Most people know that stocks are 70% driven by institutional buying and selling, whether that's hedge funds, mutual funds, etc. As such, these large institutions have the same exact charts to look at as we do. So, they are placing the same type of automatic stop orders and buy orders around the same prices that we do (just about anyway).
Now, when the markets hit these levels (either rallying up or sinking down) all these orders get triggered. The problem is that most of the orders coming in are not "limit" orders meaning that they wont take just any old price. Instead, the orders are "stop" orders which means that once they are triggered they become market orders and are filled at the next available price (bid or ask). So, when all these stops get triggered at once, they compound on each other and drive the market up or down very fast. This is one of the main reasons (not the only of course) we have been seeing such huge volatility.
If you take a look at the DOW over the last five days, you can see that there have been some huge swings and people have both made and lost fortunes just in these five days. Thursday and Friday set in a fairly important line of support shown below. A break below this would spell disaster for the bullz. However, it also serves as a support line being as its the mid-point of the bullish engulfing pattern from Thursday. Either way, it should move very quickly next week.
On the S&P we continue to be caught between support and resistance. I closed out of my SSO calls after the huge rally yesterday at very healthy profits and intend to stay out of any index ETF's until we either break below or rally above these lines.
Oil is still getting hammered on demand concerns, but it's getting a little ridiculous. Think back to the oil "boom" (if you even want to call it that) and how everyone was saying that oil was going to $200 a barrel. Well here we are all the way down below $60 and now everyone is saying that it will be at $50 or even $40 a barrel. Well, I think that its all a bunch of non-sense. I think in the short run (a couple weeks or months), oil will be back around $80 or higher.
The Morgan S. commodity index shows just how much things have fallen. These trends are not realistic and will break sooner than later at these levels. If a base is forming here, it could head back up to 600 over the next month or so. A break below would take it around 300 or lower.
One way to play the commodities is through the DBA powershares. Notice how there is a nice inverted head-and-shoulders pattern forming. If this breaks above the neckline around $27.50, it would be a great buying signal.
ADM still remains my favorite short right now. It continues to run up but has yet to close above the recent highs. Moreover, all the long upper shadows tell me that this stock is rejecting higher prices. My stop is above the highs from today and I'm looking for this to break its short term trendline and head to $20 or so. Also, in the context of the overall market, this stock has risen when the market falls and if we are in deed in for a rally anytime soon, this should be one of the first to fall.
CMI is shaping up to be a good long candidate. It's sitting nicely on Fib retracement levels and is way over-sold (for good reasons in this economy). Again, if we do get a nice rally, then CMI could enjoy a quick run to $30 before resuming the downtrend (which I think is the LT fate of this stock).
Finally, my CAL short call last week was great. I'm just upset that I sold out too early and left tons of money on the table. I bought puts the day of the blue oval and sold out at a nice profit when the stock was south of $15. Wish I could have held on longer...
Okay, that was an amazingly long post today. I hope next week is a little more clam but I'm sure it wont be. I hope everyone has a great weekend!
