Value of Perfect Information

Periodically, the question of manipulation comes up and I’ve recently been asked if the Dow theory or any other technical method is still of value because of all the efforts to manipulate the markets. The short answer is, yes. While manipulation can have a temporary effect on the market, it cannot fix the problem, it cannot stop the inevitable and in the end it will only serve to make matters much worse.

I think we can all agree that every known influence, be it positive or negative, false or real, fundamentally sound or not, big or small, founded or unfounded, manipulative or not, all impacts price. Well, the very basis of technical analysis is that everything is discounted into price. So, if every influence known to man and the market is reflected in price and technical analysis is a study of price, then absolutely the Dow theory and other technical methods are just as valid today as they have ever been and the manipulative efforts to “fix” things does not matter. The only variable that I see in technical analysis, like anything else, is that one person will see the data to mean one thing, while another person may see it to mean something different. Therefore, opinions may vary, but still everything is discounted into price and it all boils down to the technician and his methods.

I know that some believe that the March 2009 low marked the bear market low, that we are now in a recovery and that the worse thing they see is maybe a “double dip” recession. I have stated all along that my research suggests to me that the rally out of the March 2009 low has been a bear market rally and that it should ultimately prove to separate Phase I form Phase II of a much longer-term secular bear market. Point being, we are all looking at the same price data, but different conclusions are being drawn.

As price moved into the July low, it seems that most who were even remotely familiar with Dow theory were proclaiming a so-called Dow theory “sell signal.” As the July 2nd low was made, I told my subscribers that this was not a so-called Dow theory “sell signal.” Rather, I explained that it was an intermediate-term low and that higher prices were expected. Point being, this was again another example of everyone looking at the same price action, but with varying opinions.

So, what may be occurring is that some people will look at specific technical opinions and then when they don’t come to pass, they conclude that technical analysis no longer works and it’s always easy to blame it on manipulation and the PPT. Again, everything is discounted into price and if a given forecast, based on a particular technical discipline does not pan out, then its because the analyst that made the forecast was in error in that he did not read the meaning of the price action correctly. We have all certainly been there before. It’s not that price was wrong and it’s not because of the PPT or manipulation, because regardless of what is driving price, everything is still reflected into price and price is what it is. It’s only the interpretation of price action that varies. With that all being said, any technical picture can also evolve, morph, take more time, or even less time than originally anticipated. As a technical analyst, one must be able to recognize when this is occurring and adjust with the new data. If not, then he will likely find himself out of step with the market.

Personally, it is my belief that manipulation only makes matters worse. As an example of this, all throughout the period between 2003 and 2007 I explained that we were seeing a stretched 4-year cycle. I recognized this based on my statistics, cycles work, and “DNA Markers” and I was able to adjust as the technical picture morphed and stretched. But, I knew that the 4-year cycle had not bottomed and I explained that the efforts by the powers that be to hold things together would ultimately only serve to make matters worse. There is no doubt that the manipulative efforts seen during this period contributed in a very negative way to the credit and banking crisis. In my eyes, this was largely accomplished through the unscrupulous lending practices and the financially irresponsible, resulting in the housing bubble, which Greenspan tried to tell us did not exist. But, in the end, the manipulation did not prevent the inevitable decline into the 4-year cycle low. All the manipulation did was blow the balloon up tighter and tighter as the 4-year cycle stretched and then, when it popped it simply produced a bigger bang, in that the manipulation did in fact make matters worse.

There have been continued efforts to “manage” the market throughout the bear market rally that began at the March 2009 low. Once the bear has sucks enough of the misguided victims back into his grip, the bear market rally will conclude and the assent into the Phase II low will begin. When this occurs, we will again see more manipulative efforts to stop the inevitable. But, once the bear market resumes, and if the “DNA Markers,” that I have identified at all other tops since 1896, are confirmed, then it will not matter. Once the proper setup is in place, all the manipulation in the world will not stop the natural forces in regard to the Phase II decline. I hope people are listening. If not, you have been warned!

The following text on Manipulation was taken from Robert Rhea’s book, The Dow Theory.

“Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.

Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.

The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:

‘A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.’ (Nov. 29, 1908)

‘Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.’ (Feb.26, 1909)

‘…the market itself is bigger than all the ‘pools’ and ‘insiders’ put together.’ (May 8, 1922)

‘One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, ‘Between the Chains,’ in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.’ (The Stock Market Barometer) ‘…no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.’ (April 27, 1923)

‘The average amateur trader believes the stock market is guided in its trends by a certain mysterious ‘power,’ this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.’

‘It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or ‘manipulating’ the market for a short period. The professional speculator is always ready to help the movement along by ‘placing his line’ while the little fellow timidly ‘lays out’ a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time—the ‘technical situation’ so dear to the hearts of financial news reporters.’

‘Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!’

I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

On June 30th both the Industrials and the Transports closed below their June 7th lows. In doing so, anyone who had not already proclaimed a Dow theory “sell signal” seems to have done so at that time. I stated here in my last post, as well as in recent audio interviews, that I disagreed with anyone who has made such statements in regard to Dow theory. I have since received a number of questions asking me how so many people could be wrong about Dow theory and if my position has changed.

My position has not at all changed. My read is that the Dow theory bullish primary trend change that occurred in conjunction with the advance out of the March 2009 low still remains intact in accordance to orthodox Dow theory. Reason being, once a trend change occurs, it must still be considered to be in force until it is authoritatively reversed. According to orthodox Dow theory, the decline into the July low was not an authoritative reversal because in reality price held above the previous secondary low points. I also continue to believe that the advance out of the March 2009 low is one large counter-trend move that will serve to separate Phase I from Phase II of the ongoing secular bear market. It is for this reason that I continue to refer to the advance out of the March 2009 low as a bear market rally. Once the proper DNA Markers are all in place and confirmed, the Phase II decline will assert its deflationary forces far and wide. The current Dow theory chart can be found below. For more details regarding my views that a Dow theory primary trend change, which is erroneously referred to as a Dow theory “sell signal”, has not occurred, please see the July 9th article that was last posted here.

Now, with this all being said, I want to explain another point in regard to erroneous Dow theory calls that so many made in regard to the June 30th violation of the June 7th closing low. Assuming for the moment that the violation of the June 7th low is correct in that it did trigger a bearish primary trend change, which I do not agree is the case, then by default this would in turn mean that these same people are saying that the June highs marked secondary highs points. More details on the reasoning for this is available at Cycles News & Views. Anyway, the June closing highs occurred on June 15th at 4,467.25 on the Transports and on June 18th at 10,450.64 on the Industrials. Therefore, if price were to move back above these levels on a closing basis, then the same people who called the erroneous Dow theory “sell signal” on June 30th would then have to call a Dow theory “buy signal.” By not fully understanding the Dow theory, which is likely a function of having not read and studied Dow theory, one can easily find themselves on the wrong side of the market. Right as everyone was proclaiming the Dow theory “sell signal” in late June, the market bottomed and at Cycles News & Views, I was calling for a low and a rally on July 2nd as the market was bottoming. This was based on both my Dow theory work as well as my cyclical and statistical analysis. The Phase II decline is ahead of us. We are monitoring the averages as we watch for the DNA Markers and confirmation that has been seen at every major top since 1896. Please, do not misunderstand the message here. Longer-term, the entire advance out of the March 2009 low is a bear market rally that should be followed by the Phase II deflationary decline. All I’m saying here is that we have not yet seen a bona fide Dow theory primary trend change at this time. What may or may not be occurring from other technical disciplines, be it cycles, statistics, my DNA Markers, Elliott wave, fundamentally or whatever are separate issues, which are outside of the scope of Dow theory.

I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm. The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

I’m going to go through some signs that rabid bears might do well to pay attention to because I think the market is very close to a major bottom. (That doesn’t mean we are guaranteed to make new highs, although we might. Just that we can probably expect an explosive rally soon, even if it ultimately turns out to be a counter trend rally in an ongoing bear market).

First off, way too many people are counting on the head and shoulders pattern taking the market directly down to 850. Folks, historically these head and shoulder patterns have a success rate of about 50%. A coin toss, in other words. Didn’t we learn that lesson last July?

Let’s go now to the charts. We have a large momentum divergence that has developed on the daily charts.

Also, notice that the market dropped down to the 75 week moving average yesterday and bounced strongly. You can see this same support during the prior bull. The 75 week moving average acted as final support during the entire bull market. That level also happens to be the 38.2% Fibonacci retracement of the entire cyclical bull move. Not an unusual correction in an ongoing bull, on both counts.

Next, we are now right in the timing band for a major intermediate cycle low.

At 21 weeks it’s just way too late to press the short side. You risk getting caught as the intermediate cycle bottoms initiating a violent short covering rally.

And finally, breadth is diverging massively during this final move down. As you can see the NYMO often diverges at these intermediate cycle bottoms. The divergence at this point is the largest in years.

Finally, I’ll point out that the February cycle bottomed on a reversal off the jobs report. I think it’s safe to say the market has already discounted a bad number so we could see shorts begin covering in a buy the news type trade, even if the number is bad. And if the number is good, we will see the market gap higher huge, trapping shorts and throwing gasoline on the fire of a short covering rally.

It’s just too dangerous to continue pressing the short side at this point. Better to just step aside and not risk getting caught in the intermediate bottom that WILL happen sometime soon, maybe even on today’s employment report.

It’s sad to say but I’m afraid 90/95% of all retail traders/investors are not going to successfully ride the gold bull. The reason of course is that they are deathly afraid of draw downs. It’s glaringly apparent every time gold pulls back or suffers the slightest correction. Immediately a slew of traders come on the blog and warned of impending doom. “Gold is going to $600″ (think Elliot wave). Some are even brave (maybe I should say ‘foolish’) enough to short. Here is one we hear a lot lately, “miners are going to get crushed if the stock market enters a new leg down in the secular bear market”.

Pure nonsense!

Let me show you what happened to gold and miners during the 2000-2003 bear market.

During one of the worst bear markets in history gold rallied over 50% and miners well over 200%. So this notion that the precious metals sector has to get hit during a bear market is simply ludicrous.

Now I know what you are going to say, “Just look at what happened in ’08″.

The reality is that the crash in ’08 was a very special set of circumstances that aren’t likely to repeat. Up until September the bear market was following the normal path most bear markets follow. Slow grinding declines followed by explosive counter trend rallies. Gold was holding up amazingly well during this period as were miners. Both were actually up significantly during the first 5 months of the stock market bear. It wasn’t until gold entered a normal D-wave correction in March of ’08 that either corrected at all.

In September a rare event happened that drastically changed the entire fundamental picture of the bear market. At that time roughly $700 billion in debt came due. The financial system needed to roll that debt over but couldn’t as the credit bubble was in the process of imploding. That led to one of the few true stock market crashes in history.

The ensuing panic led to a selling climax in every asset class even including, to some extent, gold. The actual price of physical gold never even came close to dropping to the levels of the paper market. Smart money investors were taking advantage of the irrational selling by buying up every single available oz. of physical gold on the market. At the time premiums on physical were over $100 above the paper price.

The point I’m trying to get across is it took a very special set of circumstances to create the kind of selling climax that could take down the precious metals sector. Those circumstances are not present today. The EU has already gone to the printing press to halt their debt problems. The US has done away with the mark to market rules and Ben stands ready to print so we have no looming debt crisis in our future.

So if we are about to enter another leg down in the secular stock market bear the odds are it will be another slow grinding affair, very similar to the 2000-2003 bear. There will be plenty of sharp counter trend rallies and one can bank on the Fed throwing more and more trillions of freshly printed dollars at the problem all along the way.

And that, my friends, is the fundamental bedrock of the gold bull.

Now let me show you a long term chart of the last great secular bull market.

This is just about text book for a big secular bull market. We see a very extended period of consolidation below a key resistance level. Eventually that resistance level gets broken. Once it does it’s like a damn breaking, the force then becomes unstoppable, ultimately reaching heights far beyond what anyone can foresee at the original break out.

In oil’s case the secular bull rallied almost 300% above the $40 breakout level, topping out with a massive parabolic move lasting about a year and a half (remember me saying bubbles tend to last about 1 to 1 1/2 years as the final phase tops out?).

I want to point out this happened in oil, a commodity that was virtually impossible for the average Joe to invest in. This was a bubble driven purely by the the investing community. Remember this because it’s important.

Now let’s take a look at the next secular bull, one that’s still in the baby stage.

Gold has just recently broken out above the old 1980 high of $850. It hasn’t even doubled yet much less rallied 300%. Now if you think gold rallying to $3500 is ridiculous you are absolutely correct. There is no way gold is going to stop at a mere 300%.

Unlike oil, gold is readily available to the public and ultimately that is what drives the final stages of a secular bull market/bubble. When the public comes into the market their panic buying drives the final parabolic move to unbelievable heights. We saw perfect examples with both the tech and housing bubbles. The public was deeply involved in both.

And now, for the topping on the cake. The precious metals markets are infinitely smaller than the stock market, real estate markets or energy market. That means it won’t take anywhere near as much money to drive these markets to incredible heights.

Look at that chart of oil again. A 300% gain in a very large liquid market without ever drawing in any perceptible buying from the general public.

Now look at that chart of gold again, only this time with fresh eyes. The possibilities are simply staggering. I wasn’t kidding when I said this will be the greatest bull market any of us will ever see in our lifetime.

If, and this is a big if, you can ignore the nonsense from the Nervous Nellies or the gold Bears (a breed destined for extinction) and just hold on to your positions you will ultimately reap unimaginable rewards as this bull progresses.

Now I will say that yes, there are times to take profits in bull markets. You take profits when gold and miners are stretched far above the 200 day moving average. Everything eventually regresses to the mean. So when we see the HUI 40-55% above the 200 DMA then yes, you should think about selling at least some portion of your positions. But to sell positions with the miners 3% above the 200 DMA is … well, it’s just plain dumb. This isn’t the time to sell it’s time to buy, buy, buy.

Let me say this as plain as possible. If you want to get rich from this, the largest bull market you are ever going to see, you don’t listen to the traders and you certainly don’t adopt their flawed strategies. You simply can’t think like that if you want to ride this bull. You need to think like a value investor. When you see value you scoop it up no questions asked. And if the market is foolish enough to give you an even better bargain down the road you buy more.

Unfortunately here is what happens. Retail investors are unable to buy value. For the average retail investor to buy he needs emotional confirmation. I see this all the time. “Wait till the breakout for confirmation before buying.” The problem with that approach is that most breakouts soon fail. If one waited for the recent breakout above $1225 to buy they then had to weather an immediate draw down.

I saw this in spades at the December top. Retail traders entered in droves during that time. They were getting the emotional confirmation they needed. Then when gold corrected they either got knocked out for a loss or they held on just long enough to get out even. Most simply don’t have the patience to ride the bull on his terms. They want the bull to do what they want, when they want. I suspect more investors have been lost to boredom that draw downs.

The best strategy right now is to just sit tight. Remember this is still just a baby bull and it has a long long way to go yet.

GoldScents is a financial blog focused on the analysis of the stock market and the secular gold bull market. Subscriptions to the premium service includes a daily and weekend market update emailed to subscribers. If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions,email Toby.

The stock market topped in April which was expected from analyzing stocks and the indexes. Back in April I posted a few reports explaining how to read the charts to spot market tops. Today’s report is about identifying market bottoms.

It does not get much more exciting than what we have seen in the past 2 months with the market topping in April and the May 6th mini market crash. This Thursday we saw panic selling which pushed the market below the May 6th low washing the market of weak positions.

For those of you who have been following me closely this year I am sure you have noticed trading has been a little slower than normal. This is due to the fact that the market corrected at the beginning of the year and we went long Feb 5th and again on Feb 25th. Since then the market rallied for 2 months and never provided another low risk entry point. In April the market became choppy and toppy and we eventually took a short position to ride the market down. Now were we are looking at another possible reversal to the upside.

Only a few trades this year which I know frustrates some individuals but if you step back and look at my trading strategy you will learn that we only need to trade a few trades a year to make some solid returns. I don’t know about you but I would rather trade a few times a month and live life between trades… not trade all day every day getting bug eyed in front of the computer.

Ok enough of the boring stuff let’s get into the charts…

SP500 – Stock Market Index Trading ETFs & Futures
The pullback in the broad market was expected but the mini crash on May 6th really through a wrench into things for us technical analysts. We don’t really know the truth about what happened that day… was it just a simple error or was it a planned error for the US government to take a massive short position to move something in their favor quickly to generate MASSIVE gains? It leaves us technicians hanging wondering if that was a shift in trend from up (accumulation) to down (distribution)?

My thoughts are if the crash was truly an error then we will see months if not another year of higher prices… But if it was a planned sell off with banks moving to the sidelines then we are most likely headed into another bear market. Personally it does not matter what happens as big money will be made in either direction. Problem is if we do go into another bear market then the majority of individuals will lose capital as investor’s portfolios get smaller and smaller. That will lead to a lot of depressed people…

In short, I am neutral on the stock market for the intermediate and long term. Once we have a few more months of price action only then will I have a plan for longer term investments. But on the short term time frame the market is screaming at me with extreme sentiment levels lining up on the stock market and gold.

The daily chart of the SPY – SP500 Index shows several important points which help me time market bottoms. We have prices trading at a support zone. Buyers step back into the game here and should provide a decent bounce which started Friday Morning.

Next we have the panic selling spikes from an indicator I created. Generally the day after we see panic in the market like we did on Thursday we will see a big bounce and many times a large rally.

Down at the bottom you can see my custom market cycles which are both starting to bottom. During times like this the market has a natural tendency to move higher.

VIX – Market Volatility Daily Chart
The VIX has an old saying “When the VIX is high its time to buy, When the VIX is low, its time to go.” Simple analysis clearly shows the VIX trading high and at a resistance zone.

Put/Call Ratio – Daily Trading Chart
This chart measures the amount of put and call options traded each day. When it is trading over 1.00 then we know for every 1 call option traded (wanting the market to go up) there is 1 put option traded (wanting the market to go down). Over 1.00 is extreme and when that many people are bearish and using leverage to profit from a drop in price then in my opinion it means everyone has already sold and the selling pressure is about to end.

Actually if you go back in time and review SP500 and this ratio you will notice 2-3 days after this ratio reaches 1.00 or higher the market bounces/bottoms.

NYSE Advance/Decline Line for Equities – Daily Chart
This chart shows us how many stocks are advancing or declining on any given day. When extremes are reached look for a short term bounce or bottom 1-3 days following.

How to Identify Stock Market Bottoms with Simple Analysis:
In short, I feel the market is forming a bottom here. How big of a rally will we get? I don’t know because of the mixed signals from the May 6th EXTREME heavy volume selling session. As usual I focus on trading with the trend, trading the low risk setups and I manage my money/positions scaling in and out of those positions as I see fit.

If you would like to receive my Real-Time Trading Signals & Trading Education check out my website at www.FuturesTradingSignals.com

It has been an interesting week in the market as stocks and commodities push to extreme support levels. Below I have posted some charts showing where the market is currently trading at and what I think is likely to unfold.

Gold Futures – 4 Hour Candle Stick Chart

The price of Gold is testing a key support level. I figure we will see gold try to stabilize over the next week or so as it digests the recent drop in value then start to head back up.

US Dollar Index – 60 Minute Candle Stick Chart

The US Dollar and gold have been moving together the past few weeks as more countries pop up on the radar for serious financial issues. This is helping to boost both the US Dollar and gold as investors around the world starting buying what seems to be safety. The dollar has had a sizable pullback and is now testing a key support level.

This could be the start of a possible Head & Shoulders pattern forming which means the dollar rally could be nearing maturity in the next couple weeks.

Crude Oil Futures – Daily Trading Chart

Oil has been under serious selling pressure because of the rising USD. It has now dropped to a key support level and is starting to look very interesting. If the US Dollar bounces in the next week or two it will keep downward pressure on oil. I think this bottom is going to be a process not a one day event.

SP500 – Daily Trading Chart

Stocks have been under dropping like flies the past few weeks and shorting the SP500 last week at 1170 has played out very nicely for members. The broad market is giving me mixed signals and when I am unsure of a trade I stand on the sidelines. It’s always better to sit in cash and watch things stabilize than it is to watch your hard earned money evaporate. We could see a wave of panic selling in the stock indexes testing the previous lows so be cautious.

Mid-Week Stock & Commodity Trading Report Conclusion:

In short, I feel gold and the dollar will bounce in the coming days from their support levels. This will keep pressure on oil & the SP500 holding them down near support. Once the US Dollar forms a possible right shoulder we will most likely see them pop and rally.

We are still 7 trading days away from a cycle low on the broad market making this scenario very likely to play out. At the moment I am getting a lot of mixed signals and during times like this I prefer to stay in cash because volatility will rise and it is easy to get shaken out of trades.

If you would like to get my Real-Time Trading Signals & Setups checkout my services at www.TheTechnicalTraders.com.

The massive 200-pip jump in EURCHF in less than 10 minutes (13:00-13:10 BST) is the work of no other than the Swiss National Bank intervening to sell its own currency. But the 80-90 pip jump in EURUSD must also be the work of European banks intervening on behalf of the ECB to boost the ailing euro. The events of the last 2 weeks imply that coordinated central bank intervention is possible. If it took 2 days for the ECB’s to make an about turn on bond-purchases and for Berlin to institute a ban on naked shorts, then the prospects for intervention are very plausible. If neither the IMF/EU/ECB plan nor the Berlin announcement succeeded in alleviating selling on the single currency, coordinated central bank intervention must be utilized to at least slowdown the pace of the decline. While this is unlikely to reverse the slide in the euro, it will help resurrect a 2-way market in the currency and slow down the damage.

Euro Longs to Remain Naked

Unless the German ban on naked CDS shorts is instituted on a European or global level, its effectiveness will come up short. Unlike equity markets, credit default swaps are traded privately, and not on exchanges. And the fact that the bulk of these markets are in NY, the German ban will do little to prevent shorts from trading outside German shores. Also, according to the Deposit Trust & Clearing Corp (CDS clearing agency), outstanding CDS on most Eurozone sovereign debt does makes up less than 10% of the entire CDS market, estimated at $11 trillion. Chancellor Merkel’s unilateral ban is an ad-hoc measure that partly aims at containing her declining popularity following her Party’s defeat at last week’s regional election. Unless similar measures are adopted by the France, UK and US, these will prove to be no more than desperate politicians waging a losing war against speculators.

High Yielder, Highest Loser Down Under

It is NOT the euro that is the biggest loser since Tuesday’s close, but the Aussie, followed by the Kiwi and the Swedish Krone. The Aussie falls victim to its own success of higher yields, which are especially under scrutiny after the RBA hinted at a pause in its tightening cycle two weeks ago. We warned in our May 11th piece “Endangered Aussie Carry” that the latest sell-off in global equities has begun to unwind one of the few remaining carry trades in the non-emerging market FX space; AUDUSD and AUDJPY drop 3.8% and 5.4% respectively.

The technical significance of last night’s break below 0.8580 implies further selling of another 5% from current levels. The 0.8580 low was held in Sep-Oct 2009 as well as in Feb 2010. Last night’s failure implies a decline to as low as 0.80 and 0.78, especially if no close above 0.86 is attained this week.

Gold vs. other Commodities

Gold is finally responding to a broad sell-off in commodities. This was not the case on May 6 when the 9% intraday plunge in equities saw gold shrug off selling in copper, crude and natgas. The latest 24-hours are seeing less resiliency in gold, as the risk of deteriorating equities could force some managers into selling their winners (accumulated gold gains) to meet their widening gains. If the aforementioned suspicions of coordinated euro buying by the central banks are confirmed, traders could begin unwinding of their GOLD/EUR shorts, thereby, exacerbating the recent selling in GOLD against other currencies. Gold drops 3% against EUR from its €1,010 record high. Further pullback towards €960s could call up $1,165-70, followed by $1,120.

Are the markets manipulated ? Are they ?

You have been repeatedly told by those that clearly don’t immerse themselves in trading on a regular basis that they are not manipulated instead the movements are a function of some ordered theory that implies certainty of outcome when all one can do in reality is to conclude towards a probability of outcome that are usually little better than 60/40, well on the 6th everyone got the answer that they should imprint into their memories that the markets REALLY ARE manipulated. If your going to learn one lesson from 2010 then let that be the lesson learned. Contemplate on it, let it sink in, let it skew how you interpret price action and maybe you too can join in on future market manipulations!

Stock market volatility soars, the Flash Bounce follows the Flash Crash, the manipulated markets are not giving investors and traders time to react as the dark pools of capital continue to rake in huge profits by circumventing official exchanges such as the NYSE which if my memory is correct ALREADY HAS CIRCUIT BREAKERS that should have STOPPED the CRASH in its track so why didn’t it ?

Obviously, because far more trading of shares and their derivatives is taking place between the Dark Pools of capital OFF of the exchanges, which is ideal for a manipulators paradise. It will be interesting to see how high this months Goldman Sachs profits will leap after the 1st quarter having generated $25 million of profit EVERY DAY!

So, yes the markets are manipulated, though that is nothing new as all human activity involves manipulation of our environment to one degree or another where any mechanisms put into place to limit human manipulation are soon circumvented, we are a species of manipulators, we live in highly manipulated cities that are completely distant from the environment of the natural world, so don’t waste time going look for reasons of why the flash crash happened or crying about it, instead look for the finger prints for future market manipulation’s that show their hand ONLY in the price charts! Not anywhere else! (more on the flash crash here – 09 May 2010 – Don’t Blink Or You Will Miss The Stock Market Crash!)

Therefore this third bi-monthly in-depth analysis of the stock market for 2010, posted on Sunday 16th May (ensure you are subscribed to my ALWAYS FREE newsletter to get these and my weekly updates in your email in box) will again attempt to do the near ‘impossible’ by concluding towards a forecast trend projection for the stock market for the next 2 months, a tough task when considering today’s volatile flash crashing market environment, where it has become even difficult to project what the market will do in the next hour let alone 2 months forward!

UK Election Politicking is Over

The electorate has had their vote and settled upon a ConDem coalition government that will probably go up in smoke within 12 months under the weight of public anger at the cuts and tax rises that are about to hit the populous (not forgetting soaring inflation!).

Now it is time for the markets to vote, and they have sent sterling and UK stocks sharply lower. Though this should work to the advantage of UK investors in the mega caps as a weak sterling means the UK’s big export based corporations should see their share prices outperform. The only question remains is to what extent will the ConDem government seek to bleed the corporate’s much as the Australian Government’s tax on resources is bleeding the mega miners.

British Pound Following the Euro Lower

Sterling at £/$1.45 remains firmly on track to achieve its forecast sub £/$1.40 low (26 Dec 2009 – British Pound GBP Forecast 2010 Targets Drop to Below £/$1.40) now probably within the next 2 weeks, the specific support target lies at £/$ 1.37. I will seek to update sterling and as part of my in-depth update for the U.S. Dollar bull market later this month.

1. That sterling is targeting immediate support at £/$1.57 which implies it may temporarily bounce from there back through £/$1.60 before the eventual break.

2. That a break below £/$1.57 would target a trend to below £/$1.40. On a longer term view, the chart is indicative of trading range between £/$1.57 and £/$1.37, on anticipation of the eventual break of £/$1.57. On average this implies a 10% sterling deprecation against the trend of the preceding 6 months or so.

German Euro Gravy Train is Over

Germany has benefited hugely at the expense of other Eurozone countries over the past decade as it’s highly competitive industry had a captured euro-zone market to export to that the other countries could not devalue against. German exports were further boosted by a weak euro that enabled global exports to be maintained, however all of these small eurozone countries are now risk imploding and are lining up for a German and French handouts, the only sustainable answer to which is for the Eurozone to split into two as I speculated upon early in the week – (11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt).

Financing albeit shrinking annual PIGS deficits over the next few years will still mean that ALL of these countries debt burdens will be HIGHER in 3 years time, i.e. Greece’s debt burden is expected to rise from 120% of GDP to as high as 150% of GDP. How is that a solution for the debt crisis? How will that prevent eventual debt default ? Answer – It won’t!

The ONLY solution is for the Eurozone economies to GET their economic houses in order which means cut the deficits and total debt as a % of GDP which can only be achieved through economic growth which means public sector spending cuts and reform of economies to generate economic growth that means LESS E.U. and national regulation as touched up on in the article Solving Britain’s Economic Crisis Through Micro Business Capital Investments and Credit (31st Mar 2010). However when a country has a debt burden of 120%+ of GDP at interest rates of 5% or higher the inevitable result is still debt default.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

The Euro Bailout is to pile more debt on top of existing debt which amounts to just being temporary sticking plaster that will eventually give way to the inevitable. At the end of the day countries such as Greece, Portugal and Spain and maybe several others will default on their debts, they have no choice, NONE ! With debt at 150% of GDP the interest payments cannot be serviced even at artificially low interest rates of 4%-5% let alone any repayments entertained. which means the bailout is effectively dumping Greek and other PIGS debt onto German and French tax payers. The strategy appears to be for Germany and France to buy some time to erect a firewall between themselves, their banks and future euro-zone debt defaulters.

A big step in creating such a firewall would be for the Euro to split into two with Germany and France and maybe a few others in Euro II, which would allow all the other bankrupting euro-zone states to competitively devalue, print money and set more appropriate interest rates as they attempt to INFLATE their economies and off course default in a more orderly manner with less fallout to the core Eurozone members.

In the meantime Greeks continue to riot, perhaps given their long history and having given genesis to many of the academic institutions that are now trying to force their economic theory of what should be done, Greeks are fully aware that the likes of the IMF and E.U. are totally clueless when it comes to doing the right thing, which is evident in the fact that countries such as the United States, Germany, France and Britain have done the EXACT opposite to that which the IMF says they should have done!

Dangerous Democracy

Another factor that seems to have escaped the mainstream press is that hated governments with hated austerity policies tend to get thrown out of power and replaced with more financially inept governments that offer to take the pain away. Which suggests that if there isn’t a Euro II sooner rather than later then the Greeks and other PIGS may vote in governments that force the European Union’s hand by unilaterally exiting the Euro and defaulting on their debts as there exists a greater preference to swim in the warm inflationary waters of the Meditarian than freeze to death in an icy deflationary imploding economy as Germany requires them to do as a consequence of the Eurozone bailout.

The bottom line is that the ECB has chosen to sacrifice the Euro by joining the rest of the central bankers money printing club, the ultimate consequences of which is inflationary and not deflationary as illustrated by the 100 page Inflation Mega-Trend Ebook (FREE Download NOW)

Implications for Stock Markets – The markets have voted with a big thumbs down to the bailout which is evidenced by the Euro closing at just 123.30 instead of 130 where it had rallied to on the announcement, it clearly has a lot further lower to go. Bailouts sap life out of the private sector that are the engines for economic growth as the cost of the bailouts are dumped onto tax payers of the more competitive countries, this will undoubtedly eventually impact on the corporations of the eurozone which is discounted in the present, against this is balanced the depreciation in the euro therefore benefits those corporations that export to outside the euro-zone. A eurozone in slow motion collapse is not good for bullish stock market sentiment but there are stocks and sectors that will benefit from their dollar earnings boost.

Stock Market Trend Against Forecast and Expectations

A quick recap of the two in depth analysis of the year to date and the most recent short-term update:

02 Feb 2010 – Stocks Stealth Bull Market Trend Forecast For 2010 - The Inflation Mega-Trend Ebook Page 82 (DIRECT Download)

Dow 10,067 – Stocks Multi-year Bull Market that bottomed in March 2009 will trend Sideways during first half of 2010 attempting to break higher. The second half will see a strong rally to above 12,000 targeting 12,500 during late 2010.

DOW Stock Market Forecast 2010

23 Mar 2010 – Stocks Stealth Bull Market Trend Forecast Into May 2010

Dow (DJIA) March to May Stock Market Trend Forecast Conclusion – Therefore my specific conclusion is for a continuation of the uptrend into early to mid May, achieving the 12,000 target during this time period, also allowing for a correction during April.

Weekly Newsletter Update – 02 May 2010 – Greece Debt Crisis Storm Cripples Stock Market Rally Resulting Stock Price Churn

The stock market ended the week weak at 11,008, barely clinging on to its uptrend as of February 2010. The SELL trigger is less than 40 points away at 10,970. The trend is choppy and volatile that looks likely to continue.

My trend expectations by the 23rd of March 2009 had converged towards a strong bull run into early to Mid May 2010 to target 12,000 before a significant correction took place i.e. an acceleration of the trend off of the early Feb low that had lifted the Dow to 10,830 after it cleared the 50% axis at 10,333. The trend continued to a high of 11,258 by early April before stalling.

The market was hit by a series of debt crisis shock waves out of Europe which had the effect of eroding the time left for the rally to be achieved all the way into early May 2009 when my quick update (02 May 2010 – Greece Debt Crisis Storm Cripples Stock Market Rally Resulting Stock Price Churn) concluded that the market had just about run out of time and was hanging on to the uptrend by its finger nails within a few points of the SELL TRIGGER at 10,970, the rally to that point had not triggered any of the sell triggers mentioned during the bull run from late February 2010 to the 2nd of May.

The sell signal was triggered on 4th May with the break below 10,970, followed by the Second Sell Trigger on the 5th of May on break below 10,830 which targeted 10,750 and then 10,550 and then along came Mr Flash Crash on Thursday the 6th which I covered in last weeks update (09 May 2010 – Don’t Blink Or You Will Miss The Stock Market Crash!), which placed the Dow in a trading range of 10,300 to 10,600 pending a short-term breakout, that resulted in a recovery high to 10,920, with last Fridays close leaving the Dow at 10,620.

The Dow is clearly showing relative weakness against trend expectations, which reinforces expectations of the Dow entering into a trading range rather then any serious attempt at breaking higher in the immediate future.

Market Psychology – The Flash Crash sent shockwave’s through the market that will last infinitely longer than its 30 minute duration. Clearly the bulls were shocked that the value of their portfolios can out of the blue go up in smoke within a matter of minutes. The bears who had been betting and losing against the stocks bull market as a consequence of their Bear market rally mantra who’s end was always imminent were nearly equally as shocked, in that after all the expectations and losses to date when the sell off actually materialised they weren’t given any time to act on it to monetize on the drop! as it came and went within a blink of an eye, which I have to say I find pretty amusing

As mentioned earlier, bullish sentiment is also further eroded as a consequence of the Eurozone panic where investors are now having to contemplate the unthinkable i.e. a break-up of the Euro, which whilst it may be good for the long-term, is not so good for stock trends for the balance of 2010.

As things stand, market sentiment wise the upper hand is clearly with the bears who despite being wary of being wrong on calling the end of the bull market or bear market rally again, will clearly grow louder in their assertion that yes this time it really is it especially as the Dow revisits the Flash Crash low area.

Implications for stock trend – It implies that the bulls are less eager to buy and the bears are more eager to short. Which does not support an imminent run to new stock market highs, rather an assault on recent flash crash low as being highly probable.

ELLIOTT WAVE THEORY – The EWT pattern has concluded towards a 5th wave peak by early to Mid May as illustrated by the March 23rd 2010 Chart above. Which concludes in an EWT pattern that will seek to correct the whole bull market trend off of the March 2009 low i.e. the most significant correction to date. The normal EWT expectation is for an ABC pattern for a lower C low. Which on face value suggests a break of the 9,870 Flash Crash low, to complete the ABC pattern in advance of the resumption of the bull market trend higher.

TIME ANALYSIS – The current correction will seek to correct the preceding 14 month bull market. Previous corrections within the bull market corrected the preceding trend by approx 1/3rd i.e. the Jan to Feb 2010 and June to July 2009 corrections. This therefore suggest that the current correction could last over 4 months, taking the trend into Late September / Early October, which implies a prolonged period of stock price weakness.

Bear Market and the 1930′s Stock Price Chart Pattern – Every correction brings out these 1930 charts, is it this time ? After all it was not in January 2010 nor October 2009 before then nor August 2009 before. As ever the starting and end points are always moved to fit the price action. At the end of the day fitting past price charts onto the present ONLY works in hindsight and are totally worthless when it comes actually trying to determine and monetize on trends so plays no part in this analysis.

TREND ANALYSIS – The Dow started running out of steam at 11,200 as it entered the correction time window. The trend following that peak has been violently to the downside. This has made the trend extremely volatile which implies that one should continue to expect very large swings from day to day, as the Dow attempts to put in a bottom which at this point implies at the crash low of 9,870. The trend higher to 10,920 whilst strong, only sets the market up for a series of retests of the low.

INTERMARKETS – Whilst the Dow has marched to new highs for the bull market, China’s stock market became stuck in August 2009 and has since moved in a large sideways trading range for the past year between 3,400 and 2,500. The last close at 2696 puts the market near the low which is a sign of relative weakness and does not bode well for other major stock markets to push to new highs whilst China remains weak with a lot of resistance to overcome. Furthermore a break below 2,500 would deteriorate the picture still further, similar weak patterns are exhibiting in other asian markets. This therefore implies a trading range expectation for the Dow for probably longer than the next 2 months.

MARKET INTEREST RATES – The interbank LIBOR market is again showing signs of freezing up as investors dump Eurozone sovereign bonds for safer U.S. Bonds thus driving U.S. yields lower and currencies elsewhere lower. The banks are becoming wary of lending money to one another fearing the level of exposure amongst banks to the EURO!, this is just as occurred with subprime mortgage backed securities but on a much larger scale. This is the hidden story behind the Euro crisis as a Euro triggered interbank market freeze would be far worse than that which followed Lehman’s, which really could trigger a NEW BEAR MARKET. So it will be something that will eventually make it into the mainstream press if the interbank market does freeze again, its something no central bank including the U.S. Fed wants to happen.

This is going to directly feed into high stock market volatility that points to a trend towards the recent lows for stocks i.e. 9,870, probably sooner rather than later.

SUPPORT / RESISTANCE – Volatility has resulted in a wider range of support and resistance levels to keep focused on than has been the case for many months. Resistance lies at 10,920, 11,200 and then 11,260. Support is at 9800-9850. The wide range suggests that the Dow can be expected to continue to trade to both extremes of the immediate range of 10,920 and 9850 over the coming weeks. With the trend in the immediate future targeting the lower end of the range.

MOVING AVERAGES – The flash crash saw the Dow break the 200 day moving average, something that it has not done in nearly a year of the bull run. Furthermore the reactive bounce to 10,920 was more or less contained by the 50 day average. In the immediate future the 50 day acts as resistance and the 200 day acts as support. However I expect the 200 day to again easily give way and subsequently act as resistance which the Dow will need to overcome as it attempts to put in a bottom over the coming weeks.

PRICE TARGETS – Upside price targets resolve towards 11,260 and 11,900 to 12,000. Downside price targets resolve towards 9,800 to 9,850 and then 9,450.

MACD – The MACD is expected to hug the lower end of its range at -100 for the duration of the correction. Most recent activity suggests that Dow may be supported within the next few days for a weak trend higher over the coming weeks as MACD works out its oversold state in advance of another assault on the lows.

VOLATILITY – Market volatility as measured by the VIX spiked on Flash Crash day to 42. Current VIX at 31.24 remains elevated far beyond the sub 20 range of recent months, which is not supportive of an imminent stocks bull run. Usually a VIX of above 30 is supportive of downtrends, which implies immediate term stock market weakness, suggesting that the recent lows of 9872 / 10242 on the Dow are likely to be revisited. There’s also off course the risk of another 40+ volatility spike day so the key message is that of increased volatility following the steady bull run from the Feb lows into the late April peak.

VOLUME – Volume has remained WEAK throughout the rally, which has been one of the main reasons why so much commentary has been bearish during the past 12months. However it is perfectly inline with that of a stealth bull market and also implies that this rally has mostly not been bought into. Therefore I continue to expect heavier volume on the declines and lighter volume on the rallies.

SEASONAL TREND – Sell in May and Ago Away is here in force as elaborated in my March 23rd analysis. Weakness from a seasonal prospective could continue into September, with a possible low in early October followed by a sharp rally into December. Therefore the seasonal trend continues to match the actual chart trend. The Seasonal pattern is also virtually identical to Time Analysis.

PRESIDENT CYCLE YEAR 2- The impact of the 2nd year of the presidential cycle on the stock market is for a weak trend into September, and a rally in the fourth quarter into the end of the year for a small average gain for the year, which is starting to match the most probable outcome for the year.

Stock Market Conclusion

Despite the flash in the pan crash and prevailing Eurozone sovereign debt default gloom and doom, the bottom line is that this is still a stocks bull market with the Dow ONLY down less than 6% from its bull market peak. Therefore the sum of the above analysis concludes towards the stocks bull market under going its most significant and a highly volatile correction since its birth in March 2009 (15 Mar 2009 – Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470 ). This correction could last for several months and may extend all the way into early October, which suggests that the next 2 months are going to see an ABC correction to be followed by a sideways price action between the extremes of 10,900 to 9,800 and so despite continuing wild gyrations I would not be surprised if the Dow is little changed from its last closing price of 10,620 in 2 months time (16th July 2010). Expectations remain for the bull market to resume its trend towards a target of between 12k to 12.5k by late 2010 after the tumultuous trading period over the next few weeks. I have tried to illustrate a more precise Dow forecast projection in the below graph, reality will probably end up being far more volatile.

My next in-depth update will follow in about 2 months time with regular short weekly updates, so ensure your subscribed to my always free newsletter.

Risk to the Forecast – As indicated the support zone of 9,800 to 9850 should hold on repeated assaults, failure there would risk the Dow falling to just under 9,500 which would greatly weaken the scenario and prompt an in-depth update. The obvious trigger could be if European countries actually do start to default on their debts over the next 2 months which would result in a REAL stock market crash as we enter another Lehman’s style contagion event where governments are forced to bailout their respective banking sectors that can only result in an acceleration of the Inflation Mega-trend.

Gold and U.S. Dollar Inverse Trend Myth Busted

Do you hear the deafening silence amongst the U.S. Dollar doom merchants ? Remember when you were being repeatedly and relentlessly told that it was impossible for the U.S. Dollar and Gold to BOTH Rise together ?

It was either Gold will Soar, and the Dollar will Crash, or that the Dollar would rise and Gold would Crash, but never that Gold AND the Dollar would rise together.

Well that’s another market consensus myth well and truly busted, and there is little point now AFTER the fact, AFTER Gold and the Dollar have already risen to come to the realisation that okay Gold and the Dollar could rise together.

Gold is on track to achieve its forecast target of at least $1,333 this year (sooner rather than later), whilst it has traded to a new all time high in dollars, that’s nothing compared to the levels seen Gold soar to when priced in sterling and euro’s. My in depth analysis (02 Nov 2009 – Stocks, Dollar and Gold Bull Markets Inter-market Analysis ) concluded in strong bullish trends for Stocks (9,712), Gold ($1046) AND the U.S. Dollar (76.36), which prompted many emails and comments that my analysis must be wrong as there existed a strong consensus view that Gold, Stocks and the Dollar CANNOT Possibly ALL move in the same direction. Well more than 6 months on, that is another market consensus myth well and truly busted, with many now concluding AFTER THE FACT that perhaps Gold and the Dollar COULD both rise together after all, since which both Gold and the Dollar have appreciated markedly.

The US Dollar bull market has already achieved its long standing target of USD 84, and is on route towards resistance at 89 which I am sure will puzzle many americans reading this as they full well know of the huge amounts of debt that the U.S. Government is busy issuing to finance its own budget deficit, this is the advantage of having the worlds reserve currency and as a consequence of Countries such as the UK and Eurozone adopting panic measures to INFLATE their economies and DEVALUE their DEBT through competitive currency devaluations (See Inflation Mega-trend Ebook – FREE DOWNLOAD ). It increasingly looks like the U.S. Dollar far from crashing as many have iterated during its stealthy rise, may in fact just be getting warmed up for what is to come as the Euro targets PARITY to the Dollar Yes that’s right PARITY ! I will seek to update the U.S. Dollar bull market trend to cover the next 6 months within a week or so.

Your existing outside of the box analyst looking to pick-up cheap long-term investments during market panics.

By Nadeem Walayat

http://www.marketoracle.co.uk

Last week was amazing for both gold and index traders as gold surged higher and the SP500 tested a key resistance then fell 4% in our favor. The past couple weeks with the mini market crash and Euro issues making the market extra volatile both gold and the broad market (SP500) index has been wild.

The added volatility makes trading more difficult because price patterns become less predictable and price movements are much larger increasing risk for traders.

Below are the charts & videos of what to look for in the coming days…

GLD – Gold ETF Trading

Gold continues to trend higher at an accelerated rate. Friday we saw gold pullback and test a key support level then bounced to close in the middle of the days trading range. As you can see the trend line support has become very steep and once the trend line support is broken I figure there will be a sharp drop to digest the recent rally.

SLV – Silver ETF Trading

Silver popped and tested a key resistance level from a previous high as expected. It also tested the top of its trend channel providing even more resistance. This week will be interesting as we wait to see if precious metals have a small pullback or continue to rally.

SPY – SP500 Index ETF Trading Chart

This chart clearly shows what I think is about to unfold by looking at the past market drop. Because of the mini market crash triggering everyone’s stops already I figure we have made the low and the dip we are seeing now will drift down a few more percentage points then bottom out

ES M0 – SP500 Mini Futures Trading Setup – Pre-Drop

Below is a chart of the SP500 which we shorted or bought the SDS bear etf trading fund last week looking to profit from a falling stock market. As you can see from the chart we saw the es mini contract drift into a key pivot point on light volume. What this means is that a large group of sellers will be waiting at that price, and because volume is light we know there are not many buyers at this price level. Simple supply/demand comes into play with more sellers causing the price to stop rising and eventually force the price lower which is what we were anticipating.

The green arrows show key support levels on the 60 minute chart where 1/3 of a position should be taken of the table to lock in gains which also reduces overall risk on the trade. Once we cash in the first 1/3 of the position we move our protective stop the breakeven which is the entry point for the remaining portion of our position. This turns the trading into a winner no matter what happens allowing us to enjoy the ride…

ES M0 – SP500 Mini Futures Trading Setup – Current Price

Here is the same chart 24 hours later showing both of our profit targets triggered pocketing 2/3rds of our position for a very nice gain. Depending on the type of trading vehicle you traded there was potential to make up to 150% return in less than 24 hours.

We currently hold 1/3 of the position left with a loose stop allowing the trade to mature incase the down trend continues for several days or weeks. If not and the price rallies then our stop will get triggered for small profit on the balance of the position. Either way we win.

Pre & Post Market Correction Video: http://www.thegoldandoilguy.com/articles/sp500-market-correction-trading-videos/

Stock Market ETF and Futures Trading Conclusion:

In short, the market is trading on increased volatility making it difficult to find low risk setups. At the moment we are long gold and short the SP500 with both position deep in the money. All we can do now is manage our positions to make sure we maximize our profits.

If you would like to Get My Trading Signals be sure to check out my services at: www.TheTechnicalTraders.com

The UK election politicking is over, Britain has a new ConDem government led by David Cameron of the Liberal Democrats and Nick Clegg of the Conservatives, or is the other way around, hard to tell these days.

The coalition government parties have publically locked themselves into a 5 year death embrace. They had no choice, as their honey moon period will soon evaporate as the government has no choice but to implement swinging spending cuts and mega-tax rises such as VAT to 20% to fill the 25% black hole between what the government spends and what it earns in revenue which will soon ensure that the ConDem government is destined to become the most hated government of the past 50 years!

The ConDem strategy is clearly to survive the painful years of 2010-2012 and then engineer an election boom into 2015. If the coalition disintegrates during the pain years then that would likely result in a Labour landslide victory.

The pressure is now completely off of Labour who succeeded in killing two birds with one stone (12 May 2010 – Gordon Brown Mission Accomplished, Labour General Election Plan a Magnificent Success). Labour are now FREE to go on the offensive and play mischief as their strategy is clearly to systematically rip the coalition government apart that I would be surprised if it does not disintegrate within a year. It is just not manifestly workable for a partnership between left wing and a right wing parties to survive.

Stock Market – The stock markets are flipping from one day to another from flash crash to flash bounce back to flash crash, it’s difficult enough to know what’s going to happen tomorrow let alone further out, still my Sunday’s newsletter will attempt to conclude towards a stock market forecast trend for the next 2 months.

Gold / Dollar

Gold and the dollar continued their bullish dance as a consequence of TREND.

British Pound

Ended the week weak at £/$1.45, still targeting a sub £/$1.40 low.

Euro Blood Bath

The Euro continued its slide right into the end of the week closing at 1.2358, down 10% in less than a month. My early week analysis (11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt) speculated that the most probable outcome is for the Euro splitting into two which basically means Germany would stand on its own.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

Everyone’s dumping the Euro and European stocks, time for selective accumulation into Germany? Remember, Panic and Crisis breed opportunity!

By Nadeem Walayat