Stocks were mostly lower last week but rose Friday, Nov. 16,
when U.S. political leaders expressed optimism that a deal to avert
the fiscal cliff is possible.
Trend may be determined by answer to 'What
What if the tax increases and spending cuts associated with
the fiscal cliff are allowed to take place? Stocks fell last week
as traders pondered this possibility. What if Congress and the
president can reach a deal and avoid the cliff? We saw stock
prices move higher when this scenario became a possibility in the
minds of traders. The long-term trend in stocks may be revealed
when one of these two questions is answered definitively.
Despite a 0.49% gain on Nov. 16,
SPDR S&P 500 (
was down 1.3% for the week.
PowerShares QQQ (
, an exchange-traded fund (ETF ) that tracks the 100 largest
Nasdaq stocks, fell 1.78% last week and is now down more than 5%
in the past four weeks.
ProShares UltraShort QQQ (
, an ETF that goes up when the Nasdaq 100 goes down, was up 3.5%
last week and is up 13.52% in the past month. The chart shows
that QID has now reached itsprice target . The ETF has been
overbought for most of the past month and a smallbearish
divergence developed in thestochastics indicator last week. A
short break in the strong uptrend for this inverse fund is now
With stocks generally higher the week of Thanksgiving and
trading shortened for the holiday, now seems like a good time
to book aprofit in QID. We may buy this ETF again very soon,
but there is a good chance stocks will see a short-lived
recovery before a downtrend resumes.
Based on the high probability of a short-term rally,
aggressive traders should buy
ProShares Ultra S&P500 (
. This is very likely to be a short-term trade lasting one to
three weeks. In the past, when the S&P 500 has become as
oversold as it is now, buying SSO has been profitable 78% of
the time (7 out of 9 times). On average, SSO has gone up an
average of 5% three weeks after this buy signal.
Recommended Trade Setup:
-- Sell QID at themarket price (at Friday's close, this
trade showed a 17.8% profit since it was opened on Oct. 8)
-- Buy SSO at the market price
-- Set stop-loss at $53
-- Set price target at $57 for a potential 4% gain in 1-3
Gold sold off with stocks again
The strong correlation between gold and stocks was apparent
again last week when
SPDR Gold Trust (
fell 1.16% for the week.
Global X Silver Miners (SIL)
also broke down and fell below the stop-loss set for that
trade, resulting in an 8% loss. For now, it is best to wait for
a trend to develop in gold.
TheBollinger Bands have been narrowing, a sign that
increased volatility is likely soon. The stochastics indicator
is bearish, but the downside price target is $163.40 based on
the lower Band, less than 2% below the current price. A
decisive break below that level would lead to a short trade
opportunity. A reversal from that level could be a buy
Gold might stay in a narrow trading range for some time.
Long-term concerns aboutinflation are likely to support gold
near current levels, but fundamentals do not support
significant short-term gains in the metalsmarket .
Inflation is low in developed economies around the world:
2.2% in the United States; 2.5% in the euro zone; and 0.3% in
Japan. Until the pace of economic activity picks up, inflation
pressures are unlikely to build. Global tensions, especially
the potential for war in the Middle East, could become a factor
in the gold market, but for now, traders should wait for the
news to change and enter the market when a trend develops.
Action to Take -->
Withearnings season set to wrap up, negotiations in Washington
as the fiscal cliff nears are likely to dominate the news. An
agreement or a breakdown in talks can come at anytime and
traders need to be ready to react. Based on last week's market
reactions, expect a short-term price rise if any kind of a deal
is reached and a sell-off if negotiations collapse. The
short-term reactions make trading difficult in the near term,
but the long-term trend in stocks is down.
This article originally appeared on
Market Outlook: This Trade Wins 78% of
the Time in an Oversold Market