions are very weak. If August 9th low is taken out this week, I bet we will an acceleration down.



In July this year, we have an opportunity to break up from support but it failed and moved right down. Although, there was some consolidation patterns in August, it points to a corrective rally in a downtrend. High probability is that the July pattern will repeat and break down especially if August 9th low is decisively taken off.

It seems that it is now all about Europe. Greece continues to be a problem. Bond yields went up to unbelievable level during the weekend pointing to a default. A few countries in Europe has to stop trading for financials.

Economic results are worst this time. GDP of most countries are down globally. This includes Hong Kong, China, France, Germany, and USA.

Besides European problems, we have the US credit downgrade and the Japanese earthquake,

The spread between the LIBOR and short-term Treasuries of 3 months has gone to a 13 month high. The 2 year swap spread ( difference between the 2 year swap and the 2 year Treasury yield ) has hit its highest since July. This was the similar situation during the same time in 2008 that shows that banks would rather lend to Uncle Sam than each other. Also, banks are getting nervous about the ability of their derivatives counterparts to make good on their promises

Junk Bond market suffered its worst collapse sine Nov 2008. Investors took out $2.1 billion from junk funds in one day in early August, the most in the history of the industry. Investors are fleeing risks!

Financial stocks are imploding across the board - exhibiting similar patterns in 2008.

There is also the constitution challenge by the German Court on the European countries bailout on Sept 7th. They may not win but it points to the fragility of the efforts of the European bailout. European banks are falling fast - very similar to what happened in 2008. 

My bet is that the trend is down and we could see a very ugly September and October.

It is impossible to be completely correct. I will trade in the direction of the trend. If Aug 9th low holds and indices bounce up convincingly, it is probably because of additional stimulus by the Fed after their Jackson Hole meeting. This could cause a similar rallies like 2010. But the market price actions has to support the move.

If it happens, I will certainly adjust my positions.

Finally, gold is looking very strong now. I will wait to see how it test the $2000 level. It is at parabolic level now. The rise is almost vertical.

The question is that if the market collapse, will gold stocks and gold fall like what happened in 2008. It does not look similar this time. In 2008, it was a liquidity squeeze. Now it is a flight to safety.

I will not be surprised at all if there is another margin hike and price comes down again.  Normally, I do not not add positions on this kind of ascension on the price.  There should be a correction - even a substantial one but it will be short and sharp. I will certainly add if a correction materializes, I will add to my core position. This is one clear case when technically the chart looks like topping short term but fundamentally, the bullish factors remain. Long term I am still very bullish on the precious metal.