ta01 Scott Redler：Macro Wedge Forming to Absorb Recent Volatilit

Macro Wedge Forming to Absorb Recent Volatility

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May 14, 2010

Scott Redler

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Yesterday the market stalled around the prior breakdown point, which usually turns into resistance. Today on a micro level we broke the 1147-1150 gap from Monday and filled it pretty fast. The next level I will watch is 1120-1130, which would be the area to turn if the wedge we highlighted earlier in the week keeps forming.
A wedge is a pattern of indecision that forms when the market isn’t sure which way the next direction will be. After last week’s huge volatility and all the unknowns in this world, this type of pattern makes sense. As traders we can trade both long and short in compelling areas. If you’re an investor don’t buy stocks, as we have been in a market correction since May 4th.

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The market is still trading in its macro wedge pattern after a solid bounce this morning, and now looks set to test the upper trendline of the pattern around 1320-1322 on the S&P. If we get through the first level, we will be watching bigger resistance in the 1330-1332 area. However, based on the way the market has been acting over the last two weeks, Scott Redler of T3Live.com still does not expect definitive resolution of the pattern today.

Gold and silver are taking the day off as stocks start to once again take the mantle. Redler still believes silver, after a massive month and a half run to new highs and what looked like a blow-off top yesterday, has some downside in the short term.

Banks Role Reversal

Whereas banks yesterday weighed on the market as Goldman Sachs Group Inc. (GS) broke down through the neckline of its head and shoulders pattern, today they are leading the charge higher. In the Morning Call this morning, we focused on Bank of America Corp. (BAC), which today is holding its first analyst day since 2007. The buy area on the stock was $14.30 as indicated on Redler's daily morning Price Point sheet on T3Live.com. The stock is trying to clear a big macro consolidation that could jumpstart the move to our yearly target of $17-18 this year.

Rare Earth Bouncing

Rare earth stocks are another group that were weak yesterday but are strong today. Sector leader Molycorp, Inc. (MCP) broke its mini-uptrend yesterday (likely shaking many investors out of this volatile stock in the process) but has rallied back up $50 this morning, up around 5% on the day.

Agricultural Stocks Once Again at 50-Day Moving Averages

One group that has not seen a reversal of fortunes is the agricultural stocks, which are following through to the downside today. Over the last two months, we have now seen three separate occasions where the fertilizer stocks (we follow The Mosaic Company (MOS) and PotashCorp./Saskatchewan (POT) most closely) have had sharp two- to three-day pull-ins of between 7-11%. The previous two were buyable as they hit major moving averages, the first at the 21-day back on January 20 and the second at the 50-day on February 23. Right now they are sitting once again on their 50-day moving averages, and the question is whether agricultural bulls will have the confidence to step in once more. We are bullish on the sector and believe this could be another buying opportunity, but will look for the market to cooperate by breaking the wedge to the upside before getting in heavy on a trade.

So as we speak, the market is erasing all gains from yesterday and looks set to test the upper boundaries of the wedge. The question is, will we break above? Stay tuned to T3Live's Virtual Trading Floor and check back at the end of the day for more analysis.

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