Saturday, January 31, 2009

Road map revisited

I am still short and waiting for another few scary down days before I close my shorts and start getting ready to go long. Here is a potential road map for the S&P 500, which I am not trading, but rising and falling general market conditions are important to be aware of when trading, as individual stocks and sectors always have an easier time when swimming with the current instead of against it!

Here is a recent example in history of such a correction in the S&P 500 one year ago:

The chart patterns aren't and won't be exactly the same but this is a rather common correction pattern in stocks and I suspect a rhyme is coming. The current correction simply hasn't lasted long enough to be complete in my opinion. This has nothing to do with fundamentals, but the bear market crash we just has this fall is worth at least a 4 month correction to work off the excess bearishness, restore some investor hope, and give the downward trend a healthy breather.

We may overshoot the November 2008 S&P 500 low of 750 by a few points just to draw in a few overly aggressive bears who think we're going straight to zero. The people going short near the bottom of this correction will actually help fuel the subsequent rise when they cover their short bets gone wrong (this is why a ban on short selling is a paradoxically a bad idea, by the way).

Things I'll be looking for to help confirm we're bottoming and getting ready to launch upward:

1) RSI down to 30 level/range on a daily chart of the $SPX
2) Put to call ratio ($CPCE) should reach or exceed 1.10 on a daily chart
3) The Volatility index ($VIX) should reach or exceed 55

Once these conditions are met, I'll be looking to close my put option contracts on NEM and KSS and preparing to go long. When I do go long, it will be using call option contracts on Goldcorp (GG) and Royal Gold (RGLD) predominantly, though I may nibble on a few other gold miners. Gold stocks will outperform the S&P 500 significantly during this pending spring rally. I think a 50% gain in the ETF GDX from the bottom of the current correction, which should be completed in 1-3 weeks, is all but guaranteed (a few individual gold stocks will go up 100% or more). The best part is that it will only take 2-3 months to make these types of gains.

Wikinvest Wire