Jingle Bells

...Market sells (off), Oil lays an egg.  Oh what fun it is to trade an algorithm run financial market.  (I was never much of a poet.)  Well, boy oh boy do we have some interesting things to address, so we will dive right into it.

We have to talk about oil first.  As I write this, oil just broke 59, after breaking 60 last night.  Now down to $58.60/barrel.  Holy crap is all I can say.  In May of this year, oil was 107/barrel and it has now been roughly cut in half in 6 months.  This absolutely amazes me beyond anything else happening in the market right now.  Actually, scratch that.  What absolutely amazes me the most, is the amount of people who have NO CLUE what kind of implications this has.  I saw Rachel Maddow post a pic on Facebook a few weeks ago of a screen shot of a Fox News Broadcast.  The headline was "Is Falling Gas Prices Bad for the Economy?"  Her comment was something along the lines of "4 years ago Fox News was blaming high gas prices on Obama, now they're saying it's bad for the economy!"  Then she laughed and implied that Fox News was a complete joke (Which I don't disagree with, but so is MSNBC) Now, I'm not trying to get political or stir the pot up.   Both sides are full of shit and have no idea what there talking about.  But the point being made by Fox, was the DEFLATIONARY aspect of oil crashing as well as just about every other commodity out there which on avg have fallen about 30% or more recently.  Which certainly should be the major concern in this situation that her and the rest of America should worry about.  If they were capable of thinking past step 1 in any situation.  But I can't even fault Rachel.  She's a TV news reporter.  Jim Cramer however, who is talking everyday on CNBC about how great this is for the avg American, and is therefore WILDLY bullish on stocks, seems to think that the $200-300 a month the avg American will save on gas, they will then take and go buy stocks with.  Which first of all, HAHAHAHA!  Are you serious?  Do you really think that's where the money is going?  IF the avg American saves any significant amount of money due to lower gas, first and foremost, it will go toward paying down debt.  But even if it didn't go to that, the amount you are saving in gas is likely just now evening out with the amount more you have already been paying for health insurance.  But even if every penny of that went directly into stocks, it would not account for much in this multi trillion dollar financial system.  Shame on you Jim Cramer, you've been at this too long to say asinine stuff like that.  You've worked for Goldman, you manage millions of dollars. You should know better.

Now if oil is down 50% in 6 months, a natural thing to assume is that oil companies are making 50% less money now than they were 6 months ago.  But that's not the case, most people don't think about the cost of it.  So lets say that an oil company can produce a barrel of oil for $25.  At $100/barrel they are making $75 in profit.  If oil than falls 50% in 6 months and is now $50/barrel, their profit is now only $25/barrel.  Their profit dropped by 66%.  In 2012, Exxon earned $45 billion.  If that profit dropped 66% its now only $15 billion. I know, I know, "Only 15 billion".  Believe me, not me, or anyone else on this planet (except for maybe the politicians in Washington)  are crying over the oil companies profits, that's not the point.  The point is, that's $30 billion dollars of money that won't be in the economy anymore.  And that's just ONE oil company.  That far exceeds any benefit to the economy an extra $200-300 dollars a month the avg American will save.  Also, lets face it, if Exxon makes 30 billion less than they did last year, who do you think takes that hit?  Will the CEO get a reduced salary?  Will the board of directors get less stock options this year?  Hell no.  They are going to fire employees.  Starting always with the low to mid level jobs, of course.  And it won't just be them, but all the other oil companies or any other company who has taken a similar hit to their balance sheet due to falling commodity prices and the effects of DEFLATION.  And do you know who that is?  The avg American.  So now you're going to save a lot of money on gas prices, by not having a job to go to to begin with. Nothing is ever an isolated event.  And if Rachel Maddow, and Jim Cramer, and the rest of the world that think similarly realized that, maybe they would be as concerned about this as I am.

Below is the monthly chart.  I kept it simple, there's nothing to see in terms of technical indicators, you can pretty much get the idea, its all going straight down.  At this point 55 is a shoe-in, and likely if that happens, the momentum and the algos will probably send it down to 50.  If that level gives way, there's not much in the 40s in terms of support.  It's basically right down to that 40-35 level which was the lows in the financial crisis.  As far as Brent is concerned, they are reaching closer to par, and I suspect if 50 is reached and broken they will probably get there just below it in the 40s.  Ladies and Gentlemen, there are no excuses that can be made.  This oil chart is downright devastating.

Enough about oil now, there are other markets, but it does tie into a common theme.  You guessed it, DEFLATION.  So Europe is falling apart, and after years of talk, Draghi has said they will begin buying assets in their own QE attempt.  The Euro is collapsing and the dollar is soaring for reasons that some foolish people seem to believe are fundamental, or anything other than the fact that the Euro is collapsing along with most other currencies.  (Except gold.  In terms of every other major currency except dollars, Gold was actually UP this year.)  The dollar continues its reign as the cleanest shirt in the laundry pile.  Further East, Asia is slipping as well.  We seem to be the only ones immune to it...for now.  The SPX is beginning to falter.  Currently we are trying to bounce off of support at 2020, which is also where the 50 day MA is, so this level is important.  I suspect if this were to break down, any rallies will be capped at around 2040.  If 2020 breaks, 2000 will come soon enough.  If that level there and at 1980 can't hold, its about 100 points down to 1900-1920.  If that fails, it's another 100 or so down to 1820.  This looks like it may give us a nice trade from the short side but it probably needs a little more time to clearly unfold. 

Lets take a quick moment to look at gold which seems like it is trying to do something right now, but no one seems to have informed the gold miners of that.  Gold broke the all important 1180 level last month and dropped down to 1130, as I suspected at the time it's turning out to just be a bear trap that rebounded back above 1200 shortly after.  I realize that it's not over yet, and gold could still fail here and fall lower, but when you have a major break of support like that, if it was going to break sharply lower, it would have done so and not been holding on for a month.  Recently, silver has been outperforming gold, and the GDX has outperformed the GDXJ.  Which is certainly interesting.  Silver out performing gold typically occurs when the metals move into a bullish phase, and the GDX outperforming the GDXJ typically happens then they are moving into a bearish phase.  So, no clear direction in the gold market.  And being that the assets have been headed lower for the last few years, we MUST assume the bears still are in control of this market until it shows us otherwise.  Christmas is not usually a good time for gold.  The low volume typically sees it slide till the end of the year.  I would not be surprised if the metals made a new low before the year ends.  I'm almost 100% sure the miners will.  But I suspect come Jan, things will be very different.  We will have to wait and see.  Here are the charts for the GDX and GDXJ.  

That's all for now guys.  Keep your eyes on oil, which is now 58.02, about to break down further.

****UPDATE**** Oil breaks 58, now 57.36.  Down over 4% today.  We will likely hit 55 Mon or Tues.

-Jonathan M Mergott

Under the weather

The title of this post has nothing to do with the markets.  It's me that's under the weather right now but the market trades on, and so must I.  So here's whats going on.

Oil is in focus today as it went to test the double bottom it made at 80.  As traders say in this business, double bottoms hold and there is no such thing as a triple bottom.  Oil confirmed that saying and broke below 80 moving down to 79.40, bouncing to retest 80 and failing there so far which is likely what sent the market down.  Stocks, which opened lower already don't care an hour and 45 min now into trading and after being down about 80 points a few min ago, the Dow just turned positive.

Gold and gold stocks have done nothing but continue to disappoint.  In terms of what I said earlier about triple bottoms, well watch gold carefully because the lows at 1180 very well might fail.  The nice rally the metal had off of that level and the consolidation and drastic under performance of the miners is looking less and less promising.

So as a trader your stuck in a weird position as the market indices have taken off skyrocketing and the alternative assets like gold are a stick in the mud.  So we must look for individual stocks.  So here is what I was buying on Fri and why.

First up, Burger King (BKW).  BKW gapped up to 34 then slid down to fill the gap, which it did and caught perfectly on trendline support and the old resistance (now support) at 28.  Bounced nicely off of that level and gave us a nice bullish set up.  My initial target for this is 34, but I am not looking to blindly sell it at that level unless it rockets up there in the next couple days and stops dead.  Then I will sell and wait to see what happens next.  If it breaks through, I'll be back in.  If it steadily moves up there and everything still looks on the side of the bulls, I will have no reason to sell there until that changes.  We will see soon enough what it feels like doing.

Next thing I was buying was Blackberry.  (BBRY...I know right?  Who the hell wants BBRY?)  I do.  Same sort of bullish setup.  10 and 20 day MAs crossing higher and both crossing the 50 day.  That nice little consolidation it is making right above the 50 day is making me believe this thing will likely rocket higher, and it can do so quickly (which is why I like it).  Resistance comes at 50 cent incriminates up  as you can see, 10.50, 11 and 11.50.  But thats really just the start.  I think a move to and above the 11 area is likely and if so, it could run up to 13-14 easily.  (nice 30-40% profit on a 10 dollar stock).  If I back the chart up a bit, you can see how 18 is even plausible over a longer time frame.  So this is one that could be big profits with relatively little risk at this level.  I iniatally thought this would look fine so long as it holds the 9.50-10 level.  This morning it was sent down to 10.08 and rocketed back higher, now at 10.40, renewing my confidence in it.  I think this level between 10 and 10.50 is what will decide whether bulls or bears are in control, but I obviously feel it is the bulls now.

That's all for now.  As I curse the fall/winter season and the fact that I live in a place that experiences it, I will be raiding the medicine cab for a remedy.  Remember, today is Monday and Monday's can be tricky and deceiving.  Oil will likely dictate this market for now (which is now BACK over 80 at 80.60 now.  It's a MIRACLE!!! Watch to see if this holds or falls back to make yet another lower low)

-Jonathan M Mergott

Round 2?

So the last 6 or so trading sessions saw the stock market ROCKET higher off of the lows it hit last week.  You'd almost think the laws of physics don't apply to the SPX.   ( Now remember what I said Friday about the difference between bull markets and bear markets? BEAR markets sucker people in with massive moves higher, and then they sell out as momentum stalls and it hits new lows.  Bull markets are the opposite, quite crawls higher and quick chops down that shake out the weak hands.  This is what keeps market trends going.  As long as that action continues, the direction of the market is able to refresh itself in a way as the "suckers" provide the trend with new buying or selling as it makes new highs and lows)

So onto the chart.  We made a low on the SPX at 1820 area and shot up 140 points in 6 trading sessions.  The move is typical of a counter trend move that will likely stall out soon.  I was looking for today to be a day we begin to see the overall trend begin to reemerge (Which again, I believe is now down).  We continued climbing yesterday afternoon into resistance near 1940, which is not only where the downtrend line from the recent highs sits, but also directly where the 10 and 20 week moving avgs lie, which are now crossing over and will begin to head lower if the SPX can not better this level.  Right now, the SPX is a little lower, but this is the first day in 6 it hasn't been MASSIVELY higher.  It's a little early to say the up move is over or that a new down turn has commenced, but we need to watch this level carefully.  A move above this recent high in the mid 1940's will likely turn everything rosey for the market again.  But a move below support at 1920 begins making all short term indicators turn down again, and will likely spell out a retest of the 1820 low.  (And if that gives way, we could be looking at 1750.  If that occurs, we have now made a lower high and a lower low and stocks are likely in big trouble.)  Below is the hourly SPX.  There are a lot of lines drawn on this so I know its a bit muddy, but bear with me.  Note the trendlines, and resistance and support points drawn out.  The 20hr moving average sits right at 1920, so if the SPX breaks below that level, it will begin sending those shorter term indicators headed lower once again.  From that point, holding 1900 would be the last line of defense for the bulls before a retest of the lows is in order.

Let's look now at gold, which is barely holding on, and silver which is dropping back to the 17 level.  The miners are also slipping and have been under performing the metals in general which is never a good divergence to see.  As I previously said, we can begin to see gold pick up momentum if the market sells off as people rush to some sort of safe haven, but it will be unlikely to expect anything spectacular there quite yet.  Gold has been in a bear market, and a generally hated asset for quite some time now.  Those trends don't just reverse themselves overnight (usually).  The GDXJ REALLY needs to hold on to this level here near 32 or it runs a serious risk of dropping back to retest the low near 30.  As you can see from the chart, all major resistance converges at 34, so it is very important for the bulls to capture this level to make the technical picture turn in their favor.  I know the chart is messy with a lot of annotations and lines, but please take a min to look at each point and you'll see what I mean.

A quick note on Gold seasonality; We have become use to the fact that gold typically rallies in the fall, specifically Sept to Oct, and has a tendency to stall out by Nov into Christmas.  Spring is also historically been a strong time for gold as well, and can rally usually till early summer, which we typically see as a weak season for the metal.  In the last few years the exact OPPOSITE has been the case.  In 2013, gold found footing and began moving sharply higher in late June into Aug, a time we typically aren't use to seeing that.  As Sept came around, the metal had put in its highs and recommenced its move lower again which lasted till the end of the year.  Come Jan of this year, gold kicked off with a bang and rallied into the months of March and April, then stopped and headed lower the rest of spring.  Come June again, as the seasonally bad time of summer rolled around, Gold once AGAIN sparked a rally that lasted till Aug.  Then this fall in Sept things headed lower again.  Now as we sit near the end of Oct, I think it's safe to say the opportunity for a fall rally in the metal is lost.  We are trying to find some footing here on the GDXJ, but it being a "boring" asset to begin with, as we head into the boring holiday season, we might not see much occur here till early next year (again).  In the time in between, we could slide to retest the lows put in around Christmas last year near 28.  Even if we do slide slightly more, it still seems we are very close if not at what will likely be a generational low.  Time will tell, I'm just saying, prepare for either circumstance and let the market show you which will prevail.  Below is a chart of the GDXJ for the last couple years to illustrate what I mean.

Wanted to keep this short, so I'll wrap it up.  As I'm writing this, Gold is picking up ever so slightly as the SPX begins to roll over, now down 9 at 1932, Dow down  over 100.  What happens at 1920 will determine whether we want to short this market or not.  GDXJ really needs to hold this level near 32, and so far the slight pick up in the metal is not helping any.  This is not yet the time to be going long Gold stocks, unless you're just straight up gambling.  There is no firm indication the bulls have this market yet.  I know they're cheap, but $3 stocks can still lose you 20% of your capital by dropping to $2.40.  (And $3 stocks typically do that).

Be careful out there and mind your stops.

-Jonathan M Mergott

Casual Friday

Everyone RELAX!!  The market is up 250 points, it has regained 300 of the 1,000 points it lost in the last 6 trading sessions.  Everything is fine, breathe easy this weekend.  This wasn't too hard to see coming.  After the rejection of the lows on Wed, and a not negative day yesterday, anyone who has been short this market has made a lot of money in a short period of time and is running for the door before the session ends for the week.  This happens literally ALL the time.  Try it.  Next time you see any market down or up 4 days of the week, you can be sure it will move the opposite direction on Fri because this market is made up completely of traders who never hold positions over the weekend.  What if the Ebola outbreak gets worse?  What if there's important news out of Europe? Nobody wants to deal with that on a Sun afternoon and be completely helpless till Mon morning.

Anyway, onto the chart.  I often quote the Dow saying "The market is up 200"  because that's what people relate to.  The average Joe is not saying the markets up 12 and referring to the S&P.  But as a general rule of thumb I follow the SPX more as it is a broader base of stocks.  So, it appears like that low on Wed at 1825 is gonna hold.  I heard a few people call that as it was happening, so congrats on that.  I remained skeptical for the same reason I thought an extremely oversold market would drop down another 20 points on Wed, right to that 1825 level.

And the reason is simply this; we have seen this all before.  The market soars higher and poor old "average Joe" gets sucked in by the cheer leading media, and all the money his friends say they're making.  He looks at the SPX at 2,000 which is 30% higher than its all time high in 2007 before the financial crisis.  Joe knows the market is just "too high", he's smart enough to realize that, but compulsive enough to buy in anyway with the meager savings he does have.  He just can't help himself.  He buys himself some SPX for his little account he opened with his bank.  What he doesnt know is that his bank is the ones who just sold him that SPX that THEY bought from him in 2009 when he panicked and sold everything at 800.  He coughs up a couple thousand to make an offer for the stock, and the bank offers up a couple million shares for sale.  And so does every other bank and major institution.  All at the same time.  Joe's order gets filled first, but then the shear supply completely overwhelms the bids and the market plummets.  At first Joe is certain things will come back, because CNBC keeps telling him how good the economy is. Despite the fact that Joe works twice as hard for less money than he made 5 years ago, he believes them.  Then it goes down further and Joe realizes he made a foolish mistake, but he's not gonna freak out like an amateur, when the market bounces back to the price he bought it at, he will sell. Down, down, more and more until Joe can't take it anymore and offers it up for sale at whatever price he can get for it.  And who steps up to the plate?  The very institution that sold it to him to begin with will be happy to buy it back at half the original price.  And Joe is happy to give it to them.  And then the market rallies and then the process repeats.

The majority of stock held in this market is banks and institutions.  And when it's time to get out, they all trigger the same signals at the same time and the offers by the few Mom and Pop retail investors left in this market will always be overwhelmed by both the supply for sale, and the speed in which the computers try to execute it.  Any corrections or collapses in the market will happen faster and harsher from now on.  If you think 2008 was bad, consider how much faster the computer your on is now then the one you had then, and then realize Wall St computer systems can eat your laptop alive.  If a 2008 situation were to repeat itself, it would happen in about half the time.  Now how scary would it be to see the market drop 50% in about 4 months?  We wanted the computers for the liquidity and efficiency!  ...Be careful what you wish for...

Markets do the opposite of what you would expect.  A market trending higher typically crawls and inches up over a period of months and then smacks down hard in the corrections shaking out any weak hands.  A market going lower will typically crawl lower and have sharp moves higher suckering people to buy in, only to have them sell out in later weeks as things resume chugging lower.  We are screaming up off that low now which makes me think this rally will exhaust itself soon and a resuming of the overall trend (Which I believe now is DOWN) will continue.  Resistance comes into play first at 1900 then again at 1920.  Actually it moves up in 20 point increments all the way up to the high.  That is the first level to watch, these two resistance points are also right where the 10 and 20 day moving avgs are as well.  I highly doubt this market will go on to recover and make a new high beyond 2000 so I will be looking for it to fail somewhere before then.  We are currently up 30 points on the SPX at 1895 and I think that will be the extent of it today.  (But who knows what fun 3:30 will bring!)

Ok, enough on the SPX.  A wanted to take a moment and look at AAPL as just about every seems to own some of this stock.  It has held in ok during this blood bath the last couple of weeks but the momentum on this is dying out.  Moving avgs are rolling over as it is bouncing meekly off the 95 level.  If that level gives way, support is 5 point increments all the way down.  90, 85, 80,75 etc... So this could lose a good 20% which no one wants.  So watch it closely.  However, take a look at the weekly chart...

On the weekly, if things did pull back a bit into that major support zone, we would be looking at a pretty nice cup and handle formation that if it were to break the old highs, would likely target close to 150, so I would recommend buying AAPL after a decline when (if) you get the indication the trend has changed higher again.

Ok, next onto gold and then we will close with some subjects people have brought up.  As usual, we will be looking at the GDXJ.  First, we obviously had that reversal a few days ago and have been holding higher since then.  That is definitely a positive development.  GDXJ got down to about 30.50 then rocketed up to just shy of 35 and since then, the market has felt no need to retest that 30 print, but has also not been able to get above 34.  Look first at the difference between the low the GDXJ put in and the low here on the SPX.  The GDXJ has stopped going down after rejecting a low, and is calmly consolidating, exhausting the bears who have not been profitable the last few days on that trade and getting some longs to jump in here.  This is the type of action that makes me think a rally off of these levels would be sustainable, unlike the action in the SPX.  If the recent trend continues and the market fails and heads lower, we have been seeing gold and gold stocks act strongly in that situation so it could happen.  I would be watching the 40 level with extreme caution because I think we will likely have trouble there, but we could easily get a nice rally in the mean time.  We must still wait to be sure.

Now onto some requested topics, first regarding mining costs as we are on the subject of gold.  The current cost of mining an ounce of gold on average is about $1200.  Which is right where the price of gold currently sits. So essentially, the average gold miner is not making any money in this business.  Now this in itself we know can not be a sustainable thing, because gold mining companies dont spend hundreds of millions over decades of time to develop a mine just out of the goodness of their hearts so you can have a gold locket this Christmas.  They want to make money, or they're not going to mine gold.  And some have already stopped operations at their higher cost mines. A lot of miners I am sure are mining their higher grade deposits now with prices low and won't go back to developing the lower grade mines until price not only makes it worth it, but sustains such a level for a period of time.  Somebody asked, "Will mining costs vs the metals price cause a shortage?"  I will say this, already miners are producing less gold for the reasons I said above, not to mention that there is simply a finite amount of gold on earth to begin with.  So let me rephrase the question to come up with the answer; Mining costs plus the metals prices AND the Asian demand at these prices will likely cause a shortage on some level.  Will it be the shortage that breaks the COMEX?  I doubt it, but I would expect it could make price move higher quickly, and from an individual physical investors standpoint, you might have trouble finding coins at your local dealer.

A side note on that thought... I grew up in a very wealthy suburban area of NJ.  We had NY Jets and Giants you would run into at the bank.  Howard Stern was buying a property about 15 min away in the mountains.  We had maybe 2 or 3 gold coin dealers within a half hour drive.  Now consider that the entire inventory of Krugerrands and American Eagles that these dealers had could be bought up by Howard Stern in 1 afternoon and that would only mean him converting 1/10 of his wealth into physical gold.  When the masses decide they need gold even half as bad as they needed yahoo stock in 1999 or to flip a house in 2006, there will be shortages, that is certain.

Now, lets look at another aspect of mining costs, oil.  The 2 biggest factors in mining costs are the cost of oil and labor.  Labor, hasn't really gone up much if at all in the last 5 years as anyone with a middle class job is all too aware of.  But the cost of 1200/oz to mine is based on the oil prices we have been seeing for the last few years ranging in the 90-100 even up to 110/barrel area.  Oil has now fallen to $80/barrel meaning if it holds in the lower area for an extended period, the gold miners can start showing meager profits here even without a move higher in the metal.  Just another reason why they are likely at an all time low.  So chew on that concept for a bit.

Now the debate of Deflation/Inflation has been brought up again so I will throw my hat into the ring on this again.  Will it be inflation or deflation?  The age old question.  Inflation is INFLATING or increasing the money supply.  And by that definition, inflation has already been happening for years. What people are really wanting to know is when we will see the effects of inflation translate to higher prices.  And that has happened too.  The SPX hit over 2000 last month at the same time when Ben Bernanke, was denied a refi on his mortgage.  Ironic, as he was the man who put the plan of action into play that made banks utilize low borrowing rates to buy stocks as opposed to giving loans.  Because Exxon won't default, but you probably will.  (And with such a twisted view on economics, likely so will Bernanke)  As we sit now, commodities are collapsing and so are stocks, right at a time when both the Fed is suppose to totally end QE and also during the most popular month for the stock market to crash.  Well thought out.  We know that with the keys to the printing press its impossible not to be compelled to use it.  And they will and have, every time, without fail.  Guess what?  They will again.  Be certain, if the market slide continues and gets as bad as I think it could, (1500.  I think the market has at least a few hundred points of fluff it can shed.  I think it is possible to drop all the way to 1500 and quickly, which is why I think this is such a serious situation.) they will counter it with printing.  

So inflation wins right?  Not at all.  It's deflation.  It was ALWAYS deflation.  Look through out history, hyperinflation is a fleeting event.  It never lasts long and on average only lasts a few weeks.  The fallout from all faith being lost in a currency will translate to deflation on an economic level every single time.  The question is what will the price of gold and the market be when we get there?  $5,000 gold and $20,000 Dow are more likely than seeing an $800 gold price and the Dow back at 6,000.

Finally, someone mentioned the GLD and SLV etfs.  I am not sure what it was they wanted to know exactly but I will post the charts with my analysis.  

GLD had a good bounce off strong support and has had some positive developments, but is getting pushed back at the 120 level.  It's a little early to tell now which way this will go but it will have to resolve soon.

The picture in the SLV is similar to the GLD but the SLV broke to a new low, which the GLD didnt, and the SLV's rally off that low is a lot more lack luster than the one in the GLD.  So it's a little hard at this stage to see whether the GLDs strength will prevail sending SLV higher with it, or if the SLV will drag down the GLD with all the other commodities, but as I said, this is a tight range here and it will have to resolve soon, so stay tuned.

***UPDATE***

A friend of mine asked about buying the "dip" in NFLX this morning so I thought I'd add this one too.  Note, it is very similar to the AAPL chart, which appropriately has been the other traders favorite for the last 5 years.  First of all, lets address WHY there was a dip to begin with, if you can call dropping 100 points or 20% in 3 days a "dip".  It's because the market was expecting NFLX to earn about $1 a share this quarter.  (which do the math, means if they do that every quarter, $4 in earnings a year, means the stock is selling for more that 100x earnings.  Seems legit...)  But they couldn't do that, they earned half of what was expected, 52 cents a share.  (Which again if you do the math means avg of $2 in earnings a year which puts the price tag at about 175x earning now.)  This chart needs to hold that $300 level or it runs the same risks AAPL does.  Actually worse, because there is a hell of a lot more substance to APPL's business than to NFLX's.  This could drop nearly 50%, so be careful on this.

****SECOND UPDATE****

I wanted to add something to the inflation/deflation debate.  Lets assume a scenario.  QE does indeed end this month and the market which looks to have topped has no where to go but down.  Well, suddenly buying stocks with all the QE money isn't the profitable thing to do anymore.  This COULD mean the money banks have been sitting on begins getting pushed out into the economy in the form of more loans, as that is now the profitable trade for them.  Now THAT is where you could get your inflation right in the midst of all this.  The big issue people have been stating is that the money is being sat on and not flowing into the economy, which is why we haven't seen inflation.  This could change all that, and the Fed very well might already know this which would explain why they might not deviate from their expected course and fire up the printing press as quickly as Wall St might like (or scream for).

I think thats all for now (gee it only took all morning to write this,..)  Till next time friends, keep these words in your head as you navigate these markets.  "I'm more concerned about the return OF my money than the return ON it." - Mark Twain

-Jonathan M Mergott

There will be Margin Calls...

Ladies and gentlemen, this is that point in time when the whole  "margin debt on the NYSE at all time highs"  begins to matter.  (...For those of you I have heard only a few months ago say it never indicates anything).

So brief update; yesterday afternoon after the close gold began to slip a bit.  (at least thats the first thing I noticed.)  Later in the evening Brent and WTIC began plunging straight down.  (It seems now that WTIC is gonna catch at 80, but if that level is broken I think we might see them both meet up near 75)  Zerohedge had a posting last night mentioning that RSI on Brent was the most oversold ever. FF to this morning, around 8am EST Dow futures were down 60 and SPX was down 10.  By 8:40am EST Dow futures were down 150 and SPX was down over 20.  I made a comment prior to the open that this "Could get ugly"  and within a few mins of the open the Dow dropped over 300.  (This is where those margin calls come into play)

We now sit at about 1858 on the spx down 20. We need to hold this level at 1850.  We made a bounce off of 1840 at the open so that 10 point level between them might hold us, but fair warning, if it doesn't the SPX could drop quickly another 25 points to the 1825 before finding decent support.  From there its 25 point clips down to 1750.  And that is 100 points below where we are now. This can get ugly fast.  And don't fool yourself into thinking that it already has been.  The amount of money that can be dumped on this market by major institutions that have been in for 5 years now and looking to cash out, and the speed in which the computer systems can execute such a sizable order, are capable of sending the market straight down in hundreds of point clips.  We have seen it before and the computers have only gotten faster since then.

As usual right about the time every one is certain gold is a useless asset it proves otherwise.  Below is the 4hr chart on a day when there is not much that is green.

Gold miners are holding in there.  Barely positive with the Dow down 250 now and the SPX down 30 (*Putting it at 1847, so it broke the 1850 level already.  When I say it can drop 20 more points quickly, I mean today.)  I guess thats a win considering how miners have been acting for the last 2 years.

The headline on CNBC just said the 10 year note just fell below a 2% yield.

Dow now down $280  SPX down $34 (1845 now) and the Nasdaq is down $64.  Gold is gaining still now at 1245 up $13.  Miners are slowly climbing with it.  It's only Wednesday.  Good luck.

-Jonathan M Mergott

For comparison, the 4 major US indices

Just to get an idea of how ugly this is turning, take a look at the 4 major indices' charts.  First up, the Dow filled with monstrously large dividend paying companies. 

Next up, the SP-500.  500 of the largest, most important companies in the world.

Next, the trader's and amateur investors darling, the Nasdaq.  Filled with speculative Tech and Pharma stocks all with with very little in earnings and virtually no dividends whatsoever.  Today, the dow was down 115 points.  The nasdaq was down 102.  Reminder, the Nasdaq is less than 1/3 of the price of the Dow, yet was down nominally the same amount.

And last but not least, The Russell 2000.  The small caps that fly like Superman in a Bull market, but get squashed like a mosquito in a Bear Market.  Unlike the other 3 indices, The Russell has not been in an uptrend for a while.  It has been consolidating in a range that just broke down badly.  I'm zooming this one out more so you can see it better.

Moral of the story, safety is found in large dividend paying stocks, and the speculative crap is getting tossed away.  So as the markets all begin to break major support and half a decade long uptrend lines, I will leave you with this... Have a Nice Weekend!  (And try not to spend the whole thing worrying about what is gonna happen to your life savings come Mon morning)


-Jonathan M Mergott

P.S.   That was sarcasm for those of you who haven't mastered the art of detecting it in written form over the internet.  Cause I know damn well that is the ONLY thing Wall St. and every QE made "genius investor" is going to be thinking about all weekend.

Line in the sand

It's been an interesting time in the markets recently and I have been very absent from writing.  But one thing that will always get me back is interesting markets.  I will write this quickly before the things I am talking about COULD happen, do.

DEFLATION.  The scariest word in economics.  Commodities are plummeting, the stock market is getting shaky, and the fed is set to end QE in the same month that most market crashes have historically occurred.  Complacency has turned to fear overwhelmingly in the market and it has been a rather fast transition.  Let's just jump to the SPX chart.

As you can see above, we have had a violent back and forth consolidation in stocks for the last few days that has held at 1925 for now (*As I write this at 10:26am EST, we were flirting around 1920 and just let go, now already down to 1915.  I would be willing to bet we will probably drop another 10 today to 1905 before buyers come in.)  If this level just above 1900 does not hold, things will begin to look even shakier for stocks, as that would signify a break below a 5 year trendline.  (We'll get to that chart later)  We got a sell signal on the SPX about 1 month ago when the 10 day EMA crossed below the 20 day.  Indicators have all been trending lower confirming our sell signal.  As fear became the overwhelming emotion in the market, volume began to increase.  There is no reason to think that the 1900 level will not hold.  For 5 years straight now, the market has continued to make higher highs, so it would be foolish to expect anything different until the market SHOWS you otherwise, but in the event that it does, it will have broken major support, leaving a lot of space until about 1825 which could make for a fast, sharp, and very scary sell off.  It will also have made a lower low and that could be the start of something bad.

Lets take a quick look at the long term trend line I was talking about that a move below 1900 will break.  Pretty self explanatory.  But there is a lot of air between where we are and major support between 1400-1500.  That could mean for a 25% drop.

Lets quickly look at gold, and to do so we will use the GDXJ.  It has been interesting.  We received a sell signal in early Aug, around $40, which I pointed out and hopefully saved you from the losses for the next few months cause it is down about 25%.  We broke below the June low of 32 and and looked to be headed to test the low made back in Dec near 29 when the FOMC mins were released the other day and shot everything higher.  Since then, the SPX is right back to its prior lows (now breaking them) but gold and silver have held on, and so far (and just barely) so have the gold stocks.  It is hard to make an argument for higher gold in the face of all other commodities being taken to the wood shed UNLESS there is a major fearful event in stocks, which we could be seeing right now.  We still dont have a buy signal of any kind yet, but this is worth paying attention to as the miners are insanely cheap at these prices and can provide a much more profitable way of playing lower stock prices than just shorting the market.

Wrapping this up, today is Friday which means traders are closing positions.  Being that things have been mostly down for the week, I would venture to say this could mean a lift for everything by the close as short sellers rush to cover.  However, if we do see things close lower today, that should just reinforce to you the fear in the market right now.  I am expecting next week will be very interesting. 

-Jonathan M Mergott 

Sell signals approaching for gold stocks

I've been saying for the last couple of weeks that the highs we have hit on the GDXJ will likely be the extent of the rally. A couple of weeks ago we opened at a high of 46.50 and reversed back down 3 points to close at 43.50.  That was the first warning sign that the rally might be halting.  Since, we have proceeded to consolidate under that level.  Today, gold once again broke below 1300, and the gdxj sold off nearly 5% to close just above the low of the consolidation range which sits at about 40.  Watch that level very carefully, a break below 40 surely spells out a continued decline to test the support levels of 38, 36 and possibly even 34.  So long as it is able to remain above 40 though, then the bears haven't completely gained control.  There would still be a chance we rally back to the highs and even break higher,  but as I have been saying, I think it is unlikely.   In the event of a break below 40, you have the opportunity to hedge the profits you made going up by opening a small short position.  Buying an etf such as dust or jdst is an effective way to do this.  This pullback will likely find its bottom in August, and begin to rally back going into September,  which historically is a good month for gold.  This will likely be the last pullback in gold stocks before a massive rally that will likely see a lot of junior miners double, so stay focused because opportunities like this don't come around too often.  Onto the chart, you can see the consolidation zone's support and resistance points at 40 and about 46.  The moving averages haven't quite crossed over, and macd is still hanging above the zero line, but a breach in price below that 40 level and all that will change.  Watch carefully. 

-Jonathan M Mergott

This is what I've been waiting for

Yesterday was a big intraday reversal in the gold miners, that happened right at the same level it did during the last rally.  The GDXJ gaped open yesterday  to about 46  and began to lose all of it as the day went on.  It closed in the 43 area.  This is precisely what I was expecting to happen which is why I haven't been buying this move higher.  This rejection will at the minimum cap prices until a big move higher on good volume can blow it away, but I think this consolidates in this low 40 level for another week or so before breaking below 40 settling in the 36-38 region.  ('d guess by mid Aug)  Watch the MA's for cross overs.  We are still in a buy signal, but that reversal is likely a game changer.   Don't get discouraged, as far as I am concerned, all this means to me is  more time before the move explodes.  I would much rather buy the GDXJ near 36 than 46 anyway.  Here is the chart.

-Jonathan M Mergott

4th of July

Quick note just to alert everyone to my mode of thinking here.  We have an abbreviated trading week due to the 4th being on Fri so the NYSE is closed.  Thursday is a half day, and we also have the jobs report.  With the low volume on the holiday, the fact that were in the dead of summer which is not a good time for most markets, and the jobs report fiascoes we deal with all the time, don't be surprised if gold is hit hard tomorrow.  It seems almost too easy from the other side of the coin, so watch that.  That's all, have a happy 4th and enjoy the short week, I myself am having a BBQ and watching the fireworks and I can't wait to do it, so I will leave the market watching for the next few days to whoever feels compelled to do it, but it won't be me.  :)
Update,  heres a  chart of the last 5 min in the gdxj.  Smack.

-Jonathan M Mergott

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TWTR update and GDXJ status

Ok, First I actually want to look at the GDXJ, which was up about 20% last week on what I believe was mostly short covering.  How on earth could I know that?  The charts tell the story.  Below is the hourly GDXJ which you can see the key points in the circles I highlighted....
 


The first one came around Memorial Day, (surprise surprise, low volume...)  the GDXJ broke below support at 34, this was an obvious cue for the bears to jump in short as it clearly is acting very weak.  However, what followed was it refusing to go lower than where it broke to, and after a little consolidation, MA's crossed over, MACD moved above the zero line and the bears upper hand was lost.  What started as a modest rally began to feed on itself rapidly and the GDXJ shot up to 40 where it stopped cold after testing twice.  Now we have a consolidation appearing, so the rally has stopped moving higher.  Where it goes from here is up for grabs, there is nothing to say it doesn't break above 40 and were off to the races, but it would be unusual to happen in June for starters.  Also, by nature a short covering rally as I have said before has a shelf life.  There is a set amount of shorts in any given asset.  If they all decide to get out of that position, they must buy and then the transaction is closed and over.  There is never a limit to the amount of people who could create demand to buy in long.   So unless people decide that an asset which was 34 last week and is now near 40, that this is a good time to jump in long inevitably the buying will stop and things will begin to slide.  Now, support on the GDXJ is like a step ladder each point lower, we can see initially within the consolidation that our first support is at 38.  If that fails, and I think it will we will find support near the lines drawn on the chart at 37, 36, 35-34, and finally our recent low at about 33.  I don't believe we will go all that far down though.  If I had to guess I think we slide to 36 before we find some buying come in.  As I always do, I am probably jumping the gun on this.  We could easily have a few more weeks of consolidation before things take a long slow slide that lasts the whole month of July, and then begin to find our footing in Aug in time for the customary fall rally.  That's what would be logical, but we will see.  I'd rather be way early than too late any day.

Next, our TWTR trade is doing nicely.  Jumped into that into that one at 34 and its now 38.  All seems well so far, we are reaching some resistance at this 38-40 level, but I've seen nothing that makes me want to get out of this yet. We can watch the hourly chart to get better exit and re-entry points if you like but I am posting below the daily chart, which indicates that this move may be just getting warmed up, so as Jesse Livermore would say, (I'm paraphrasing)  Don't be too eager to sell whats working.  Simply means, too many people hold onto their losers way longer than they should and justify why with ridiculous reasons.  You bought it because you thought it would go up, it didn't, you were wrong, don't take it personally, just get out.  Likewise, people begin to show a couple hundred dollars in profit on something and they sell it, in the face of a frenzy and feel thrilled to death over the $200 they made, enough so they forgot about all those stocks with thousands in losses they're still holding in their portfolio.  Don't do that.  If it works, at least let it run till it stops going up and begins to consolidate.  You can buy it back if it breaks higher.

-Jonathan M Mergott

Watch Twitter for a break above 35 soon

I've been jumping in and out of TWTR which looks to have made a major bottom after a sharp capitulation at the beginning of May.  Currently, TWTR is down about 50% from where it was at Christmas, after soaring to 75 from the 40 region shortly after its debut on Wall St.  Regardless of any of the Bull/Bear arguments you can make, from a TRADING standpoint, this looks like a low risk/ high reward situation, which is exactly what we are always looking for.  Below is a cup and handle formation being made on the 30 min chart .

We can see a series of higher lows, MA's crossing over, MACD crossing over and staying above the zero line.  These are all conditions that have changed in  TWTR over the last few weeks.  They are conditions typical of a bull move.  From this we are getting the indication things are going to begin to move higher.  From here now, we must look at the most important indicator of all; Price.  If price manages to get above the 35 level its been capped at, what that says is that people who were sellers of TWTR at 35 now believe it is a good price to buy it at, and we can be pretty certain a rally is underway.  That is what support and resistance are, they aren't just lines on a chart with some chicken bones and voodoo.  It's psychology visualized.  If people have been buying a stock repeatedly at 28 every time it hits it,  you will see multiple bottoms on a chart that are forming support at 28.  People think its a good deal at that price.  If a few days later, price falls below 28, what its saying is no one is willing to step up at that price anymore.  Something changed, doesn't matter what for these purposes.  It just means if your long, get out.  It could always be a false break and things rally right back.  If that's the case, it only takes a second to buy it back.  So you missed out on a little bit of profit, but you had peace of mind, and that's far more important.

Here is an hourly chart of TWTR zoomed out to show the more long term picture.  We can see major resistance doesn't show up till about 40, which is 6 points higher than where we are now.  We can see more resistance at 44, 48 and 50, and there is nothing to say it couldn't get there, but even the conservative target looks pretty nice.  We can see we recently found support at 32 at the lows of the "cup".  We can use that as our stop.  Follow the rules, wait for the 10 day EMA to cross the 20.  Look to MACD for confirmation.  Be sure it is trending higher and above the zero line.  Don't be too eager to sell!!  If we hit 40 and things are still going well, STAY!  Wait to see it stop going up first, then look to the MA's for signals.  We might get to 48, and you could short change yourself 8 points.  If this is going to move, it will likely make it's strike in the next few days so watch carefully. 

-Jonathan M Mergott

Simple Trading method for the GDXJ

My apologies for not posting anything recently, there honestly hasn't been much to say but I wanted to make a couple points and at least update some charts.

As I have mentioned before, in terms of gold I use the GDXJ to analyze the entire picture.  I have a number of reasons why I do this.  A) Junior gold stocks are massively oversold and undervalued.  They should first begin to hold stronger than the metal itself when the move lower begins to exhaust itself.  B)  In any sustainable bull move in gold, the miners should outperform the metal and the juniors should outperform the seniors. C) They will also predict a changing trend and begin to move higher before the metal itself.  Point is, gold can move without the miners reacting and the seniors who have earnings and dividends can move without the juniors, but if the juniors begin to have a strong move higher, you can be guaranteed that the seniors, gold and silver will all do the same, so no use analyzing 10 different charts for all of them (In the interests of time as we watch for a change in trend.  By all means, when we begin to see buy signals, analyze the individual miners and the metals themselves when you are ready to buy.)

So whats the GDXJ saying?  Nothing too exciting.  I have taken this chart and used a very simple trading method based on 10 and 20 day exponential moving avgs.  When the 10 crosses above the 20, buy.  When it crosses back below, sell.  Here is the result of that for the last year or so.

If you saw the MA's cross lower in Sept of last year, you would have sold at about 47-48, only to see it go down about 40% in the next 3 months.  You then had an excellent opportunity at the beginning of this year to buy at about 30-32, only to see it go UP about 30% in 2 1/2 months.  The sell signal you got in April has kept you out since then and saved you about 10 points in losses.  You can also notice that at every buy or sell signal, MACD crosses above or below the zero line.  This is your confirmation.  Recently the GDXJ has been sliding slowly lower, but beginning to show signs of some value buying.  We don't have a buy signal yet, but we can see that a rally towards the 35 area would trigger one.  I believe we are at a bottom and within weeks of a major change in trend in gold and miners.  Watch this closely over this summer. Summer is never a good time period for gold, so don't expect it to be exciting, but we should see a final low within this month or next and begin to see some strength emerge around Aug, as we move toward the fall which is typically the strongest time period for gold.  This is one of those opportunities that comes along every couple of generations, where SERIOUS money can be made here, so its in your own interest to watch this like a hawk.  BUT, in the mean time we need to make some money somehow, so lets look elsewhere.

I utilized Twitter last week to make a call to buy Twitter stock. (If you missed it you can follow me here.) Since, I have jumped in and out again, but the overall picture looks nice so lets take a look at the chart.

Now, first of all I am a trader.  And in a lot of ways to do so successfully, you also need to be a traitor.  I have no allegiances.  My allegiance is to profit. You can leave the name of the stock off if you wanted to, it doesn't matter to me what it is, I'm just looking to see if it meets my standards for a trade.  Fundamentally, twitter is a shit company selling for 358 times earnings or something ridiculous like that.  It is not a good investment.  But all we are doing here in terms of trading is analyzing the money flows.  It's a lot like surfing actually.  You wait for a good wave that meets your standards, you position yourself, begin to paddle, and if its good, it will catch you and send you for a ride. If it doesn't, you don't keep paddling trying to make something happen when the wave is gone, you stop and go back for the next one.  When the ride begins to lose steam you get off and swim back to your start point and wait for the next one.  There is no difference here.  We can see money pouring into TWTR right now and it's beginning to look right.  So we will watch it, paddle out and get ready.  If the MA's cross, we are ready to ride the wave of money moving into TWTR.  If that nice wave proves to be a dud, and either the MA's cross lower or we move towards a new low, we don't waste time, we sell and go back to wait for another.  If it catches us, we ride it till the momentum stops.  We don't jump off a wave halfway cause we made a little money.  If it's working we ride it till that ceases to be the case.  When it stops going up we wait for our sell signals.

We can see on this that everything is in place for a trend change here.  We just need to see the rally break to a higher high than before, and have those MA's cross, which all should occur if it can get above the 34 mark.  So watch this, because this could easily rally 25%.  And that's a pretty decent chunk of change to make while we wait for gold to do something.

That's all for now.

-Jonathan M Mergott

Disconnect with stocks and bonds

I can't shake the feeling we've done this before...oh that's right, because we have done this before.  And inevitably one of these two markets are gonna be proven wrong and will reconnect with the other.  And every single time it's been stocks that are wrong and correct to meet back with the bond market.  It's never different this time.   As the market chugs higher and we get new trading signals to go long stocks, just keep this in mind for the big picture.  Keep your stops tight and be ready to bail if things turn south.  


-Jonathan M Mergott

Not a time to be buying gold

We are simply looking at this from a trading standpoint.  What is the market saying right now, and it's saying gold is not the thing to be buying, so find something else to do.  Hold your gold positions, but dont try to trade this.  A lot of things to talk about later, like the rally in the NASDAQ, that has saved it from certain disaster,  but we will get to that later, just know the path of least resistance for stocks is once again higher and for gold is lower, take that into consideration in everything you trade.

-Jonathan M Mergott

Nasdaq situation not improving

Wanted to highlight the daily nasdaq chart today, which is not improving at all.  I have mostly been keeping my eyes on gold and the gold miners and the nasdaq as I feel that these sectors will tell us where things are going.  If the nasdaq begins to break down, we can be certain the Dow and the SPX will follow.  In the event stocks break down, we can also be pretty sure gold will move higher either as a reaction to the move lower, or it will foreshadow the move in stocks by going higher prior to a nasdaq break down.   There is nothing of interest to note on the gold stocks, which are just drifting aimlessly, so let's look at the nasdaq. ..

Bulls are keeping things afloat as it dips near 4000, but there is no momentum to push it higher than the 4150-4200 area.  Price is butting heads now with the down trend line from the top of the head back in March.   Pressure is mounting and there must be a resolve soon so watch closely.   We will likely see a break lower in the next week or two and have a good opportunity to short the nasdaq with a target around 10% lower .

-Jonathan M Mergott

NY Gold show 2014

This Mon and Tues was the NY gold show at the Marriott Marquis in Times Square.  Couple of notes:  The attendance was non-existent, both from the visitors standpoint and the presenters and miners standpoint.  Nobody cared, we had Jim Sinclair speaking and a former presidential candidate and no one cared.  This was a forum for gold bugs in the financial capital of the world and no one cared.  The miners who were there consisted of 1 or 2 majors, and about 6 or 7 penny stocks desperate for financing. The other 10 booths were for newsletters and coin dealers.  If that doesn't say something LOUDLY about the gold market I don't know what does.  Anyway, as it states in my profile, I work as an investor relation consultant for Jim Sinclair and Tanzanian Royalty Exploration.  I know Jim has a big following so I took video of his speech at the gold show this year.  I'm not just saying this because I work for him, (I technically work for the company) but Jim is unbelievably intelligent and successful, and if you have ANY money invested at all, it is worth it for you to spend 15 min to listen to what he has to say about the economic world around us. Here it is parts 1 and 2.

part 1 https://www.youtube.com/watch?v=X0ZbgYyaT1Y&feature=youtu.be

part 2 https://www.youtube.com/watch?v=fILOluy32zk&feature=youtu.be


-Jonathan M Mergott

Stock Market is starting to look scary

This post will be less talk and more charts, so lets get down to it.  Through out the charts, take notice of the divergence in the indicators vs price.

Common theme; price has been consolidating and indicators are headed lower, and getting close to the point where they are in correction territory.  We have not yet gotten a signal from the moving avgs rolling over yet, but everything else is setting itself up for a break lower so far.  On to the SPX, which has a similar picture...

Same picture essentially other than hitting slightly higher highs this year, which the Dow failed to do.  Now lets move on to the NASDAQ, which is a completely different picture, although equally as ugly looking.

Now this looks nothing like the other two.  We can see while the other two indices seem to be reaching a point where they are unable to move higher, therefore leaving the alternative as a possibility of there next move, the NASDAQ has already shown significant weakness, and it has translated in the form of a head and shoulders top, with a neckline at the 4000 level that has been holding so far.  We can also see the divergences in RSI and MACD that are present in the other two, are much more pronounced in the NASDAQ.  MACD has already crossed down hard below the zero line and has rallied meagerly almost back up to the zero line, but looks like it will fail to break above it before it heads lower again.  This crossover will likely coincide with a break in price below the 4000 neckline that has held up so far.  A break of such will likely be what triggers the other indices to begin to collapsing as well.  Pay close attention to the NASDAQ over the next few weeks, because it will likely spell out where all stocks are going to be headed in the near future.

-Jonathan M Mergott