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