NB Charts: Many Potential Setups for Year End

The S&P 500 has been stuck in a narrow trading range for 14 trading days. The last few consolidations like this have led to rapid advances in short bursts. You also have Crude Oil and several other Commodities in multi-week consolidations and Gold in a vertical rise of panic buying.

Needless to say, a lot can happen between now and the end of the year, so this is a very comprehensive and long post. I cover a lot, but I think these charts indicate how I will be positioning money over the next 4 to 6 weeks, if the big boys show up to push prices higher into year end.

Here is the trading of the S&P 500 over the last 3+ months (Hourly Chart). There have been three rallies and three consolidations. Breakouts from the consolidation have been accompanied by breakouts in the RSI(14). This has been the flattest of the three consolidations, which tells me that the big boys just weren’t interested in selling. There is a pretty obvious entry point on this chart.

Do you see why I consider this to be a trader’s market? In October, price on SPX went from 1,020 to 1,100 (+7.8%) and then back to 1,030 (-6.4%). That’s nasty. A 6.3% drawdown in 7 trading days is brutal.

Here is the daily chart of SPX. I have highlighted the three consolidations. I want in if SPX breaks out.

Gold (GLD)
I started to sell some of my Gold stocks. They have had some impressive runs and I have moved out of some extended names and into some new names breaking out of bases. I’ll get to them in a minute. First, I wanted to look at a longer term chart of the Gold ETF (symbol GLD).

In late 2007, GLD broke out of an 18-month base and went vertical. In November 2007, GLD hit the +20% band above its 200-day (Red Line and Red Arrow). At this time, RSI(14) got up to about 80 (Green Vertical Line). This is normally a zone of being so overbought and stretched above a key moving average that a pullback or consolidation is to be expected. RSI (14) measures Momentum and often peaks before the final peak in price.

GLD sat around for 6 weeks and then started another leg higher. On this second rally, RSI (14) put in a lower high. Price then sat around for only 3 weeks (Secondary Bases are normally shorter than the first) and then GLD had its final rally of the move. On this rally (Black Vertical Line), ADX shot up to and peaked at over 50. ADX measures the strength of the trend and ADX at over 50 is where trends go to die.

Look where GLD is now. ADX is only at 27! But RSI (14) is at 82 and price is +20% above the 200-day. It has been a heck of a run, but I am looking for a near term pullback in Gold. I will be selling some here. I think the easy money has been made and will look to reload on a breakout of the next base or pullbacks into the 50-day or the +15% Band (Blue Line).

RGLD has rallied 25% in a month and ABX is up 35% in about a month.

While SSRI and GFI are just starting to break out of bases. It is easier for me to play defense on SSRI and GFI if things turn unexpectedly sour. I am also looking closely at Anglogold Ashanti (AU).

Crude Oil ($WTIC)
Crude Oil has been sitting in a narrow trading range for 7 weeks. It has stalled out right below the 38.2% retracement of the Bear Market (who says that the computers and their Algorithms aren’t driving trading in 2009…). It tagged the uptrend line on Friday’s Dubai panic (Red Arrow).

RSI(14) has stalled out for the last 6 months at 60. RSI doesn’t stall out at 60 – it either breaks to 80 or 90, or collapses back to 30 or 20. A big move is coming! Hopefully soon…

ADX is now at 16 (Black Arrow). I keep telling you how I run screens to find stocks that are basing. I like a reading of 15 or less for ADX, but will take a reading of 16 on the weekly chart…

I sold my USO (Crude Oil ETF) yesterday. I’m not worried about missing out on a dollar or two. I will be heavily invested in Crude when it does break out. I may also be heavily invested in the short of Crude if it breaks down. I expect a very dynamic move in the not too distant future and I want in! That 50% level sure looks like a magnet on the upside (Green Arrow), as does the 200-day (Blue Line) at $66 on the downside.

During the time Crude Oil has been in a trading range, Energy stocks have also been consolidating. Large Cap Energy (XLE) has been consolidating right on top of its 50-day and has a fairly obvious entry point, while the Energy Explorers ETF (XOP) has been consolidating below the 50-day.

Normally, the smaller Exploration companies have more volatility on the way down and up, than the large Energy companies. I expect the Energy stocks to move out of their bases (either up or down) at about the same time as Crude Oil. The higher octane way of participating in the moves of Energy Stocks is DIG/DUG, but the SEC frowns upon owning leveraged ETF’s for anything more than a “Day Trade”. Buyer beware!

The Agricultural Commodity ETF (DBA) broke out of its recent trading range today. However, the action was weak and DBA actually closed below its opening trade of the day. That said, it still definitely has my attention.

The Total Commodity Index ETF (DBC) is the textbook example of why I wait to buy breakouts. Remember what I have been telling you since I started this blog – stocks tend to make big moves over short periods and then sit around for a long time, before either reversing or reinitiating their trend in another violent move.

The big moves on DBC have only taken a few weeks (Parallel Green Lines) and the consolidations have taken a few months (Blue Lines). I expect the next move on DBC to be pretty violent and if the big boys show up and buy it hard tomorrow, then I will be interested. Today’s action was pretty lame.

Take a look at how Gold has traded over the same period versus DBC and DBA. Which one would you rather own? GLD has been a core position for a reason!