Easy There, Turbo

I know everyone is getting Jim Rogers’ style erections these days, with male genitalia shaped as bow ties materializing at the first sound of the word “commodities,” but the short-terrm outlook is not so stimulating. Instead, while I believe that the longer-term bull thesis remains firmly intact, the weekly charts for the ETFs of both cotton and a basket of agricultural commodities, seen below, indicate that the buyers have likely exhausted themselves for the next few weeks.

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Plenty of excellent sites out there include more macro commentary in their links, namely Downtown Josh Brown and Abnormal Returns. I thought I’d share a “Traders Only” collection. Here are the traders that I am reading today (click on links):

• Yours truly in The Wall Street Journal
• The @HCPG crew with a review of the precious metals review
• @Vjland doesn’t like AAPL up here
• “The Goat,” @gtotoy, likes OPEN through earnings
• @mb_willoughby with her daily list of actionable setups
• @DerekHernquist with a great piece on trading psychology
• @wwwstockrake on the gold move
• @daytrend, Vic’s intraday market stats

There are plenty of other key sources that I check everyday, so be sure to look on the right hand side of your screen for my “Recommended Links.”

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In lieu of my usual evening recap detailing the continued troubling underlying divergences in the market despite resilient dip-buyers, I am going to discuss the OIH, once again. Please be sure to go back and read this post detailing the serious, multi-year supply that the oil services ETF is likely to encounter in the $155-$160 area.

Today, the OIH printed what is known in Japanese candlestick terminology as a “hanging man” candle. Basically, the hanging man is aesthetically similar to the bullish hammer. Both candles feature price dropping significantly from where it was at the opening bell, yet the buyers are able to rally back towards the end of the session up near the opening price level. Instead of appearance, what makes the hanging man bearish and the hammer bullish is predicated on when they are printed. If we are in a rather amorphous, oscillating market, then a hammer or hanging man carries far less significance, as too many traders make the mistake of extrapolating on them when they should usually be ignored.

However, after a steep uptrend, the hanging man must be taken very seriously, as there is a distinct possibility of an imminent reversal (just as after a downtrend, the hammer has a high reliability of signaling a bottom). Moreover, as is the case in the daily chart of the OIH seen below, price has been in a rising wedge (pink lines on chart), another pattern that must be taken seriously for its tendency to resolve lower. All of these red lights are being flashed as the OIH is running directly into the multi-year resistance I discussed in my post on Tuesday.

Essentially, there may be a perfect storm brewing in the energy space. Talk of commodities–specifically oil–being on an inevitable run higher for a variety of macro reasons (geopolitical, inflation) may very well prove true over the next few years. In the short run, though, a multitude of technical factors point to a lousy risk/reward profile for being long right here, right now.

Disclosure: No position in OIH

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You know that FCX continues to be one of my main broad market tells, and it has served me well over the years. After the stock has recently seen its share price split, we can see on my annotated daily chart below that Freeport is at a significant crossroads. The stock broke down two weeks ago, and has seen a fair amount of indecision ever since. Yesterday, price was rejected from the gap fill up to that breakdown level. Moreover, the stock is printing a rather indecisive candle today, right at the convergence of the 20 and 50 day moving averages. Finally, note the possibility–again, the mere possibility–of a head and shoulders topping pattern.

Despite the increasingly accepted view that commodities are going higher in a seemingly straight, perpetual line, Freeport needs to be watched closely here with an objective eye, as complacent bulls may be tempting fate.

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MARKET WRAP UP 02/02/11

The market is trying to prove its resilience once again, despite a multitude of reasons to be cautious here. Here are some of them:

1. While the S&P 500 is right at 52 week highs, the transportation stocks (IYT or DJT) are slicing down through their respective 50 day moving average.
2. The technology and small cap stocks (QQQQ and IWM) failed to “confirm” the S&P’s fresh 52 week high by printing one of their one.
3. FCX GLD and SLV are sporting weak daily charts, struggling at important price levels after bouncing back up to them.
4. There is a lack of clear leadership. Instead, traders are simply scrambling from pocket to pocket of perceived momentum.
5. Sentiment is becoming a bit too complacent for my taste. The non-financial media is espousing the idea that all is well with the market because the Dow broke above 12,000 and the S&P 1300.

Hence, evaluating one’s own threshold for risk is key at times like this. The above evidence is not enough to become aggressively short in the face of a seemingly inevitable melt-up. However, is it a good reason to tighten up.

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I detailed the unfavorable risk/reward profile for allocating fresh capital on the long side to the OIH yesterday based on that monthly. Today, let’s take a look at the monthly SPY. As you can see on my annotated chart below, we have run straight up into a key reference zone–the general $131 area–after printing five consecutive green monthly candles. Moreover, we continue to reside outside of the upper monthly Bollinger Band. Accordingly, extra attention should be paid to position sizing, protective stop losses and timeframe now more than ever with respect to any longs.

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