Two setups that I am stalking are in the gold and guns space. Both plays have the added bonus of being considered, at various points in time, functions of BOTH strong risk appetite as well as risk aversion.

I have previously traded $SWHC on the long side, and may get involved with that stock again. I sold out of it a few days ago, as I was more or less playing it as a wildly oversold name during the previous months.  Now, though, the stock is threatening to break above the 200 day moving average.  If it can break above–and more importantly hold–that level, I will look to buy back in.

In the interim, $RGR has caught my eye.  Note that it could easily become a short if it breaks down below its flag. However, it should be a bullish setup.

$GLD is pulling back today, as it looks to be a healthy gap fill and shakeout.  “The color” may need to retest $114, though, so taking a full position at this moment is not advisable.  However, it remains at the top of my buy list.

Due to the continued state of WTF??!!! in the market, the above ideas are still just brainstorming at this point.  When an accomplished and respected technician like Brian Shannon says that he has no feel for this market, you should continue to adhere to the house rules at “Gentlemen’s Clubs” in New Jersey—look, but don’t touch (uhh, or so I’ve been told by my friends, that is).

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On the back of the hammer that we printed yesterday, you would think we would have seen more enthusiasm from the bulls today. However, so far we are seeing an uninspired effort with no conviction either way.  Seeing as we remain below the 20, 50, and 100 day moving averages, with lots of other tough resistance overhead, this does not bode well for a sharp recovery to the correction.  On the other hand, we are still relatively oversold, so chasing shorts down here is probably not a good idea.  What we are seeing now is as close to no man’s land as you will probably find in the stock market.  The short term chart should illustrate this point, seen below.

As I am writing this, I see that we just gapped lower.  Just as I noted yesterday, trying to anticipate an inflection point is a money losing strategy over the long term, despite short term luck.  Believe me, I am just as anxious to put my 100% cash position to work as anyone else, but I am not seeing good setups. How I feel about that is irrelevant.  Either the trade is there, or it is not.  Try to force it, and you are making a mistake.

With that said, you should not choose to turn off your laptops and walk away. The character of the market can change at any moment, so it is important to watch the action closely, even if you have no vested interest at the moment. Sometimes, being a spectator–and only a spectator–is a necessary part of being a profitable trader.

I am looking at 1128, 1125 and 1115 as key support levels for the rest of the day, with 1142 and 1150 as resistance.

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As noted in this tab on May 12, I bought $TZA, $SKF and $SDS to play the short side. I only bought each position in 1/3 size of what I would consider to be a full position.  As luck (sort of) would have it, literally since the moment that I bought those inverse ETFs, we have gone straight down 50 $SPX handles. Stairs up, elevator down, to say the least.  At this point, I believe it would be a mistake to add to those positions here.  The closer we get to the 200 day moving average, just above 1100 and rising, the more inclined I am to take any kind of short exposure off of my books.

Thus, I have sold out of those three ETFs.  $TZA at $6.50 (bought at $5.75 as documented in The PPT).  $SKF at $20.51 (bought at $18.32 noted in The PPT), and $SDS at $32.89 (bought $30.38, see The PPT).

I have also fully sold out of longer term trades–long $BZ, $SWHC and $VCI.

I am currently in 100% cash, and remain convinced that is the best course of action for now.

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Despite ending the week higher, the bulls continue to lose control of this volatile market.  Earlier in the week, many traders pointed to the exuberant bounce as a good indicator that we would revert to the previous instances since March, 2009, of disappointing the bears just when it looked like we would fall off of the cliff.  However, this time around the rally was sold–and sold hard–on Thursday and Friday to close out the week.

The main reason why I say that the bulls are losing control of the market is because we have lost several key battleground price levels and reference points.  The daily, updated, annotated chart of the $SPX shown below should illustrate these arguments.

Please note that I have included the 150 day moving average in the chart.  The last time that I discussed this moving average was back in February (in the Peanut Gallery), when I saw the bulls begin to take back the initiative in that quick and sharp selloff.  I believe that you should be keying in on that reference point this week.  It is currently at 1124.

Let me be clear that moving averages are not a place where you should have limit orders ready to buy hand over fist. Rather, they should be used to gauge just how powerful, indeed, the underlying bid to the market really is.  Beyond the 150 day m.a., the overall market continues to look weak, as we are breaking down below a bearish wedge.

Because we remain firmly below the 20 and 50 day moving averages, in addition to many charts being broken, I believe that the overwhelming number of longs should not be taken for anything more than daytrade at this point.

I think that a similar type of analysis applies to the Nasdaq daily chart, seen below.

Although the Nasdaq, unlike the S&P, is still (barely) holding the January resistance levels, the semis have been noticeably weak, and in fact they have been one of the leaders to the downside. Their sector ETF daily chart indicates as much.

I would resist the urge to bottom pick the Nasdaq and the semis, for now.

Of course, much of the news driven nature of the current market is due to the weakness in the Euro.  The Euro has long been regarded as a proxy for either risk aversion or strong risk appetite. I would be remiss not to update a chart of the ETF of the currency for you.

Again, this is another chart where you want to resist the urge to call a bottom, until you see an inflection point and a sound base. Obviously, we are not there quite yet.  In fact, there remains a serious downside risk.

The oil space has been getting hit very hard as of late, and the oil service sector ETF chart indicates that the weakness is showing no signs of abating.  In fact, I think this a significant breakdown that will need weeks to heal.

Turning to metals now, if you have missed an entry point in gold and/or silver, their charts remain constructive.  I would use any orderly pullback as a good opportunity to accumulate.

Finally, two key individual stocks that I am keying in on this week are $NFLX and $GS. I have no position yet, but I view $NFLX as an excellent short selling opportunity, as evidenced by the chart and my explanation seen below.

Note that on Friday we began to see confirmation of the bearish shooting star, as the stock was down 8.59% on above average volume.

$GS spiked down and has been in a falling wedge pattern for about a month. Volume is drying up, and so are price swings. Moreover, the stock is at a key support level from the summer of 2009.  Basically, the stock is on the cusp of making its next big move.  Be ready to jump on and ride the move, whether it is up or down.

Above all else, I believe that cash and patience are my best ideas in this current market environment.  It sure would be fun for me if I could give you 10-20 charts of stocks looking ready to break out.  However, we are simply not there yet.  The charts need some time to erase the froth and complacency before resetting.

As frustrating as it is to sit in cash and watch, I think it is important to remember that we are playing a serious game, with high stakes here.  Discretion is the better part of valor.

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As I detailed in one of my posts yesterday, the market has a knack for turning the expected into the unexpected.  After several quarters of the market climbing a wall of worry on low volume, technically shaky bounces after sharp corrections, many traders went on tilt and shrugged off the idea of shorting in the face of a bearish setup.  I believe the crucial difference now is that within the past few weeks we have regained many or all of the losses from the 2008 crash.  The wall of worry became awfully slippery the higher up we went.

This time around, bears and heavy cash holders have been rewarded with a market that was set up technically very bearish, and followed through accordingly with price action and volume.  As I am writing this, the $SPX Is off 2.28% at 1131, as we have lost several key levels of support.  Because of the ferocious nature of the selling since 2 p.m. yesterday, I have not had a chance to add to my 1/3 positions in my three inverse ETF holdings–$SKF, $SDS and $TZA.

The 30 Minute chart of the $SPX indicates that we may have more room to fall from here.

Look for possible support at the 150 day moving average at 1124, as well as the 200 day m.a. at 1100.

The Euro also remains under pressure, and if it cannot catch a bid here, it looks as though it will fall back to where it was at its inception.  Here is the monthly chart.

Eventually, we will see actionable swing trading setups on the long side.  For now, however, many charts are either broken or are in the process of breaking down.  Thus, resisting the urge to bottom pick is important.  Likewise, given how much selling we have seen in the past twenty hours, initiating or adding to short positions is probably not a good idea at this point.

Hence, patience and a heavy cash position reign supreme.

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Given the fact that the very oversold conditions of the broad market and many individual issues have clearly been worked off since last week, not to mention the fact that we are bumping our heads up against overhead resistance, I have decided to get aggressive on the short side.  I have taken three new positions today. Please note that the following positions currently account for no more than 15% of my overall portfolio.  They are leveraged instruments, so tread carefully if you choose to buy them.

I went long $SKF, $SDS, and $TZA. They are all inverse ETFs, meaning that I am essentially going short by buying them.  I have bought a 30% starter position in each individual name thus far.

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