Gold has been smacked down pretty severely, falling 14.4% in the past six months.  But, the charts suggest it will soon be time to start melting down that jewelry again.

GC has reached the lower bound of a well-formed channel that dates back to 2000.  While not every channel bottom tag results in a reversal, odds are this one will.

In Sep 2011, GC topped out at 1923.  Since then, it has traced out several descending triangles in a row — breaking out of each one in turn.  Each breakout has been followed by a very deep retracement or back-test and subsequent breakout.

The latest back-test is most likely completed, clearing the way for a test of the highest yellow dashed TL presently up around 1740.

But, it’s worth noting that the previous breakouts have all ended up around the same price level: 1800ish.

Were the next breakout to advance at the same slope as previous ones, and were it to backtest the LT channel’s .25 line as occurred in Oct 2012, we could see a 14.4% rally by mid-June.

It’s difficult to draw such a long-term channel with absolute precision, so there’s a small possibility that the true channel bottom is closer to 1525.  But, the daily RSI suggests the next move will be higher.

If I’m wrong, and this latest bounce fails, we’ll know pretty quickly with a bearish drop through horizontal support at 1525ish. So, watch your stops.

GLTA.

As expected, the EURUSD has turned the corner, easily topping our 1.30 target from Apr 4.

The daily RSI shows a break out through the resistance of two long-term channel midlines (yellow and white) with a third, shorter term midline to come.  So, while we could see some near-term consolidation, the pair appears to have room to run.

The dollar has likewise met still resistance at the .886 Fib (83.616) we discussed a few weeks ago and turned down.  Recall that this resistance also came at the intersection of two price channel midlines (red and white.)

While, daily RSI shows a conflict between a long-term midline (yellow) and the inclination to tag the lower bound of the rising purple channel.

We shorted at 1573 on Apr 2  [CIW: Apr 2 10:37 update]  looking for a pullback to the .786 (1546) or .886 (1542) of the rally from 1538 to 1573.

The market slightly overshot those levels on Friday, but remained north of the Mar 19 low of 1538.57 — thus completing a Bat Pattern.  So, we went long at 1539.86 [CIW: Apr 5 9:33] with tight stops.

I remain long, but will take an interim short position on the drop through the channel midline at 1551. Stops right there.

A drop through 1548.50 would be cause to consider switching sides.  But, I suspect the weakness we’re seeing this morning is continuation of the shakeout attempt from late last week — so I look at this intra-day short as a protective position that’s unlikely to register more than a few points to the bottom of the little white channel.

UPDATE:  10:05 AM

Stopped-out on the protective short position for no gain — will let the long position run.  Note that we’re safely back in the large purple channel dating back to 1343 in November.  The bottom of the little white channel is now around 1549.25, so set stops accordingly.

I should mention that we’re basically playing around in the tails of the daily candles.  That is, on the daily chart all of this action will be disregarded as was Friday’s dip and subsequent recovery.  So, anyone not inclined to day trade should really ignore all this stuff and stay focused on the forecast.

UPDATE:  10:20 AM

The little white channel actually looks better with this drop down to 1548.63.  Looks like a good place for SPX to make a stand.  Perhaps a run up to 1558-1560 now?

Keep an eye on this channel, as any departure is cause to hedge or play the downside — at least on a short-term basis.

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Looks like we’re going to hit our downside target after all, thanks to a dismal payroll number.  I’ve had 1546.08 as my top choice [CIW Apr 3, 2:25 update for members.]

I’m inclined to stay short for the purple channel bottom at 1546.08 or the 1.618 at 1549.09, with stops at 1558.47ish.  But, anyone who doesn’t mind the extra trading might consider going long here — with the understanding we might run into trouble at the channel top (small falling white) at 1558 or so.

But, if the downside momentum builds, 1542.57 is definitely in reach.

To the extent it’s available on the opening, I’d play the downside to those levels and be ready to bail.

A drop through 1538 opens up much lower prices and essentially busts the channel that dates all the way back to November’s 1343.

UPDATE:  9:33 AM

I think it’s worth taking a shot on any loss of momentum just shy of 1538.57 (lower really damages the bullish case.)

So I’ll take a stab here at 1539.86.  Going long again with stops at 1538.

Note that at these prices, SPX has completed a Head & Shoulders pattern, albeit with a very steep slope.  But, it’s not verified unless we close below 1545 or so.   Even then, we’ve had two such (normally very reliable) bust in the past several weeks.

If drops like this morning’s make you nervous, the market makers have done their jobs.  Remember, this morning’s plunge is by design. The open interest on the SPY 155 weekly calls that expire today, for instance, is 97,000 contracts.

Each contract gives you the right to buy 100 shares of SPY at 155 through today.   It’s the equivalent of SPX 1550. They’re currently trading at 12 cents (probably a good deal.)  But, three days ago — when SPX nudged into the 1570’s — market makers would have been happy to sell you all you wanted at 2.33.

A $23,300 “investment” in 100 contracts at the high would be worth $1,200 — a 95% loss in 3 days.  This is an example of the typical game played by market makers who just love optimists.

They love pessimists, too, and just sold a boat load of puts this morning to those expecting this morning’s plunge to keep going to 1500.

It’s taken me a couple of years to come to the conclusion:  if you can get the kind of results we do without leverage and without options, why take the risk?  It’s hard enough to be right on the direction and magnitude of a move, without having to be right on timing too.

Even if we had held long instead of shorting at 1573 on Tuesday, we’d be down a whopping 1.7%.  Beats the heck out of -95%.  By shorting, we actually made money.

*  *  *

I met an old friend for coffee yesterday, and we talked about pebblewriter.com and my investment strategy.  He asked if the results we got this past year weren’t simply attributable to a great market.  The question took me by surprise.

The S&P 500 was up 8.75% between Mar 22, 2012 (our inception) and Feb 28, 2013 (without dividends.)  That includes a 12.8% gain from Nov 16 – Feb 28.  I guess the MSM has done a bang-up job of selling this as a “great market.”

But, the question did get me to thinking.  As of Feb 28, just shy of a year since inception, we were up about 113% in a theoretical portfolio where we bought SPX at called bottoms and shorted at called tops.

Forty-eight percent of our gains came from long positions and 52% from short positions. In other words, we benefited slightly more from declines than from rallies.  Unlike almost all long-short funds, we did it by being either long or short, depending on my outlook.

The major moves during that period were:

• Apr 2 – June 4, 2012 (1422 to 1266, an 11% decline)
• June 4 – Sep 14, 2012 (1266 to 1474, a 16.4% rally)
• Sep 14 – Nov 16, 2012 (1474 to 1343, an 8.9% decline)
• Nov 16, 2012 – Feb 28, 2013 (1343 to 1515, a 12.8% rally)

So, anyone who captured all of those major moves earned about 49% — much better than the buy-and-hold approach of 8.75%. They would have had short-term rather than long-term capital gains; but, anyone with a marginal tax rate below 85% wouldn’t have minded.

My objective is simply to capture most of the moves most of the time.  If 49% represents the most we might have earned by capturing all the major moves all of the time, we apparently earned about 64% by playing interim moves — going long and short.

Shorting the market scares some people.  When I was a shiny new broker back in the Middle Ages, all they had to say was “when shorting, you have unlimited losses.”  It sure scared me — which was the point.

But, by using stops this past year, we limited our single biggest losing trade to 1.5%.  There’s always the possibility of a 10% gap down, but by using e-minis rather than cash markets and going to cash in precarious situations, that risk can be greatly reduced.

What I find really risky is buy-and-hold investing, where investors hold long through 10-20% declines.  If your name’s Buffett, no big.  But, if you need money for a wedding/college education/vacation house in a few months, and that 10% decline turns into 58% (2007-2009), 51% (2000-2003) or even 22% (May-Nov 2011)?

Everyone’s talking about whether the S&P 500 will make a new all-time high, topping 2007’s 1576.09.  But, after inflation, it’s still down about 25% from its 2000 peak.  The real Nasdaq is down over 50%.  For someone planning to retire, that’s risk.

One final thought…the beauty of our strategy is it provides concrete decision points.  If you buy AAPL at 500 based on the hype around the new iWatch and the stock falls the following day to 490, should you hold?  What if it falls to 460?

What if the iWatch is released and the stock only recovers to 485?  Do you sell?  Double down?  Wait for the sales numbers? Wait for the next quarterly report?  At what point do you pull the plug?

Between Harmonics and chart patterns, we’re rarely left without a sense of whether our investment thesis is correct or not. Even a simple channel will usually tell you if you’re on the right track.

In early December 2012, we had been following an analog that had earned us over 10% per month — forecasting all the major moves since the previous March. The analog called for a reversal and move lower from either at 1424 or 1446.

I tried shorting both times, giving up a few points before it became apparent the market wasn’t going to tumble.  The same thing happened a few weeks later, when the Fiscal Cliff “solution” sent the market gapping higher after New Years Day.

There were multiple potential targets to the upside, so I have tested the short waters many times on the way up from 1474 to 1573.  It’s always fun (and more profitable) to be right for a big score, but by managing my exposure and paying attention to the trends, I’ve still pulled in decent returns without taking undue risks (March update coming this afternoon.)

I will continue refining the strategy and trading techniques in anticipation of our new fund that I anticipate coming out next month.  I have developed a distribution list for those who have expressed interest.  If you’d like to be on it but haven’t yet contacted me, please CLICK HERE.

*  *  *

UPDATE:  3:50 PM

The market has rebounded nicely since this morning’s 1539.50 low.  Anyone too wigged out about Cyprus, the NFP number, Korea, etc. should take the money and run.  Forget about the market and enjoy your weekend.

But, 60-min RSI just broke out of the most severe of the bearish channels and SPX should have no trouble reaching 1560 either today or Monday.  What it does then matters a lot, but I suspect our forecast is still intact.

I’ll hold long unless we reach 1560 today, at which point I’d probably go to cash.  Stay tuned.

UPDATE:  4:05 PM

Nice safe close, back in the loving arms of both the purple channel and the white channel.  I’ll update the forecast later this afternoon, but I believe we’re in good shape re the forecast.

Oh… and congratulations to anyone who bought SPY 155 calls at 12 cents earlier (they traded up to .38 shortly before the close.)  Take the money and do something nice for somebody deserving.  Karma and all that…

More later.

 

 

 

 

 

Keep an eye on the channel we’ve been charting since Tuesday.  If SPX breaks out, it’s time to take an interim long position.

Upside potential if this is only a countermove is the white channel midline around 1561.45.

UPDATE:  10:00 AM

Things are happening faster than I can type this morning.  We just reached the white channel midline and are still going strong.  I’ll set stops here and see if we can reach the purple .25 line at 1563.40.  Charts in a few…

UPDATE:  10:12 AM

Almost reached the .25 line and immediately backed off, triggering stops on my long position at 1561.45.  Reverting to full short.

The falling purple channel I’ve inserted is more a place holder than anything else.  It’ll give us something by which to judge the upcoming moves.

UPDATE:  10:45 AM

Here’s the chart I’ve been focused on this morning.  Even with all the whipsawing, the 60-min RSI shows a likely move lower to tag the bottom of the big white channel.  The reversal at 1562.60 came in slightly higher than the midline.

But, as the chart shows, many of the reversals have missed a precise midline tag — making reading RSI channels equal parts science and hermeticism.  Remember, each data point happens on the hour, so the current blip lower than the midline could reverse itself and turn higher in the next 20 minutes.

UPDATE:  11:15 AM

Seeing some support at the (new) proposed channel midline.  Stops at 1561.50ish.

UPDATE:  1:20 PM

I’ve had several questions about whether the push lower than our original 1560 target busts our leading forecast.  Many hours of charting later… I don’t think so.  Once SPX broke through 1560, we targeted 1549 — which we came every close to tagging yesterday (1549.80.)

I had no objection to taking the 23-pt profit, but I think there’s more where that came from.

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ADP unemployment miss, FOMC gov’s publicly debating QE_n, a growth warning for China even as PMI levitates and the Volcker Rule might not become law till 2014.

Yesterday’s last minute ramp in stocks has fizzled as expected, and we remain short from 1573 [10:37 update] a price that proved to be 0.66 from the high.  We have a 30-day forecast in place, now [see: yesterday’s 11:50 update]; and this morning’s sell-off is falling in line so far.

The dollar continues to channel properly, but is falling in concert with stocks this morning.  When SPX reverses around 1560-1561, look for DX to continue falling.

The EURUSD is bumping up against its channel top again.  This time, we should see a decent bounce — probably topping the 1.30 mark again.

The .786 retracement of the rally from 1558 to 1573 is at 1561.72.  The .886 is 1560.2.  Either would work as a tag of the rising wedge’s lower bound.

UPDATE:  11:07 AM

Just got the tag of the .886 at 1560.20.  I’m going to take profits on the short from 1573 and go long here at 1559, with stops around the previous low of 1558.46.

UPDATE:  12:15 PM

I mentioned earlier about the dollar falling as stocks bounce.  Stocks and the dollar have had a love-hate relationship for the past few months — at times ignoring the high negative correlation that characterizes the general risk on/risk off environment since Feb 2011.

The dollar’s next major move should be higher.  I see this as a temporary breather that should accompany the euro’s bounce, the yen’s last gasp higher, and stocks’ next little rally.

The dollar has been on a tear for the past two months, easily reaching our interim target of the .886 Fib retracement at 83.616.

But, completing this Bat Pattern means we should see a sell-off, as the daily RSI chart below supports.  Having broken the white channel midline, the next real support is the yellow midline.  If that falls, the next support isn’t until the intersection of the white .25 line and the bottom of the purple channel.

If that’s all Greek to you, just know that regardless of the longer-term prognosis, there is some downside risk here at these levels which supports the idea of a reversal from the Bat Pattern.

UPDATE:  1:10 PM

SPX just nudged below our stop at 1558.46 and briefly dipped below 1557.  I think this is all part of an effort to shake out bulls for the next rally, and don’t see it dipping much below 1555.57 without a significant change to our forecast.

If we reverse off of 1558.47, I might change my mind.  But, it looks like the 5-min RSI is staging a breakout to go with the price breakout.

I’ll keep an eye on the red and white channels.

UPDATE:  1:32 PM

Just popped down through support on RSI.  So, I’ll play along on the downside, next target 1553.30 – 1553.38.  If that doesn’t hold, look for 1549.

UPDATE:  2:25 PM

SPX broke out of the 5-min channel and just back-tested it.  But, there’s no guarantee that this isn’t the start of some RSI chop while price works its way lower.  1552.10 works nicely in terms of the upside possibilities (see yesterday’s forecast), but it’s pretty much no-man’s land in terms of existing harmonic and chart patterns.

I’m inclined to stay short for the purple channel bottom at 1546.08 or the 1.618 at 1549.09, with stops at 1558.47ish.  But, anyone who doesn’t mind the extra trading might consider going long here — with the understanding we might run into trouble at the channel top (small falling white) at 1558 or so.

While we’re waiting for the channel to resolve itself, let’s take a look at what these extra 10 points on the downside means to the odds of reaching 1576 or higher.

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The futures are pointed higher at the opening, though the dollar and the EURUSD and the eminis themselves — which is sitting at an .886 retracement of the yesterday’s move down — don’t support the idea of higher prices just yet.

With a 6 point pop on the opening, SPX will be right near its .886 (1569.19) as well, so playing along on the upside at the opening should be accompanied by tight stops — as this could easily be one of those lovely little pop and drops.

But, I’m still looking for 1576, as is just about everyone else, so this could be the overnight ramp-enabled push to reach it.

UPDATE:  9:35 AM

There’s the tag of 1569.19.  I’ll close here and revert to short, with stops right here at 1570.58 in case I’m wrong about the pop and drop potential.

And, just to get it off my chest, the chart patterns since the middle of March are have been some of the sloppiest, least well-formed, most forced (read “manipulated”) looking patterns I’ve seen in a long time.  This morning makes ten gaps up or down of 5+ points on the opening.

That is, 10 of the last 12 sessions have seen a 5+ point gap in the opening 15 minutes — with the average being 8.61 points.

Several of them have negated completed chart patterns that are normally 60-80% effective in predicting future moves, including two IH&S patterns and several Crab Patterns.

Clearly, the Street has an objective here, and it would be wise not to stand in the way.

UPDATE:  9:51 AM

Just got stopped out on the short, so I guess we’re going higher.  Watch out for the rising wedge (red, dashed) top at 1572ish and the factory orders due out in 10 minutes.  Could be that’s what the market makers are in a hurry to beat.  If the numbers are lousy, good luck hitting 1576 today.

UPDATE:  10:03 AM

The factory numbers were, in fact, lousy.  But, they won’t be reported that way.  The top line number was +3% versus expectations of +2.6% and Jan figures of -1.0%.

Gains without transportation were up only 0.3%.  Stripping away defense and aircraft, the figure actually fell 0.3%.

For a reality check (not that it’ll be reported in a million years), the top line number is down over 2% from January (not seasonally adjusted) and every single measure is lower than Feb of last year.

The top line number was good enough to get SPX to the top of the rising wedge, where it is reacting negatively.

Anyone who went long at the new high of 1570.58 might wish to take profits or place stops back at the .886 of 1569.19 just in case.  I believe I’ll do the latter, as this (albeit manipulated) rally seems destined to succeed in it’s one and only mission — a new high about which the talking heads can crow.

UPDATE:  10:37 AM

Just took another look at things and figured out where this is all going.  And, surprise!  It’s not 1576.

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