Archive for the ‘Stock Recommendations’ Category
In my entry of March 7th I stated that if the lower uptrend line of the indicated chart pattern on the Q’s was violated then that might be the beginning of an intermediate term market correction. That line was violated and we are now in a full blown market correction. The question then is how low can the market go and how long can this correction last for.
We might get a hint from looking at the VIX. The VIX has been in a downtrend since it’s November 2008 top. If we connect that top to the May 17, 2010 top we have a well defined downtrend line. A VIX rally to that line would bring it to about 35. The VIX hit a high of 31.29 today. Therefore if the VIX hits 35 or trends downward from this point there is a chance the correction may be nearing an end. A VIX break above 35 would not be a good sign for the markets.
How can a movement in the VIX be equated to the price of the S&P? That is not a straightforward calculation. From top to bottom, the S&P dropped 30 points or 2.5% while the VIX went up 10 points or about 46%. If this relationship holds up, then a VIX move to 35 would equate to about a 1% move down in the S&P yielding a low of 1243. Right now the market is being driven by news in Japan. The quicker things are resolved there the sooner the correction will end.
I wouldn’t be surprised to see a relief rally take us to about the S&P 1300 area followed by a final leg down. It may turn out that this year is buy in May and have a nice day.
On February 26 I recommended CNX (Console Energy) based upon the rising price of oil. The problems in Japan have given the stock and other coal producers a boost as Japan will now have to import a lot of coal to generate electricity. Both technically and fundamentally CNX looks like a good long term hold.
The Japanese nuclear reactor problems are the second major energy related disaster that has happend within the past year. The Gulf Of Mexico still has not recovered from the BP explosion as there is oil on the bottom that is killing off the low end of the fish food chain. Therefore over the longer term I would expect alternative energy sources such as wind and solar to start gaining traction.
At this point in time it is unclear how long the problems in the middle east may continue and to what degree they will affect oil prices but it does not appear that the situation there will be resolved quickly. I do not agree with some of the talking heads on CNBC that are saying $100. a barrel is not sustainable.
Libya provides 75% of the oil to Europe and theirs is of the highest quality. Saudi Arabia has stated that they would move in to fill the gap but Saudi oil is of inferior quality and it is fairly well established that they have been exaggerating their quantity of oil supplies for years. In any event there may not be enough refining capacity to correct the problem in a timely manner as Saudi oil requires a lot more refinement than does Libyan oil.
When you throw China and India’s voracious appetite for oil into the mix we should expect higher oil prices regardless of what happens in the middle east. So far it does not appear that current oil prices will affect the U.S. economic recovery. The situation should be closely monitored, however, because we know from 2007-2008 that if oil spikes to $150. a barrel it is definitely going to affect the U.S. economy and in a negative way.
With oil prices almost certainly heading higher, alternative fuels such as natural gas and coal will become more important at least in the short term. A stock you may wish to look at purchasing is Console Energy, symbol CNX. This company has both natural gas and coal assets.
The chart pattern on the stock looks extremely bullish as it has formed a 1 year cup and handle and appears to be breaking out of the handle right now. There was a large volume purchase at $45., the bottom of the handle, and this appears to be the pre-cursor of higher prices. March or April near the money call options should also be considered.
Technically the stock could hit $78. based upon the chart pattern but a quick spike to $55. or $60. does not seem unreasonable. A trailing stop should be placed at $45. or just under it and should be moved up if the stock moves up.
It might also pay to purchase either USO or USO call options (United States Oil Fund) in order to capture a profit on the rise in oil prices.
TBT is an ETF that goes up in price at twice the rate the 20 year U.S. treasury index falls. As interest rates rise bond prices fall. Since interest rates are currently rising so is TBT’s price. TBT has just broken through it’s 200 day ma after breaking out of a pennant formation.
It looks like it could rally to at least the longer term downtrend line as illustrated in the above chart to a price of about $44.
While the fare of the day is to sell bonds and buy stocks, I am not totally convinced that a bear market in bonds has begun. This could be a temporary spike in interest rates as it is still unclear how the Fed QE2 will affect bond prices or whether there will be further quantitative easing by the Fed. In any event since so many talking heads are convinced the bond rally is over, that is usually a sign it is not.
TBT is designed for a short term trade and is not suitable as a long term investment. Therefore take profits quickly if it moves up in price and set a tight stop just under it’s 200 day ma in case it reverses direction.
The market is preparing for the next leg up. As I mentioned in my post of November 12 SPY has broken out to the upside of a multi year equilateral triangle. I also mentioned in my post of October 14 the SPY has broken above the neckline of a multi-year inverse head and shoulders pattern. Additional bullish patterns are also on the charts and this leads me to believe that the secular bear market in stocks may be over and a new secular bull market has begun. Of course we won’t know for sure until the S&P breaks through it’s October, 2007 high but the technical chart indications are there.
If we take a look at the above 5 year chart of the S&P 500 you can see 2 cup and handle formations that I have outlined. The target price of a cup and handle pattern is computed from the bottom of the cup to the top of the upper right of the cup added to the top of the cup. The target price of the larger cup is approximately 1700 and the target price of the smaller cup is 1400. We are now forming the handle of the smaller cup.
The S&P seems to have found significant support at the 1220 level and a breathrough of 1230 should get the market moving nicely. Financials have been lagging the market but appear to be picking up steam. If financials rally Goldmans Sachs should lead the parade. It had a strong day today and broke through a short term downtrend line and is back above it’s 21 day moving average.
GS is at 166.14 as I write. A wild speculative but possibly extremely profitable play would be to buy GS Dec. 175 calls. As of this writing the bid is .19 and ask is .23. If GS rallys next week and they wind up in the money you could make a 500% or more profit. Expiration is 7 days away so only do this with money you can afford to lose.
If you have a lot of chutzpah buy the GS Dec. 180 calls bid .06 ask .07. If GS makes a big move you could wind up with a 1,000% gain.