Source: An Update On Copper

In an interview on Fox Business News last Monday, I pointed out the same three levels of resistance to Fox viewers that I pointed out to IDE readers earlier that morning (it pays to subscribe).  One thing I did on Fox that I didn’t do in IDE was make a recommendation, so I feel like I owe readers something.  My recommendation on Fox was to buy the ProShares UltraShort S&P 500 ETF (NYSE:SDS).  I still think this is a good pick and I think it could jump 30-40% over the coming weeks.  As a bonus pick, I think you can make every bit as much with the QID, which is the ProShares UltraShort QQQ ETF (NYSE:QID).

After looking even closer at the charts, I noticed what appears to be a very well defined inverse head and shoulders pattern.  Look at the weekly chart below to see the different parts of the formation.

One thing that strikes me about this chart so far is the symmetry of the move from the neckline to the head and from the head back to the neckline.  Each of these moves lasted nine weeks.  It doesn’t have to be that well defined to fit as an inverse head and shoulders pattern, but it struck me as interesting.

So where does this leave us?  It looks to me like the S&P will decline over the next 7-8 weeks and then should start to find support near the 750 level.  If the 750 level holds as support and we start heading higher again, you could play the up move for about six weeks or so and then see what happens after it reaches the 950 level again.

If all of this pans out the way I think it will, the end of this year could see an explosive move to the upside as it breaks above the neckline.

The thing about head and shoulders patterns is that you typically want to wait and play the break above (on an inverse) or below (on a regular H&S).  The big move comes after the pattern is complete.

In the interim, you can play the short side as I think the three resistance levels I talked about last week will be too much to overcome when the S&P is as overbought as it is on the daily and weekly charts.  We move down again, the moving averages have time to catch up, and we won’t be as far below the 52-week (360-day) moving average as we are now.

We saw a similar pattern develop in the 2000-2002 bear market.  It wasn’t as clearly defined as the one we are seeing develop now, but it was there never the less.

Be patient, the biggest gains are yet to come.  The rally from the March low was very enticing, but there is even more money to be made if this plays out as I think it will.

Good luck and good trading,

Rick

Source: Classic Chart Pattern Predicts Bad News Followed By Good News

In an interview on Fox Business News last Monday, I pointed out the same three levels of resistance to Fox viewers that I pointed out to IDE readers earlier that morning (it pays to subscribe).  One thing I did on Fox that I didn’t do in IDE was make a recommendation, so I feel like I owe readers something.  My recommendation on Fox was to buy the ProShares UltraShort S&P 500 ETF (SDS).  I still think this is a good pick and I think it could jump 30-40% over the coming weeks.  As a bonus pick, I think you can make every bit as much with the QID, which is the ProShares UltraShort QQQ ETF.

After looking even closer at the charts, I noticed what appears to be a very well defined inverse head and shoulders pattern.  Look at the weekly chart below to see the different parts of the formation.

One thing that strikes me about this chart so far is the symmetry of the move from the neckline to the head and from the head back to the neckline.  Each of these moves lasted nine weeks.  It doesn’t have to be that well defined to fit as an inverse head and shoulders pattern, but it struck me as interesting.

So where does this leave us?  It looks to me like the S&P will decline over the next 7-8 weeks and then should start to find support near the 750 level.  If the 750 level holds as support and we start heading higher again, you could play the up move for about six weeks or so and then see what happens after it reaches the 950 level again.

If all of this pans out the way I think it will, the end of this year could see an explosive move to the upside as it breaks above the neckline.

The thing about head and shoulders patterns is that you typically want to wait and play the break above (on an inverse) or below (on a regular H&S).  The big move comes after the pattern is complete.

In the interim, you can play the short side as I think the three resistance levels I talked about last week will be too much to overcome when the S&P is as overbought as it is on the daily and weekly charts.  We move down again, the moving averages have time to catch up, and we won’t be as far below the 52-week (360-day) moving average as we are now.

We saw a similar pattern develop in the 2000-2002 bear market.  It wasn’t as clearly defined as the one we are seeing develop now, but it was there never the less.

Be patient, the biggest gains are yet to come.  The rally from the March low was very enticing, but there is even more money to be made if this plays out as I think it will.

Source: Classic Chart Pattern Predicts Bad News Followed By Good News

In fact, the rally appears to be overdone.  We have jumped too much, too fast.  Looking at the chart of the S&P 500, the daily stochastics have reached their highest level in two years thanks to this rally.

A closer look shows three significant hurdles for the S&P to overcome in the immediate future:

• The 200-day moving average is in the 958 range
• The downward-sloped trendline is sitting just above the 200-day
• The high from January- 943.85

Combining the three levels of resistance and the overbought state (both on the daily chart and the weekly chart), there is little chance of the S&P breaking through the resistance in the immediate future.

While I still think 2009 will be a positive year, a decent pullback will be healthy for the market.  The monthly chart shows that we are barely out of oversold territory.  We are still 100 points below the 12-month moving average that I have talked about using to time your asset allocations.

If you are a short-term trader and have reaped the benefits of this massive rally, I suggest you take some money off the table.  If you are a long-term investor, I suggest you wait before committing any additional funds to equities.

A move back down to the 800 level and some sideways movement for a month or two would give the 12-month moving average time to catch up and then we could potentially see the 6-month moving average cross back above the 12-month.  And that is when you will know for certain that the bear market is over.

Source: Proceed With Caution

Last week Drew/Jack used the phrase “financial obesity”.  Now of course this was viewed in a humorous manner, but it sent me down a different path.

The term financial obesity may sound like fun, if you are the one fat with cash.  But I kept thinking about obesity in another form.  The obese budget deficit we are looking at in this country is extremely daunting.  Democrats can blame the Bush administration for the deficit that President Obama inherited and Republicans can blame the various stimulus packages of the Obama administration, but pointing fingers isn’t going to solve the problem.

When I was thinking about this article I shared my thoughts with my colleagues and I pointed out how if a person is overweight, they didn’t gain 100 pounds overnight and they aren’t going to shed the extra weight overnight either.  My colleague Jon Herring pointed out that you aren’t going to lose the extra weight by eating more ice cream either.

Not only are we eating more ice cream, we are eating the cake as well and then we are washing it down with chocolate milk.

I could care less who you want to blame when it comes to the budget.  The only two things I want to know are how are we going to fix it and how can I profit from it?

As for now, inflation is being kept in check.  But you can guarantee that inflation will rear its ugly head at some point in the future.  There is simply too much money being printed and eventually all those dollars floating around in the economy will be chasing a supply of goods that simply isn’t large enough.

So how do you invest for inflation that isn’t here yet?

First, you want to wait until you see the Consumer Price Index and the Producer Price Index creeping up a little bit.  Don’t wait until it is a concern and then react, when it starts increasing slightly you want to take action.

The actions you will want to take are as follows: diversify your portfolio with appropriate allocations to bonds, precious metals and stocks.  How much do you allocate to each?  That is really up to you, but you will want to factor in things like your age, your comfort level with risk and how many years you have until you retire.  There are other factors, but my point is you want to diversify with a balance of investment vehicles, not just diversify within the stock market or bond market, you have to diversify among asset classes as well.

And if you think you can diversify with foreign investments, you are only partially right.  I was reading some data from Dimensional Fund Advisers, a mutual fund company that applies extreme levels of academics to their investing practices, Thursday evening.  Included in that material was a table showing the performance of various global equity markets over the last 24 years.  There were two things that jumped out at me from that table.  First, the only equity market that was positive in the bear market of 2001 was the Australian market (+1.68%).  This list doesn’t include all equity markets, but it includes all the countries I would consider developed markets.  The second thing that jumped out at me was the fact that over the last 24 years, the U.S. equity market has never been the top performing market.  Among the other markets that have not been the leading market over the last 24 years are France and Germany.

These two pieces of information tell me two things: one, diversification among different countries only gets you so far and secondly, the thought of seeking safety in the most developed markets leads to underperformance in most instances.  This should all tie back in to your comfort level.

As far as my plan, I will probably leave approximately 50% of my portfolio in equities (diversified among various markets and sectors of course), and then put approximately 25% each in bonds and precious metals.  And when I talk about my portfolio, I am talking about the 80% I view as long-term.  The 20% that I trade on a short-term basis changes from day to day.

Make a plan for when the U.S. is forced to go on a diet, and don’t expect to shed these extra pounds in a few weeks.  It is going to take time to shed the extra weight we have put on in the last nine years or so.

Source: Financial Obesity

In fact, on Saturday April 4, I spoke at a conference in Orlando and the crux of my presentation was why buy and hold isn’t the way to go anymore.

After my presentation, one of the attendees asked me why I felt buy and hold was dead.  What has happened in the market that caused the long-held belief that buying and holding a stock or the market forever is not the way to invest?

Where do I start?

With the help of my colleague Christian Hill, we went back to 1950 and looked at the S&P 500 over the last six decades.  Here are the returns per decade.

As I looked at these results, I started thinking about how different the market is now compared to the 1950s.  How many people do you think were actively investing in the market in the ‘50s and ‘60s?  Not too many I would guess.  Maybe four or five million at best.  People may have had money in pension plans and the like, but the funds were being managed by a professional investment manager.

In the ‘70s and ‘80s we saw tremendous growth in Individual Retirement Accounts and mutual funds.  This made it easier for the average Joe to get involved in the market.  In the ‘90s, we saw two things greatly impact investment growth- 401(k)s and the internet.

Look at how the ‘90s were the biggest growth decade for the S&P 500.  Do you think that is a coincidence?

By 2005, there were 436,207 plans, 44.4 million participants and $2.4 trillion in assets in 401k plans.  Do you think the growth in participants and growth in assets had anything to do with the tremendous growth in the market during the ‘90s?  You bet it did.

Take a look at the 20-year periods.

Look at the tremendous growth in the last 20-year periods.  I also decided to break it down into two periods, the first 30 years without 401(k) plans and the 20 years since 401(k) plans were introduced.  From 1955-1985, the S&P went up 350%.  This is an impressive number, but from 1985-2005, the S&P jumped 632%.

The second thing that happened in the ‘90s was the onslaught of the internet and internet brokerage firms.  Instead of having to have an account with Merrill Lynch, Shearson or Paine Webber, individual investors could open an account with any number of online brokerages and pay one-tenth the commissions charged by the mainstream brokers.

I am not saying whether I think 401(k)s and online brokerage firms have been good for the overall market.  But what I do know is that these two creations have had a profound impact on how you have to view the market.

They have created easier access to the market and created more involvement from more people.  Unfortunately, they did not come with more education about the markets.  This is why I think traditional views on investing have been changed forever.

God help us if the plan to allow self-directed Social Security ever comes to fruition.

Source:  How Has The Market Changed Over The Last 60 Years?

Could the market actually be bottoming or near bottoming? Could the economy be showing signs of recovery?

Sorry. It’s going to take a lot more than consumer confidence edging up in March. I want to see…

• Manufacturing increasing. It went down by 18 percent last quarter. I guarantee you that it’ll keep going down next quarter.
• Non-defense capital orders increasing. They went down 5.7% in January.
• Productivity increasing. It went down in the fourth quarter. Too many workers standing around doing nothing as plants ratchet down production.
• Auto sales increasing. GM, Ford and Chrysler suffered through another month of sales falling 41 percent compared to this time last year.
• Retail sales increasing. They dropped “only” 0.1 percent in February – hailed as a sign of better things to come by several pundits in the mainstream financial media.

Give me a break…

Could it be that the financial media is reacting to complaints that it’s “talking the market down” by reporting on all these downward trends?

The popular media is not doing anyone any favors by reporting bad news as good news. So, what the heck is going on with the Wall Street Journal? Why is it getting into the “bad news as good news” act?

Listen to this dribble from Saturday’s edition (talking about last week’s market bounce)…

The rise in the stock market, even if it isn’t always a reliable predictor of the direction of the economy, could offer a sorely needed boost to confidence. ‘What you’re trying to do is reverse psychology,” said Robert Barbera, an economist at ITG, a research and trading firm. “‘You’re trying to get people to think of the glass as a third full instead of 97% empty. Once you do that, the enthusiasm about things improving can do a lot of the heavy lifting.”

Listen, I have nothing against Robert Barbera. I’ve never even heard of the guy. BUT WHAT HE’S SAYING DOESN’T MAKE ANY SENSE…

A “sucker’s rally” isn’t – and more to the point SHOULDN’T –make people feel confident.

Not when the economy is losing over 650,000 jobs a month…

Not when one out of every eight households is behind on their mortgage payments or in foreclosure. By the way, foreclosures surged in February…

Not when companies are cutting dividends and taking $41 billion away from shareholders last year and another $33 billion so far this year…

Not when people are seeing $11 trillion of net worth disappear over the course of a single year (in 2008).

And I haven’t even mentioned the 800-pound gorilla in the room yet…

NOT WHEN THE GIANT $27 TRILLION MORTGAGE DERIVATIVE MARKET HASN’T FINISHED UNWINDING.

Even if just $5-10 trillion of this giant market has to be paid off by the banks providing the insurance on these derivatives, that’s a big sum that the banks have no idea how to “handle”.

So, forgive me if a couple of banks cooing about revenues going up in the first two months of the year doesn’t get me excited.

And if you want to jump up and down in sheer joy from Ben Bernanke’s qualified statement that the recession could end by the end of the year “if the financial markets stabilize,” go right ahead.

But if that was the most bullish statement Ben could come up with, I’m thinking his heart just wasn’t in it.

Anyway, you know how I stand on this: There’s no way that the financial markets will stabilize.

Seeing the glass as a “third full” is dangerous if it leads you back to the stock market too quickly. As far as I’m concerned, even the “97% empty” take is too optimistic.

How about “99 percent empty”…

The market is taking a little break right now. Before long, it’ll be heading down – all the way down to near 5,000.

And this little interlude we’re having right now will be completely forgotten.

But there will still be some who blame the media … and others who blame a lack of confidence.

Give me a break.

Source: The Most Dangerous Con: Selling Hope

A few weeks ago in the State of the Market special report, I cautioned the bears to look out for a sharp rally. The market was just looking for an excuse to rally. Enter Citigroup (NYSE:C) (which I suggested was worth taking a flier on in last week’s article) with word that they made money in the first two months of the year.

Here is what I would suggest. First, if you are looking at the short-term, I would look for the market to continue to rally over the next few weeks. Getting the indices out of the historic oversold level we reached a few weeks ago. Second, if I am looking at the long-term, I might be wading in at this point, but I would not be diving in headfirst will all my money allocated to stocks.

I know many investment professionals say you shouldn’t try to time the market, but I have to disagree with them. You don’t have to time the tops and the bottoms, but you certainly should be adjusting your asset allocation based on whether or not we are in a bear market or a bull market.

How do you know which one we are in? There are hundreds of answers for that, but a simple one that I have been using and testing is a crossover of the 6-month and 12-month moving averages for the S&P 500.

Look at the chart below. Over the last 20 years, had you loaded up on stocks when the 6-month crossed above the 12-month, you would have been heavily allocated to stocks from late 1994 until late 2000, heavily allocated to bonds from 2000 until early 2003, back into stocks from 2003 until early 2008, and then back to bonds. Is it perfect? Of course not. It doesn’t get you in at the exact bottom and it doesn’t get you out at the exact top. But it does have you in for the bulk of the move.

How effective would this S&P timing signal have been over the last six years? Well I looked at three portfolio scenarios after the last bullish signal in early 2003 until the end of 2008.

Scenario 1- all money was put into four equity ETFs- the Diamonds (NYSE:DIA) (the Dow), the Spyders (the S&P 500), the QQQQ (the Nasdaq 100, and the IWM (the Russell 2000). There was no timing used in this scenario, it was strictly buy and hold.

Scenario 2- 80% of the money was put into the four equity ETFs in scenario 1 and the remaining 20% was put into three different bond ETFs. This scenario also used a buy-and-hold strategy.

Scenario 3- using the simple timing mechanism mentioned above, 80% of the portfolio was in the four equity ETFs and 20% in the bond ETFs until March 2008. At that time, the funds were reallocated to 30% in the four equity ETFs and 70% went into the three bond ETFs.

So how would you have fared using this strategy? Look at the chart below. Assuming a starting value of $1,000,000, at the end of 2008, your buy and hold strategy for stocks would have produced an overall gain of 14% and the buy and hold strategy with bonds and equities would have gained 19%. The clear winner was the one that used the timing mechanism. This strategy would have produced an overall gain of 52%.

Notice on the chart how Scenario 3 trails the other two ever so slightly for the first four years, loses ground in 2007, but saves you massive pain in 2008.

Getting back to the original theme, as a short-term trader, I would be playing the long side of this market for the next few weeks with an eye on the earnings season that will start in approximately three weeks. As a long-term investor, I would be dipping my toes in the water for now, but I would wait for confirmation of the 6-month moving average crossing back above the 12-month moving average before changing my asset allocation back to mostly equities.

Source: Simple Timing Tool That Will Help You Protect Your Assets

But that is old news.  You are here because you want a forward outlook, not a rehashing of what happened last week.  But I bring up the major earnings from the past week to make a point.  The expectations for Alcoa (NYSE:AA) were still relatively high and they dropped sharply.  Expectations for J.P. Morgan were pretty low and they beat, but got taken down by the industry (guilt by association).  Intel warned, came in at expectations and jumped three percent the next morning.

The point is that earnings reports boil down to one thing: EXPECTATIONS.  Looking at the expectations for this season, due to the current economic crisis, overall expectations are much lower than in recent quarters.

This week we have a number of big tech stocks reporting and the expectations are definitely coming down.  Just to put it into perspective, I made the following table that shows the companies reporting and the current consensus estimate for earnings this quarter.  I have also included the estimates from 30 days ago as well as the estimates from 90 days ago.

As you can see, the expectations have declined sharply in the last 90 days.  Have they come down enough?  That remains to be seen and it will likely be case dependent.

If you look at the analysts rankings on these five stocks, the analysts love Google (NASDAQ:GOOG), Apple and IBM.  They hate AMD and EBay.

So the two of the five that stand the best chance of beating estimates are AMD and EBay.  This doesn’t mean you should rush out and buy them before earnings are announced, but should these two beat estimates, they have the best chance to move sharply higher.  Thanks to the negative sentiment toward them.

Earnings are a tough thing to play, but if you do your homework—looking at analysts’ rankings, short interest ratios, put/call ratios—you can tilt the odds in your favor.  I recommend to most people that they wait until after the earnings are announced, but if you insist on getting in ahead of the report, do it with options (lower cost of entry) and make small allocations to the trades.

I don’t make earnings plays in my K.I.S.S. Service, but I do occasionally have a trade on when earnings come out.  I almost always take profits off the table before the earnings report comes out and leave a little exposure so that if the stock goes my way, I can really juice my gains.  Meanwhile, if the stock goes against me, the pain is negligible because of taking profits off the table on a portion of the trade.

Good luck and good trading,

Rick

Source: Earnings Season Ramps Up This Week; Expectations Are Considerably Lower

But there is a lesson to be learned from every rough patch. One of the lessons I learned from the crazy market of the fourth quarter has to do with the elasticity of indicators.

What I mean by “elasticity” is that a number of indicators are calculated based off the most recent trading activity, including most of the overbought/ oversold indicators. In the fourth quarter, these indicators were stretched out like an elastic waistband thanks to big moves in both directions.

For example, if you use the Relative Strength Index as one of your indicators, the RSI uses volume and price change in its calculations. Whena stock goes up four or five percent two days in a row and then drops four or five percent the next day, the RSI is getting stretched out. When the market calms down and that same stock is moving less than one percent per day, the overbought and oversold levels are harder to reach because the RSI is stretched out from the four and five percent moves. These changes to the RSI lead to fewer trading signals.

I know personally that I cut back on my trading because I wasn’t getting as many signals as I was a few months ago. With my mini futures trading for the Velocity Strategy, I went from getting six or seven trade signals per month to only three or four. Now that the market is settling down, the indicators are starting to tighten back up, and the signals are becoming more frequent again.

I have said it numerous times in IDE, but it is worth repeating. You don’t want to be trading for the sake of trading. You want quality trades, not quantity. When the indicators get stretched out like they were in the fourth quarter, you have to have the discipline to step back and wait. Sometimes the waiting is the hardest part of being a disciplined trader, but it is also one of the most important traits.

Discipline and patience are always important traits, but they are even more important in a market like the one we have seen for the past year.

Source: How Elastic Are Your Trade Indicators?