Great Trades

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Tuesday, December 22, 2009


VIX Break Below 20 Support, Gold Pullback

The VIX has dropped sharply from the lower 30's to the lower 20's, which has been a strong support area recently, so this sharp short-term rally phase may be nearing its end.

At the time of our last post, the S&P 500 had rallied over 60 points in less than 6 trading days. In the ensuing 6 weeks, the S&P 500 has traded in a narrow range from 1085-1120.

Until today, the VIX has remained in the lower 20's during that time:

Today, the VIX finally broke below 20 support, for the first time in over a year. The S&P 500 closed at the upper end of its recent trading range, at 1118.02.

If the VIX continues lower to establish a new range and the S&P 500 can break out above 1120 resistance, that would be bullish for the stock market in the short term, especially during this seasonally strong time of the year. However, the last time the VIX broke below 20 support, in August 2008, the short-term rally was followed by the precipitous market decline into the fall. Also, January has featured sharp declines in each of the last 2 years.

If the S&P 500 fails to break through 1120 resistance during this holiday season, that would be a negative for the market, especially if the VIX break below 20 turns out to be a head-fake, and the lower end of the recent range (at SPX 1085) is broken instead.

Given the recent market action, it looks most likely that the S&P 500 will finally be able to break through 1120 resistance (perhaps after a very short-term pullback) and spurt higher in a short-term rally as the VIX establishes a new range. Depending on the market action, such a rally could prove to be a selling opportunity, judging from the last couple of years.

Gold has had a very strong rally recently, so a short-term pullback can happen at any time, but the longer-term trend continues to be higher.

After a very strong rally to well over $1200, gold has pulled back over $150 in less than 3 weeks in a short-term pullback, as the U.S. Dollar has rallied back strongly following a strong decline since March. Considering the longer-term trend higher in gold in its powerful bull market, this pullback should prove to be a great buying opportunity for longer term, for gold and silver as well as quality mining stocks.

Fund update: Our plans to start a fund have been placed on hold, pending the proposed onerous trader transaction tax. Such a tax would put many funds out of business. Until the dust settles on this silly legislation, we'll continue live testing across markets under different conditions. Testing continues to go very well.

great analysis keep it up
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