2/8/2010 - A look at the Euro

The Euro has been absolutely pounded because of the default fears over Greece and other European countries.  This "crash" is reminiscent of the 2008 financial crisis, and as long as the Euro falls against the dollar, US equities will continue to fall.  What's troubling is that the eur/usd chart has broken the 360 MA.  However, I do see a temporary bottom based on the reversal candlestick pattern, and we could see a sharp rally to re-test the 50 EMA soon.  This would give a chance to dump long positions. 

Selling the next bounce

Market decided to rally shortly after touching the 200 day EMA, giving a long tail on the candlestick formation otherwise known as the hammer.  The hammer is bullish, so I am expecting a higher chance that the earlier part of next week to be up days with light volume.  Any upcoming rallies will be opportunities to sell existing longs (keep a couple strong positions like AAPL, GNW, etc) and establish SMALL short positions or just STAY CASH.  The SPX has crashed through major support at 1,115 and 1,085, and these will now become key resistance areas.

There's a couple reasons on why it's crucial to scale in small short positions or stay cash.

1.  This a fakeout before reaching new highs.  In this case cover shorts as soon as the 50 EMA does not hold.

2.  Worse yet, consecutive fakeouts while the market trades within a channel.  This occurred in 2004 as the US emerged from the 2000 - 2003 recession. This zig zag scenario is a very likely for 2010, but no way to be certain.  Trading this kind of a market is extremely difficult, as it takes both patience and additional forms of analysis.  By strictly using the 2050 EMA rule, your account would take considerable hits from the fake outs. Nevertheless, it still can be done.

• The safest way to play this is to not play it at all - stay cash, or invest in stocks with great fundamentals and sell covered calls.
• Use channels once the first high/low swings are formed.  Sell/buy according to the top/bottom of the channels.  If the shorting at the upper channel and movement pierces to the upside, cover immediately.  Vice versa.
• Use the 20/50 EMA rule, but enter positions strictly at the 20 or 50 EMA during the BACKTEST after a trend break.  Get out immediately if the position doesn't go your way.  Wouldn't recommend holding more than 2-3 days.
• Out of the 3 options, I believe staying cash or selling covered calls will be the best play.

2/5/2010 - Noon Report

Market selling off on HIGH volume.  Big players want to get OUT.  Hedge funds are SELLING.  Do not think this is just another dip.  The trend has already reversed.

Remember:

1.  Don't catch a falling knife.  Every bounce so far has been sold off.
2.  Do no average down in a downtrend.
3.  If you absolutely must enter a position, do it at the end of the day, minutes before the close.
4.  OVERSOLD CAN BECOME EVEN MORE OVERSOLD.


You do not want to be the bag holder weeks or months from now.  More updates to come after market closes.

TREND REVERSAL

Thursday's action has officially put an end to the uptrend.  20/50 EMA cross over, VIX crossover, SKF and short ETFs broke out decisively from the 50 EMA.

U.S. Steel (X) - Short at $55

X is a great trading vehicle, and it looks to be the high has been put in for the year, unless it can break and hold $55.  X is heavily damaged from last week's high volume sell off, and I believe it has more room to go down.  Wait for the gap fill at $55 to short, although entering at $54 may not be a bad idea.  $43 will be key support so pay extra attention to that area.  Weekly chart suggests a right shoulder may be forming.  If $43 breaks, target to cover will be in the low 20's. 

PALM - Short @ 13.40 - Revisited

Initiated a short at $13.40, covered too early at $12.60.

SPX - Bearish

Bulls were crushed last week on high volume as basic materials and tech retraced hard.  The downtrend is almost confirmed - wait for the major indices to retest the 50/20 EMA and sell half of long positions and use those funds to add to short positions.  The trend has been severely damaged and I do see a continued sell-off to anywhere from 970 to 1050 once the 20/50 EMA is tested.  Do not be attached to any stocks.  It's time to take profits since the trend confirmation from April last year.