Golden Cross signal on US Dollar

On Feb 18th the 50 day moving average signal for the US Dollar ($USD) crossed above the 200 day moving average. Historically this is a bullish signal for whatever equity is involved and in this case it’s the dollar. If the US Dollar does in fact continue to rally what does this mean for the price of Gold, Precious Metals, Commodities, and Stocks in general?

I first started looking at the dollar relationship in April of 2008 and then warned we would see a big correction in all the aforementioned sectors if the US Dollar rallied. Let’s look at Gold and Gold miners. GLD has a price objective of 94 and the probability of hitting it will be directly tied to the dollar pricing near term.

GDX (Gold Miners) has a positive price objective but must break above the red downtrend line if bullish momentum is to continue.

Let’s look at the VIX to see what measure of fear is in the market, as you can see it’s almost at the last low which is where the last 8% pullback was triggered.

What does this mean going forward, will the rally continue?

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Bradley Turn Date imminent

Futures markets are up this evening which is hopeful but not a guarantee of an up day tomorrow. The dollar is down slightly and there are more rumors of a bailout for Greece. There are definitive technical resistance levels that must be overcome for this rally to continue that will be discussed further in this blog entry.

Who knows, maybe China will revalue currency and we’ll rally for a month or two.
There are also other trading plays coming out of the Chilean earthquake in the members area here and some are Best of Breed Stocks.

I’ve been giving a great deal of thought to the current economic/world conditions and the data is a complete conundrum of chaos and confusion (CCCC for short). That’s why I like hedging/buying protection in uncertain times.

On one hand since January we’ve seen RECORD earnings and BTE (better than expected)reports from the majority of companies in America along with a slew of improving economic indicators. Certainly looked like the recovery was well under way but……..

On the other hand the stock market ignored said BTE earnings, existing and new home sales are down, jobless claims are up, and last week the 30 yr mortgage rate rose again. Congress is gridlocked and the current admin doesn’t seem to be giving any confidence to investors or world markets and this doesn’t count the financial limbo in the EU.

Next week is CRITICAL for bulls. How are we positioned going into next week? What does the infamous Bradley Chart predict?  

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Is the Stock Market Rally really over?

“The best strategy in my opinion in times of uncertainty or close to market peaks is to have 20-30% in Cash, 20-25% in ultrashorts, and 50-75% in Best of Breed stocks or bull ETF’s. Though my gains were limited when the DOW came up from 9800 my losses were controlled rather nicely on the way down using this strategy. When the DOW was below 10.2K we had no clue if lower lows were imminent or if the highs of this rally had been achieved. Prior to last week my drop dead warning level was DOW 10K, not it’s DOW 10.2K and hopefully I’ll get to raise it to 10.4K this week.”

I wrote the above in my last blog and the balance of bulls/bears has proven to work very well especially on news driven bearish pullbacks. Today was a perfect example of when to “Leaving Well Enough Alone” which I didn’t do. As the market tanked below DOW 10.2K, Conditional Sell Orders executed for all USD, UYM, EDC, and some FAS. Right before this happened I had a sneaky feeling it was a fake out and changed other CSO’s to DOW 10,150. In retrospect I wish I would have done it for all sell orders and not made any changes. Some days it goes like that and you just have to shake it off and go forward.

Looking at the DOW and SPX PnF charts shows a different story. If you change the box size to see a closer view of the action both of these indexes now have negative Price Objectives. That doesn’t mean the market won’t rally further but it does mean both have to break out to a higher high to regain positive direction on the charts. In the case of the DOW this means it must close at 10,380-10,400 to break the downtrend. The SPX must close around 1107 to do the same.

Today’s selling of some bulls and buying of some bears left me with this portfolio balance and bull/bear ratio.

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Where is the next Stock Market top?

Amazingly last Friday the DOW pulled back into the 10.3K area before rallying the rest of the day to close above 10.4K with the SPX closing above the all important 1108 area. Both indexes have now went slightly above the 50 DMA and the MACD signals for both went positive on the last rally from DOW 9830.

As I wrote last Thursday night, the market overreacted to the Fed raising the discount rate that evening. I had sold several short positions on Thursday when I saw the DOW clearly break into positive territory and was pretty concerned on Thursday night. It took a strong break above DOW 10.3K to get the markets out of the range bound area we’ve been stuck in since January’s decline.

The rally Friday took the ultrashort ETF’s I sold the previous day to new lows (excluding EDZ and FXP which I bought more of late Thursday as a hedge) so I bought back some SMN and FAZ to increase my hedge. I also sold some US Steel at 175% profit to increase my cash position. I’ve noticed EDZ and FXP have dropped but seem to hold more strength on a daily basis. My outlook is they could get cheaper but if and when the stock market does a 20-30% correction the ultrashort ETF’s will probably gain 50-100% very quickly. The 8% pullback we just had gave said ETF’s a rise of ~30% on average.

My personal outlook very near term is EXTREME CAUTION is needed, we’re only 300 pts below the YTD high on the DOW and probably very close to the Stock Market top short term. I remain hedged and plan to take profits and increase short positions on any mini-rallies going forward. There is a possibility we could set higher highs before this rally fizzles out but make no mistake, it will fizzle out again. Possibly in March, April, or May which fits both seasonal timing models and the Bradley charts. Let’s look at the VIX chart to see how the volatility index was affected by a 600 pt DOW move.

What is the “plan” going forward this week and into March?

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How to make money in almost any stock market condition!

After the historic rally and the last 4 weeks of bearish pain for the bulls (not to mention a 900 pt drop on the DOW) we finally saw major capitulation selling  last Thursday and early Friday followed by a big bounce. The SPX hit an interim bottom very close to 1050 the pro’s had predicted.  Most investors hate this volatility, most traders love it. Who hasn’t asked themselves “How can I make money in almost any stock market condition?”. Daytraders sometimes do great, long term investors sometimes do great but with radical 200 pt daily swings it’s almost impossible for long term investors to get ahead. How can you hedge your bullish positions to prevent catastrophe because of sudden unexpected selloff’s induced by world market panic? Is this even possible. We’ve proven that it is thru a properly allocated and balanced portfolio with some hedges on the side. No one can pull the trigger on buys or sells fast enough or in the right direction to keep up with programmed trading and market manipulation so that was the premise that led me into hedging strategies or Auto CYA Mode as I like to call it. A form of this was first used at market peaks last August successfully to decrease volatility thru the oscillating market in Sept/Oct.

One very good thing worth noting is at the lows last week on many days my Best of Breed Stocks were up showing why they are Best of Breed’s!

Unfortunately last week the DOW dropped below the 10K level ON HEAVY VOLUME SELLING and went down to 9830ish as I predicted in my daily discussion board posts. I loved the bounce from those lows on Friday, that day I went from up 1% at the lows to up 2.59% at the close.  The insane VIX volatility and high volume selling led me to

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Buying opportunity or Shorting paradise?

Everyone has read the news stories on the last few week’s various catalysts which drove the DOW down over 500 pts from the recent double top test of the 10,700 level. While seeing the largest 3 day drop since last March wasn’t much fun it’s also good to let the steam out a bit on the largest rally in history. What are the opportunities now? Which Best of Breed stocks, sectors, or ETF’s are the best trades or investments in the very near term? Will the stock market continue the downward trend and go from a small pullback to a full fledged correction? Can we make another 2 month 25% profit on a ETF trade like the last 2 month move on TNA before it pulled back (I sold all of mine at 47)? Let’s look at some charts and try to plan a couple of steps ahead. 

Here’s the DOW Point and Figure Chart from Friday where you can see the triple bottom break below 10,250 which is now upper resistance. 

To put this rally and pullback in perspective let’s look at the larger view on the DOW.  The 50 day moving average was breached to the low side for the 1st time since last July which ended up being a great buying opportunity (which I capitalized upon).  We won’t know if Friday was a buying opportunity or a shorting trader’s paradise till we see the reactions this week regarding Bernanke, China, and future top line growth on the back of better than expected earnings from 75% of the SP500 companies to report so far. My bet is 

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SPX 1000, Where do we go from here?

The charts say it all, the thesis for SPX 1000 was proven against many odds and patience paid off. We also hit my high term target of DOW 9400. I’m very dubious of another serious leg up in the rally at this point and now the Bullish Sentiment Indicator is peaking towards a high. With all of that and geo-politics in mind I’ve taken profits and implemented Plan C.

What is this infamous Plan C you may ask and those who regularly read our Forum know the answer?  It’s to sell 1/2 to most of the ultra leveraged Bull ETF’s and buy their opposite ultra Bear ETF’s to hedge remaining Best of Breed Stocks and ETF’s. Running about a 30% short hedge position now with about 45% in bulls and remainder in cash.

I’m hedging with EDZ, FAZ, SRS, FXP, TZA which are ultra shorts of Emerging markets, Financials, Real estate, China, Small caps. With the portfolio weighted in this manner I won’t get the huge 2-4% gains of late which is fine, my goal is wealth preservation till the direction is clear. We are very close to a near term top and if I can manage to gain .5% daily returns I will consider this successful. All of these bear ETF’s are at the BOTTOMS of major stem moves, they could go a little lower but the upside potential is huge on a pullback or correction.

Here are some eye opening  long and short term PnF charts to give perspective-

On Friday when the DOW broke above 9400 (which was my high end target) I sold a good chunk of bulls and bought more bears. These were either new or remaining shares and regular readers know almost all of these provided 100-300% profit coming off the March lows. Here’s the breakdown.

CIT- sold 1/2 of position at average profit of 120%
FSLR- sold 1/3rd at 28% profit
FAS- sold 1/3rd of minimal remaining position at 109% profit
URE- sold 2/5ths at 65% profit
TNA- sold 1/2 at 48% profit
UYG- sold 2/5th at 43% profit
UYM- sold 1/2 at 34% profit
USD- sold 1/2 at 32% profit

Still holding shares of the following Bulls-

AAPL, GS, X, FSLR, POT, CIT, FAS, UYG, URE, UYM, USD, TNA.

I’ll probably have to adjust my Bull/Bear ratio via weekly buying or selling to manage Plan C’s goal of wealth preservation with slight gains going forward the next few months. If there is a huge break to the upside I’ll dump a handful of shorts or conversely dump some longs if we in fact see a major pullback as I anticipate going into early November.

The daily/weekly data, volume, PnF charts, and Technical support/resistance levels  will be my guiding light.

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Stock Market Consolidation or Top?

During the latter part of last week we saw the DOW test 8700ish several times before heading higher and closing right at 8799. There is a lot of market moving news due out this week and it’s quadruple witching week for options. The trading range has tightened back to what is probably normal volatility but pro’s are expecting increased volatility this week and hopefully we’ll break out of this range to the upside.

Best of Breed stocks like GS, AAPL, X, etc….. all made new highs and pulled back slightly. All are close to filling the closest gaps and we could see 10% more additional upside according to Art Hogan with some experts calling for DOW 10-12K by end of year. My near term upside target is 9.5K +/-200 pts. When we see Financials rally again and a lot more side money come in the market it will be probably be time to look for the door and/or go short. The PnF charts are my guide.

http://stockcharts.com/def/servlet/SC.pnf?chart=gs,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G

The Nasdaq 50 day moving average crossed above the 200 day average with the DOW/SPX expected to do the same in a week or so. This is called the Golden Cross (thanks Smile) which is converse of the Death Cross seen in this indicator in late 2007. It’s not proven to be 100% accurate (like anything else is right) but should be given some credence in your investment decisions. The Bradley Charts show a MAJOR turn date rapidly approaching in mid-July. Though I’d love to see the DOW shoot up another 1000 pts I’m very cautious now especially due to the Bradley Charts and overall perceived oversold conditions.

I’ll be selling more long positions as the market moves up and I’d like to be 30-50% cash by the end of June UNLESS the PnF charts and technical indicators show more upside.  Look at the ultrashort charts for FAZ, SRS, EDZ, ERY, etc…….., they are ALL on the bottom of major downward stems. These will be GREAT trades when the market does correct.

http://stockcharts.com/def/servlet/SC.pnf?chart=faz,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G

Here’s the links to the current DOW and SPX charts.

http://stockcharts.com/def/servlet/SC.pnf?chart=$SPX,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G  The SPX looks like it’s in a consolidation pattern to me before moving upwards very near term.

http://stockcharts.com/def/servlet/SC.pnf?chart=$indu,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G  The DOW shows the same consolidation pattern before the late day breakout to 8799 on Friday. Target is mid 9000’s IMHO.

These are the equities I hold at present and percent returns as of last Friday 06/12/09.

USD	PROSHARES ULTRA SEMICONDUCTORS PROSHARES							46% Original shares up 73.8%
AAPL	APPLE INC							46.3% Original shares up 59%
MOS	MOSAIC CO							Sold ALL at 75% profit	closed
DXO	POWERSHARES DB CRUDE OIL DOUBLE LONG ETN							108%  Sold 1/2 at 125% profit
FSLR	FIRST SOLAR INC COM							62.9%
X	UNITED STATES STEEL CORP							117.5%  Original shares up 126%
GS	GOLDMAN SACHS GROUP INC							81%   Original shares up 96.1%
URE	PROSHARES ULTRA REAL ESTATE PROSHARES							46.8%  Original shares up 109.4%
ERX	DIREXION DAILY ENERGY BULL 3X SHS							66.5%  Original shares up 123.8%
UYM	PROSHARES ULTRA BASIC MATERIALS PROSHARES							48.8%  Original shares up 142.4%
BGU	DIREXION DAILY LARGE CAP BULL 3X SHARES							151.7%
TNA	DIREXION DAILY SML CAP BULL 3X SHS							79.2%   Original shares up 192.6%
FAS	DIREXION DAILY FINANCIAL BULL 3X SHARES							106.5% Original shares up 336.9%
UYG	PROSHARES ULTRA FINLS PROSHARES							46.6%   Original shares up 168%

Real Time Average portfolio gain at +76.3%  as of Friday’s close for a 1.8% gain week to week.

If you are a member of the Best of Breed Investing Discussion Board you can read the daily and intra-daily discussions to see my daily thoughts on market direction as well as information/opinion from quite a few other very experienced investors. 

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Questions/Comments email me at- patrick@bestofbreedinvesting.com

Rally continues in the face of profit taking

Quite a roller coaster ride again this week and the market was impressively strong holding support levels around DOW 7800 in the face of obvious profit taking. Seems the earnings report season is surprising more to the upside than most expected. I watched the lower lows emerge that I discussed last blog and decided to set stops at 7800 after the first wave down. That level held and we in fact rallied from there most of the week to end slightly down week over week.

http://stockcharts.com/def/servlet/SC.pnf?chart=$indu,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G

Now up 54% total average which is a 9% decline from last week BUT I also sold 20-25% of most positions when the market rallied on Friday. The average profit percentage for these sales was 68%.  I have stops and conditional orders in place in case we get a sudden turn of events downward and also bought a small entry position in FAZ as a hedge. This 3x ultra-short of financials is at an all time low along with SKF (the more widely known financial short). FAS, FAZ, SKF, UYG are at the top of the high volume movers almost daily.

Many pro’s are predicting we’re going to DOW 8500-9000 level before we see another major leg down but of course just as many are predicting an imminent crash again. Seems like the good contrarian move is to bet on a further rally as MOST expect a pullback.  It is interesting to note the Investors Alamanac and a few others claim the DOW MACD signal going negative on April 21st was the signal that the favorable season is over and we’re headed down. Of course this same favorable season was given the green light last October when the MACD crossed positive right before the big crash in November.

What I found most interesting today is I read an update from the Bradley Chart guru (who exactly called the crash last year). The same guy is now predicting a HUGE rally near term followed by another major pullback. We’ll know soon enough, the DOW and SPX now need to produce higher highs to further convince me. The VIX dropping to 30 will be the ice on the cake!

I sent an alert to friends and members of Best of Breed Investing this week to take some profits, preferably something around 20% of holdings.  As we rally further I’ll be taking more profits with a target to be at least 50% cash by the end of June. The next big leg down and subsequent rally into 2010 are probably going to be the last chances for HUGE point moves for the next few years. We just went thru the worst decline and best rally in ~80 yrs.  This is a major statistical anomoly.

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