SPY is breaking down from its descending triangle pattern, hitting another closing low for the year today. Intraday charts remain volatile with ridiculous price swings, which are bearish in nature, and all signs point to continued downside. Undercutting this month's previous lows is a sell trigger and the downside could continue for days to weeks.
USO continues lower as oil sells off further, ignoring the 1.5 million barrel cut in supply by OPEC on Tuesday. Selling on news like that shows the demand destruction going on in crude right now. Oil is also being led down by a strengthening dollar, against which crude is a hedge. However, I see oil's steep decline bottoming out within a couple weeks as investors' mindsets switch from the present to the future with the upcoming Presidential elections adding optimism and hope. Geopolitics heating up will also be a catalyst for oil prices to bounce, as the Iran/Israel conflict becomes increasingly imminent and as Russia and Venezeula start turning up the heat on foreign affairs. Also, with Barack Obama having such a commanding lead in the Presidential race right now, John McCain and the Republican Party will definitely attempt to make foreign affairs a big deal again in the minds of Americans, which would help oil prices rise. Most importantly, however, the US Dollar will start declining again against other currencies, as other countries start recovering from their liquidity crises. The dollar has been on a strong tear lately as other countries begin their interest rate reduction cycles, but there is no fundamental strength to the US dollar, it is all relative strength. And with the US Federal Reserve set to cut interest rates another 50 basis points tomorrow, the US Dollar should start declining again after a terrific run, and that will also lead to increased crude prices. Nevertheless, oil remains in a downtrend and is set for more downside, but a reversal is likely within the next few weeks.
As the dollar goes up, oil goes down, as do all commodity and energy stocks. Stocks like Potash Corporation of Saskatchewan (POT), Peabody Energy (BTU), and Sandridge Energy (SD) seem ready to break down further from their already historic sell-offs. SD is ready to break down from a descending triangle, which could send the stock to under $7 soon. This from a stock that was $70 just this past summer.
BTU is at an important support level and further selling from here could result in a strong sell-off.
Alternative energy stock also are tied to oil prices, and First Solar (FSLR) and LDK Solar (LDK) are potential short candidates if oil continues selling off. FSLR is breaking down from a symmetrical triangle and hit a new closing low for the year today.
LDK is bearish on multiple timeframes, and is breaking down from a large descending triangle, breaking a vital support level just days ago.
Financial stocks look very weak right now, and the Ultrashort Financial Proshares ETF (SKF), which acts 2x the inverse of the S&P Financials, is in a very bullish pattern, suggesting lower prices ahead for banks and insurers.
Goldman Sachs (GS) is among these potential short candidates, as it delicately sits on the support line of a descending triangle, ready to break down hard. GS could be under $75 within ten days if this support line is breached on strong volume.
Morgan Stanley (MS) is in a similar situation as GS and could be trading under $10 in no time.
Citigroup (C) and UBS AG (UBS) hit new closings low for the year today and seem to be breaking down as well.
Last week I mentioned Bidu (BIDU) as short candidate with earnings coming up, and it has sold off about $70 since then. It is poised to move even lower, as it continues its breakdown from its large descending triangle. China has been hit very hard by this financial crisis, as well as its own domestic issues, and cyclical tech stocks are the first to fall in recessionary conditions. All the stars are aligned for this to be shorted. Highly liquid American tech stocks, like Apple (AAPL) and Google (GOOG) also look very bearish, as they tend to move big and marketwide selling pressure can bring these stocks down hard.
The Volatility Index (VIX) is consolidating near its highs, suggesting higher prices ahead for it, and lower prices for the market. It closed near its high of the day today, giving support to the idea of further downside for the market.
Keep in mind that there has been a lot of buying pressure lately at these oversold prices and that if there isn't strong selling pressure with both price and volume expansion to confirm breakdowns from these triangle patterns, the triangles could wuickly turn into falling wedges, which are bullish. I believe the market is headed lower in the short term but that if there is another breakdown, it will be weaker than the crash of a few weeks ago and that it will lead to an intermediate term bottom.
The best investments right now are ultrashort ETFs, like SKF, Ultrashort S&P 500 Proshares (SDS), Ultrashort FTSE/Xinhua China 25 Proshares (FXP) (which acts 2x the inverse of the Chinese stock indices), and Ultrashort MSCI Emerging Markets Proshares (EEV). These go up big when markets sell off, and they ahve already been having 20-30% up days in recent trading sessions.
Betting against the market seems like the way to go here, but with the Fed meeting tomorrow, anything can happen, and I do believe a bounce in the market will be coming in the next few weeks, whether it follows a second breakdown or not.
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