Meltdown Catalyst
Research for Online Investors

by John Dalt

4/15/11

Doom and Gloom seems to be rampant around the market, maybe that is why I can’t get a feel for the next move.  Almost everything I read predicts the market wants to move lower to test support.  This would normally cause my contrarian streak to look at the bullish argument.  If everyone thinks the market has to move lower, it will most likely move higher.

This happens because some traders try to anticipate the market move, and short it.  When they get caught in losing trades, covering their shorts adds buying pressure to move the market higher.  The market also lacks supply of stocks to sell, as weak hands have sold in anticipation of a downturn.  Those holding stocks are not anxious to sell, so buyers have to bid the prices higher and buy on the ask price.

The market is sitting at the 20 and 50-day moving average, the next support looks to be in the 1280 range, but is that all there is?  Are we looking at a quick dip and dash, “clean out the cash” type dip or is there something worse ahead of us?

I rode motorcycles when  I was younger.  I spent a lot of miles on a Harley Davidson Chopper, yeh I was one of “those” guys!  I didn’t belong to any of the infamous biker gangs, but could have passed for one of their members.  Luckily, I survived my youth with little damage except road burn and a few scars.  But, I still think of the time spent rolling down the freeway with the wind in my face and not a care in the world.  Never aware, or caring, about the danger that could lay ahead of me.

I read an analyst this morning that asked, “What if?”  What would happen to the world economy if the Middle East sinks into a cauldron of turmoil and oil shoots to $140 or $200 a barrel?  What if the Chinese raise interest rates one more time (they have already raised them four times in the last six months) and their economy stops rather than slows?  What if Bond Vigilantes show up at U.S. Treasury auctions, absent the Fed, and interest rates pop 200 basis points in one week?  What if Greece burns investors for 50%, and bond holders sell all Euro denominated bonds?  What if the U.S. economy slows because of one of these events, and the Fed rolls out another bigger and improved QE3?

I could go on with the “What if?” questions, but you get the idea.  The scary thing is, these are just the questions that come to mind immediately.  What about the ‘game changer’ events that could happen we don’t even know about now?  Look at this chart of the S&P 500 for the last three years.

The 200-day moving average is at 1207.  This is a popular reference that many investors look at for support.  You can see the market has been above the 200-day moving average since last September when the Feds intentions to spend $600 billion on QE2 started influencing the market.  We had traded close to or below the 200-day average since the middle of May after QE1 ended on March 30th.

The market had traded above the 200-day average since July of 2009, when the first monetization of debt by the Fed finally took hold to lift equity prices.  We don’t think the end of QE2 is the end of the world, but combined with another calamity, the combination could trigger equities to seek support.

Also, please notice the declining volume shown at the bottom of the graph.  Recently we have set records with the lowest volume of the year, drying up liquidity.

We have drawn two horizontal lines on the graph.  The top line is at 1192, this is the 23.6% Fibonacci retracement of the market rise from the market low in the first week of March 2009 to the high reached in Feb. 2011.  The lower line is at 1092, the 38.2% retracement for the same period.  Who is Fibonacci?  Leonardo Fibonacci was a 13th Century Italian mathematician credited with popularizing the use of the Arabic numerals 1-9 as opposed to Roman Numerals.  He also studied the sequential repetition of numbers.

We don’t know what we don’t know, but we do know that markets cannot go up forever.  Sooner or later, an event or group of events will combine to create a perfect storm.  Investors will make individual decisions to exit the market or at least reduce their holdings.  Fear will take over as stop losses are hit and more selling occurs.  The market always seems to overdue it, and the 200-day moving average may look like a welcome point of resistance to build to, rather than a distant point of support.

Today’s letter is not intended to scare you, but to wipe away some short-term haze that we all may be suffering from.  Make plans now.  Understand what is possible.  Don’t be confused by the probable near term for the possible long term.  Be on guard.  The VIX fear index is trading at unbelievable 52-week lows.  We are all being lulled into a sense of well being that can be dangerous to your financial health!

Of course, I wouldn’t hesitate to recommend any of our premium services to help you with timely moves to protect and profit from the market.  That is our Job #1 with all that we do!

Gold has been in a strong bull market since 2001. The pace of that upward trend increased beginning in mid-2005. Following the financial crisis of late 2008, gold once again increased the pace of its ascent. Currently, gold is making new rally highs and has more than quintupled in price during its ten-year bull market. Today's chart shows gold is approaching long-standing resistance (red line) of its accelerated trend channel.

Chart courtesy of www.chartoftheday.com

The Mailbag:
Do you use LEAPS options in the Buy, Sell, Hold service?--subscriber D.T.

John's reply:  No, we sell covered calls expiring in the next 90 days exclusively.  Thanks for your interest in the Buy, Sell, Hold service, come on in, the water is warm and the profits are great!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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