Our index indicators are giving bullish to neutral readings, a downgrade from last week’s bullish readings, as the Dow and the S&P 500 have fallen below their 50-day moving averages, although the S&P 500 just barely. And given the current irresponsibility taking place in Washington, it is important to consider that the long-running bullish primary trend might be in jeopardy. For that trend to remain in place, the Dow must stay above its 200-day moving average, currently at 14,715, and the S&P 500 above its 200-day at 1600. Meanwhile, the Nasdaq remains bullish, and will remain so by staying above its 50-day moving average at 3690.
Our internal indicators, which were signaling trouble brewing last week even as the indexes remained bullish, are still weak. The 200-day Moving Averages Index remains bearish, and the Advance/Decline Index looks ready to fall to neutral. The Cumulative Volume Index remains bullish. And six of the nine S&P sector funds are bullish, down from seven of nine last week.
As would be expected, the 20+ Year Treasury Bond Fund (TLT) has been rallying as traders seek out a safe haven in which to hide. That rally began a couple weeks ago and has continued. TLT’s intermediate-term base at $102 can now be considered a safe line of support, and its short-term 50-day moving average support in the $106 area is also showing signs of holding. That TLT is being looked at as a safe haven play is somewhat ironic, as a default by the government on its debt in a couple weeks would cause Treasury yields to rise, perhaps dramatically.
Speaking of that, for all the media brouhaha over the current government shutdown, that event is not what is important to the markets and the economy. Raising the debt ceiling in two weeks is drastically important. Perhaps both sides of the political aisle are thinking that whoever blinks first on the shutdown issue will also cave first during debt ceiling negotiations, so now is the time to draw a line. That stocks have weakened but not yet cratered can be taken as a sign that investors think the ceiling will be raised in time. We can only hope so.
With our indicators weakening, and with political gamesmanship showing signs of going to the brink, options players should begin accumulating bearish positions by increasing your put buying.
Recommendation: Buy SPDR Gold Trust (GLD) December 114 put options at $1.35 or lower. After entry, take profits if the stock price hits $118 or the option price reaches $3.70. Exit if the stock price closes above $131.80 or the option price falls to 80 cents.
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