Market outlook for the week of May 18th, 2009

Back on April 10th, I made these comments for my Blog post that day regarding watching the price of Gold:

Gold has finally gone down as the market has gone up. On March 17th I said the following, "If Gold can get back below 900 watch the market move up more strongly. Gold is at 916 in pre-market. The low closing last week was 905. We were as low as 820 in January and I can see Gold pulling back significantly to these levels if news continues good."

As we now know from the 3 month chart above, after that statement on March 17th, Gold shares soared after the treasury decided to buy back Treasury notes, going to $952 before settling in back at the close Friday of 880. That is a significant pullback and shows the rally for the past 30 days is for real. Watch for moves up in Gold to signal a market reversal."

If you want to know where the market is going watch Gold, because as either inflation is going up or if people are more worried/scared, or manufacturing has sharply increased and is using more of the precious metal, Gold rises. Well this week we saw the Core CPI almost at zero so that indicator should not make Gold rise. Neither has manufacturing increased the use of Gold. But Gold did rise this week, closing at $932/ounce. The only reason is that people are more worried about where we are in the recovery of our financial system and the economy. Gold may go over the $952/ounce it had done back earlier.

The Dow closed this week at 8,269. This is down 305 points from the previous week's close of 8,574. The Nasdaq closed this week at 1680 and is down 59 points from the previous week's close of 1739. And the S&P 500 closed this week at 883 and is down 27 points from the previous week's close of 910. These declines although not steep were steady starting on Tuesday and continuing to the close Friday. When the market is in a declining phase low volume can chip away at these indexes for quite a while until the final surge to the lows and then reversal in trend. So as we look ahead, it is difficult to predict when this decline will stop and where it will stop.

The flood of newly issued shares by many of the Banks to raise capital sucked the wind and momentum of the uptrend rally in this market. More new shares should hit the market this week and next so I am pretty confident this downtrend will last for at least several weeks. My guess is that it will be gradual and possible as a zig-zag saw tooth pattern. You know those patterns as they are teasers. One day up a few points and then a day down of larger proportion. If you are wanting the market to go up it can be very frustrating to watch. However, if you have a sizable short position as I do, you can just let it play out and relax until it picks up steam and volume, because eventually one sells their position to take a profit. Timing is difficult during this pattern but if the focus is profit and not greed, it is a much easier trade.

The Put to Call ratio is also slowly rising but only very slowly as it closed yesterday at 0.80 and while it reached as high as 0.93 on Thursday intraday, it had a much lower range yesterday between 0.73 and 0.80. The VIX also remained subdued closing yesterday at 33.12, up 1.75 for the day, but well below the highs we had come to expect in the 40's and 50's when the market dropped back in early March. It still was a healthy 5.6% gain. It may be the more sensitive of the indicators to watch, in the coming weeks.

Look now at the 3 charts above. They are of all 3 Indexes, the Dow, Nasdaq and SP500. The red line is the 200 day Moving Average for each Index. If you look at the slope of that line, it is my belief that will be the rate of decline for the next few weeks. It looks to me almost predictable. So if you take the Dow, I would guess that we will be down testing the 8,000 level in the 2 weeks and on the Nasdaq we should be testing the 1600 level and on the S&P 500 we should be testing the 840 level again. Here, Jim Cramer of CNBC's Mad Money and I part ways, as he sees Tech stocks taking us higher. I see Tech stocks now leading us down as many take their profits from the lows. Besides, it is the closest Index to the 200 day Moving Average and is being pressed to go lower. Let's see if I'm correct. Stay tuned.

So I will continue to hold both TZA and FAZ and enjoy the ride. I think those on the Short side can go away and come back in a week.