July 3rd, 2008

Our "Worst Fear" Is Realized

Only a week ago, on June 24, I wrote in “What We Fear Most“:

“Even though I wrote yesterday that one shouldn’t fight the tape, the whole Oil & Gas sector seems greatly extended by most technical measures (for example, Bollinger Bands). I started closing out some positions today. Selling too early? I won’t know for a while but the Congressional Hearings are my “tell” that it’s time to lighten up. It also may be impetus for the S&P 500 to resume its decline to 1150 and, perhaps, beyond.”

What I didn’t expect was that the commodity soft spot was coal rather than oil; but perhaps oil’s going to follow soon.

The coal stocks imploded today and either coincidentally or as a result the market closed below the support level … just barely (the Index closed at yesterday’s intra-day low). Tomorrow could be an unbelievably chaotic trading day: labor report and EUB interest rate before the market opens and early closing before a long weekend). Going out a limb, I can only see the market dropping another 2% to approximately 1234, a trendline I inserted back in 2006 due to having been a pivot point frequently in 2005 and 2006:

It’s feasable to assume that:

  • the 2% decline could happen tomorrow
  • the trendline extending from 2006 could serve as a supportive lower boundary in a new horizontal channel with the upper boundary being the trendline that’s currently the lower boundary of the January-June channel
  • that support will be tested for several weeks, with a high likelihood that it will ultimately fail as the only strong stocks in this market, the oils, food, steel and other commodity stocks, follow coal’s lead and cascade down after the Olympics.

But this is getting way ahead of ourselves. First let’s see if the market bounces around 1234 or goes through that level, as one talking head recently said, “like a warm knife through butter.”

Fortunately for me and I hope for you, we’ve been anticipating this coming storm with our hedges through the gold and silver ETF’s, the double short ETF and cash positions that I’ve been recommending for the past several months.

Subscribe below or click here to learn more about help for navigating turbulent markets.