Aug

Investing Systems Research Lab Blog for Week of August 9th, 2010

The market proved more resilient than most people expected last week, given the weak employment data.

However it was a very narrow range week and the S&P seems to be stalling around the 1130 area.

The potential is there for one more push up as high as 1150, but that would be the major resistance area from January and it would likely be downhill from there into the fall.

With earnings season winding up and the election cycle gearing up, we don’t see any logical reason for the market to continue going up, other than the last gasps of the current momentum.

On the positive side the S&P is trading just above the 10-month, the 30-week and the 200-day moving averages, but we think that is temporary. Last week the low was below all three of these key moving averages and the unusual strength late Friday managed to close it above them.

On the daily SPY chart below you see we are at an inflection point. We have a fairly steep uptrend line and a horizontal resistance line that are going to be tested next week. If the momentum carries forward the market might push into the “right shoulder zone” indicated by the green circle. If the market breaks the trend line, then we move into the “caution zone” indicated by the yellow ellipse.

While I am very cautions at this point the good news is that we have been making higher lows and have support at the 20-day and 50-day moving averages.

Honestly I think the path of least resistance is down, but it seems there is some “force” out there holding the market up. Most likely it is the weakness of the US Dollar as the market and the dollar have had an inverse relationship lately. If the dollar were to lose 5% and the S&P went up 5%, it has essentially gone nowhere, but it’s priced in nominal dollars so you see the relationship.

The thing to watch will be the price of gold, as it will move inverse to the dollar.

Gold is in a long-term uptrend as you see on the weekly chart below and is bouncing off the lower end of the channel. GLD is also near a critical juncture with a bit of overhead resistance, but only a stones-throw from a new all time high in nominal dollars. We think it will continue up the channel and move into the green box this fall. If, however it breaks the lower end of the channel and the 30-week moving average, then it’s possible to envision a pullback all the way to 1000. I think this is unlikely since gold is the “true money” in a world of “fiat currency”.

Silver is likely the best “investment” anywhere for long term buy and holders. If I had to recommend just one investment to someone that was going to buy and hold for the next 10-years, it would be physical silver.

We use SLV as a proxy, but it’s not the same “investment” as physical.

You can see we are reaching the apex of this long triangle on the weekly chart and keeping a close eye for the breakout to the upside.

It has been said that silver is somehow “manipulated”. In that case there are no guarantees that it can’t be taken lower, but as I have mentioned before, that presents a buying opportunity for long term investors. Silver is about the only thing I feel good about “averaging down” on.

In my opinion, one day we will look back and say “wow, remember when you could buy an ounce of silver for under $20…?”

I won’t get into all the reasons that silver is a steal under $20 here as there is plenty of information out there if you are interested. I’m sure you have heard us discuss these reasons on the shows over the years anyway.

Moving on to stocks, I actually see quite a few charts that look constructive, but if a pullback is in the cards next week we don’t want to step in front of that.

I thought it would be interesting to revisit the charts from last weeks blog post to see how the stocks moved after I marked them up.

RIMM had an unusual week as it was one of the most discussed stocks on CNBS due to several countries considering banning Blackberries because they are so secure the Governments can’t snoop on private emails and web browsing. To me, this is a positive thing because people will prefer to use a device they can trust to be secure. It really almost seems the negative “chatter” was designed to hold the stock down.

As you see on the chart above, it was starting to breakout from the consolidation in the green box. The negative chatter sent it right back into the lower-end of the consolidation zone and back under the key moving averages. We will be watching closely to see how the bottoming process plays out, but I expect the July lows will hold and that RIMM does indeed move higher. The nice thing is that RIMM is not too extended from the lows, so that would make a perfect place to set a stop-loss if the stock can’t hold that area. At this point I would be inclined to wait for strength before getting in, but the longer this consolidation lasts, the stronger the move will be if we break out to the upside. There’s no rush on this one as it is going to take some time to develop.

Have a great weekend and join us Monday morning in the Research Lab at the market open.