As a technical analyst I have predicted a mid-January top in the S&P 500 Index, with 1285 as the minimal upside from the 1173 4th wave lows. As it turns out, the Index has been to 1296 but that seems to be the top.
Copper, Gold, Silver — All topping and rolling over for now. A few weeks ago I began to go bearish on gold (And with it silver), and the Elliott Wave patterns became very muddy and unclear. This was a warning signal. Also, gold’s failure to surpass its $1,425 — $1,430 an ounce highs through three attempts indicated a triple top failure. The gold, copper, silver topping and rollover movements are warning signals to be more cautious. Gold should work down to $1,270 — $1,280, and silver to $25 — $26.50 ranges.
Small Cap Index — The Direxion Small Cap Bear 3X Shares (NYSE: TZA) had a huge two-day reversal rally on Thursday and Friday of last week. TZA closed just at $16.07 and I see it moving to $19 — $20. The Russell 2000 is rolling over first, which makes sense because the sentiment and strong economic rebound from the summer lows has peaked out. Small caps are likely to correct the hardest in this wave pattern down, and so we shorted them instead of shorting the large caps or S&P 500. To wit, last week the small caps dropped 3.5% and the S&P 500 only 0.8%.
IBD 100 — The Investors Business Daily top 100 fell 5.4% last week collectively. A quick scan of the charts on those 100 reveals a lot of topping and weakness patterns to me. These would be considered leader small-cap and mid-cap growth stocks, and suggests further evidence of continuing correction in the markets.
Bottom Line — I continue to be cautious on the markets and believe the S&P 500 will drop to 1170-1180 on the LOW END, with 1210-1229 possible as the shallower end of a correction. The Russell 2000 will take the hardest hit, and probably has another 8% — 9% downside left before a bottom pivot. We remain long TZA to short that index at three times multiple over at my Active Trading Partners (ATP) service. I have not shorted the S&P 500 or large caps on purpose, because I think the best place to short is small caps. I continue to recommend high cash positions for now (I’m about 40%) so that you have money to buy into an oversold Wave 2 bottom in the markets when it occurs. Gold will continue to correct with a bounce at $1,310 — $1,320 areas likely. I see it getting to $1,270 — $1,280 though.
Large Caps are likely to outperform Small Caps in 2011, as the bulk of the economic trough and rebound have now occurred and been priced in. Gold may struggle for several months but has a shot at hitting $1,500 — $1,515 by year’s end, but one month at a time. That said, selective stock picking will always have the ability to trounce the index averages.
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