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.