Are we to blame Nixon?

The Fundamental forces driving this market higher for the short term is partly due to the expectation of QE3. Ben Bernanke will ultimately prime the printing pump again, but only after we see the selling pressure intensify.

There is still plenty more downside left of this market, which is why I'm telling you not to believe this current rally. It is simply a contra-trend within a larger decline, but only for the intermediate term.

What do I mean by that? While there are those per-ma bears who feel we are doomed for a deflationary environment, and on this basis, prices will likely head south to retest the march 09' lows. Folks, there is still plenty of evidence that suggests this is only a mild correction within a larger bull market.

Here are several things to consider....

Ever since President Richard Nixon eliminated the gold standard, the value of money is determined by a basket of currencies. This means the value of our dollar is at the mercy of central banks, and believe me, their priorities are to pay back sovereign nations with cheaper money. This will alleviate them from their enormous debt obligation, but also achieving something much worse- destroy the purchasing power of your bottom line wealth.

The Federal Reserve has made it clear that they will do whatever it takes to avoid another 08' collapse, and now more than ever are firewalls in place to prevent such from happening.

Think about it.  For the past year the Market has been masking several dramatic developments that could have, and should have led to catastrophic consequences.  They were- the bankruptcy of M.F. Global, J.P. Morgan's announcement of a $2 billion dollar loss on risky credit derivative bets, and the growing magnitude of Europe's economic contraction.  Yet the market shrugged it off like a bad case of flees.

And I should also mention that only a handful of Market Indices in the entire world have managed to decisively clear above their previous 2011 highs. I'll give you a hint, they all trade in the United States. Why do you think that is?

You see, the U.S. dollar still holds the World Reserve Currency status, and by default, is considered a safe haven to other international currencies. For this reason, citizens of Europe have been taking money out of their home land (real estate, banks, European stock market, etc.) only to re-allocate these funds where the return on investment has a more promising outlook.

We are beginning to see the early stages of this process come into fruition. However, the question that remains is where exactly will all this money go? It can't all go into the Dollar, nor can it all go into gold. It will spread throughout every asset class of the Stock Market , and consequently, re-inflate stocks and commodities to new all time highs.

 S&P 500 v. U.S. Dollar



S&P 500- Daily Chart

Silver- Daily Chart

The U.S. Dollar- Daily Chart

Gold- Weekly Chart

 GDX- Weekly Chart

The striking similarities upon us

I have this growing suspicion that many of you are making the subtle transition to a potential bullish outlook for the stock market. I'll need a minute or two of your time so that I can King Kong all of that nonsense.

If I must say, last week was full of distractions. Obviously the first, Apple's remarkable quarter was a surprise to many, especially given the five day sell-off prior to the actual news release. This outcome provided investors with relief, and the reassurance of knowing this bellwether did not actually stumble, but instead just underwent a retracement. Unfortunately, the leaders of the stock market, including Apple, have yet to clear their previous highs. This I can tell you has done very little to generate much renewed confidence among investors.

The second was of course, Mr. Ben Bernanke. It's unfortunate that investors still to this day are hoping for his long awaited bailout package. Folks, expecting this announcement prior to a sharp decline is nothing short of wishful thinking. QE3, or lets say another currency swap, will only occur during or after a liquidation process out of all asset classes of the stock market. At the moment, there is not enough political pressure on him to push the button especially since the market has generated a near thirty percent gain from the October lows.

Thirdly, the dismal GDP figures were released the morning after Spain's credit rating was downgraded to BBB+. At the exact timing of this actual data, the dollar took a plunge. It was a classic example of the inner workings of our government bond buying program on stand-by. The "plunge protection team" will manipulate the dollar lower in the face of a game-changing event that has negative consequences. This is done in effort to create a soft landing in stocks, but it cannot delay the inevitable correction coming. You see, the government can hold up the market with Operation Twist, but it does not have the ability to change the current trend of the market.

While the Dow Industrials reasserted its underlying strength by clearing above its previous minor high, the remaining market averages are telling us differently. Usually the first week of every month is the time when money managers allocate their clients fixed income into dividend growth stocks. This explains the money inflows into the utility sector and for the same reason that twenty nine out of thirty Dow stocks closed mildly positive in yesterday's session.

Utility Sector V. The Dow Industrials

The Dow Industrials- Daily Chart

The Russell 2000 Index- Daily Chart

The S&P 500- Daily Chart

Have a great day,

Darah

Market Update

Despite today’s upward move, this multi-month rally is clearly running out of gas. It’s now coming down to a market totally driven by news events. Plus, the bulls are finding it harder to generate renewed confidence among investors.

To no surprise, Ben Bernanke said nothing of a stimulus package yesterday. Spain is undergoing a mini-crash, and several of the big name companies are falling short of their bullish expectations. These bearish subtleties are clearly being hid from the market averages.

We’ve had a lot of news to digest this week and it has amounted to a sideways choppy market that whipsaws investors to death. Today- initial jobless claims were reported lower than expected, and just mentioned in the after hours, Spain’s credit rating was downgraded to BBB+.  

This is only a small bite of today's market update. If you're interested in reading the full article, please go to the premium newsletter tab and subscribe today.

Taking Risk

I have been warning, for some time now, that investors should be prepared for an imminent correction that will ultimately wipe out all of their gains of the last several months. For those who don't believe in taking opportunities on the bearish side of the market are only kidding themselves. Now more than ever is the market in position for it's most profitable investment of the year. It just takes a little courage on your part.

It's probably a good thing that I learned early in my trading career, not to shun, but to embrace fear. The old saying of "fear the unknown" in the marketplace is actually a disconnect between the the amateur (with only basic knowledge) and the seasoned veteran. What appears to be an unkown event to the rookie is seen as an opportunity for the senior. Courage is not the absence of fear, it's taking action in the face of it.

We're here to make money, and it takes a lot of self in this business. Almost all investors who became successful were able to take on the necessary risk in their life to enjoy the rewards. Don't forget that those same successful investors have also made every mistake in the book in their early days. Our job is to avoid making the big mistakes, and not get discouraged when facing minor set-backs. It takes approximately 10,000 hours of studying these markets to become confident and a competent investor. And along with a bit of luck, and patience, you become "World Class."

Bottom Line- Find your "theme" and stick to it, don't deviate from it. These markets will soon break the backs of many financial advisers, economists, and money managers of every description. The media is now beginning to turn slightly bearish, which is, a subtle early warning sign in itself. Now that all of the conditions have been met, the only question that remains is, can you risk a bet on your own conviction?

The S&P 500- Daily Chart 

The Russell 2000- Daily Chart

The U.S. Dollar- Daily Chart

Darah

The Coming Days

There is speculation out there that maybe the right shoulder has indeed completed its formation. I don't believe that is true, but I would not rule out any more short term selling in the next few sessions. At the latest, Wednesday of next week, the market should find some short-term strength and begin its way back up to form the right shoulder. If that does not happen, but instead we sell-off into all of next week - then the right shoulder will have been formed in only two sessions. Now I've mentioned this before, and I'll say it again. Next week is options expiration week. As a general rule, the specialist on the exchange manipulate prices back up so their options expire worthless. So why is next week so critical? Well, the specialists have deeper pockets than you, your neighbor, or even the wealthiest friend you know. If they can't hold up the market next week, then who else can? I think I hinted to that idea in my previous post.

Now on to the markets, starting with the S&P 500. I think it was Wednesday of this week that the market made an attempt to bounce, and almost everyone had their doubts. Thursday showed signs of strength, suggesting that maybe it was not a bounce but a buying opportunity. Friday's session basically wiped out all of Thursday's gains, of which came from the last hour of trading. It's funny how the mentality will shift on a dime. Everyone felt a little bit better and possibly more confident to begin their purchases of stocks, until the bear came back to drag you back into it's den.

S&P 500 -Daily Chart

Stocks and the remaining asset classes of the marketplace are at the mercy of the U.S. Dollar. Friday's strength will more than likely spill over into next week, so we should expect for a little more follow-through in the coming days.

The Dollar- Daily Chart

Volatility is beginning to rise and also leaving some foot prints behind. The 50 day moving average is a lagging indicator, but gives the best readings when its slope is noticeably changing. The white line was in a clear downtrend, but now I see it flattening out. Expect for that same moving average to curl up and begin to rise.

The VIX- Daily Chart

Have a Great Weekend,

Darah

Black Monday

It has been my expectation for some time now that the market is forming a Head and Shoulders Topping Pattern. This particular pattern will often times frustrate investors by its lack of direction, and sideways structure. At this point, especially with Friday's early morning sell-off, it could be that we are not only better defining the Head of the Pattern, but marking a Major top in the Stock Market. I'm going to step out here on a limb and call the top at 1419.75 in the S&P Futures market, and here's why.

After the release of disapointing economic data on Friday morning, the Dow futures dropped 60 points in less than 30 seconds. If that wasn't enough to "freak out" anyone, the market continued its decline by selling off another 60 points to close out the 45 minutes of trading. Now, had this news been presented on a day that was tradable to the public, my guess is the cash market would be down somewhere between 100- 150 points, minimum. So that leaves Monday as the next available option. To add to these aforementioned bearish implications, it might also be important to mention that prices are resting on the intermediate trendline dating back to the October lows. If we break this trendline, not only does that suggest a change in trend, but it will also reveal the early stages of this next decline coming.

The inital sell-off is usually a sharp decline that gets a lot of attention. "The Dippers," who I call the crowd that buy every dip, will buy this next bounce assuming it's a buying opportunity. Only this time my friends, it's the last chance you have to get out before the next selling phase. The difference between the first sell-off and the one after boils down to the degree of selling pressure. Lets just say that you may need a trash can by your desk if you wake up one morning to see the Dow down 300-400 points. It unfolds as a waterfall decline, or a panic sell-off that raises the talk among all the news outlets, talking heads, and mom and pop store owners at a town near you. To put it simply, it generates enough talk to even suggest for an intervention of some kind, possibly a government intervention.Let's face it, with as bad as the economy is right now, the only way this market sustained any uptrend has been because the printing press spigot was turned back on. It's Bernanke's only tool, but the next drip out of that faucet will coincide with the single best buying opportunity for the remained of this year.

S&P Mini- Daily Chart

Russell Futures- Daily Chart

The Dow Jones Futures- Daily Chart

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Have a great Weekend,

Darah

Time is running out!

This may be the most important blog post to date, so you'll need to hear me out on this one. I don't know if you remember the runaway move that we all experienced in silver last year, but almost every blogger, newsletter writer out there failed miserably at picking the top. It started with 30 bucks, then a week later is was 35 bucks, until 40 bucks became 50 bucks quicker than you could turn your computer on. You see, when emotions are running high, the retail investor will "buy into the hype" and quickly rush into an position hoping to catch the next ten dollars higher. This irrational decision making would have lead to a costly mistake, and even a terminal mistake had you been late in chasing the stock.

So why would such a scenario be so fitting for the current market we're in, you ask? Well, if I were to tell you that the Stock market is hinged on the performance of one stock, and that particular stock is in a parabolic, runaway move, would you be concerned? I know I would.

It would make sense for the strongest company of the market to have developed into a parallel uptrending channel which could allow investors to time an entry point on every pullback. However, the nature of the stock pattern suggests for a chase to buy. If this parabolic move breaks, and they all do, how would the stock market react? Even worse, right? So my point is, for the same reason the stock market has outperformed in these last several months may be for the same reason the stock market should undergo some turbulent times.

Oh and by the way, if you haven't already guessed by now, the stock is Apple.

Apple- Daily Chart

S&P 500- Daily Chart

Take that all you bull junkies out there!

Darah