Outta Gold and Into Utilities and Some Random Observations

I bailed on my short gold position today as it broke through my stop. It's showing quite a bit of momentum and it traded on decent volume today. I'm out for now and will look at going short again once (or if) it approaches the recent lows. Here's a daily chart:You can see that gold bounced off the 50% retracement level and then failed to make lower lows. We'll see if it chops around or takes off higher. One thing to note is that Silver (slv) has been very strong this week...it has been at the top of my relative strength list for 2 days in a row now.

I did manage to get in utilities (XLU) today. This is a support test trade which means I'm betting that the recent support will hold. The weakness over the past week has offered a good risk to reward entry and as always, we'll see how it works out. Here's the daily chart for XLU:Note that I labeled the support a zone, this is because I don't like pinpointing the exact price but rather a thin zone for support/resistance trades. The stochastic is in oversold territory, which is essential for this type of trade.

Other things to take notice of are the extreme strength in both energy (xle) and materials (xlb). As for materials, FCX and DOW have been particularly strong. There was some weakness in tech (qqqq, xlk, smh) but that's not surprising given the strength that the sector has shown recently.

Last but not least, the dollar (uup), which I'm still long, continues to chop around with little significant moves in either direction. Long term yields pushed higher today which helped my short long term bond (TBT) position. I'll be back later in the week with more.

I hope everyone's off to a good start for 2010.

TLT

Weekly Relative Strength Rankings

Here's the rankings for last week:My current open positions right now are long the dollar (UUP), short gold (DZZ), short 20 year bonds (TBT) and long AMAT, which is in the semi-conductor sector. Comparing my positions to the above relative strength rankings shows me that I've got good trades on for now. The only categories that I'm not exposed to that I will be evaluating are energy (USO and XLE), copper (JJC) and Materials (XLB) and I'll also be looking for signs of strength in utilities (XLU).

Part of what I do to determine trades is that I compare individual stocks with their sector ETFs. For example, with energy (XLE) I watch XOM, SLB, and CVX. In order to take a position, I need to see strength and buy signals in both the ETF and the individual stocks. Here's a snippet of the daily checklist spreadsheet that I use and in this picture you can see the difference between XLE (a little mixed) and SMH (strong): The above readings tell me that energy is potentially a buy, just not yet. Keep in mind that this is just my system, anyone who owned USO or XLE in the past week made some money...I'm just saying that there's not quite an edge for me in trading energy in general at this point. We'll see what next week brings as traders and investors come back from a long vacation.

Have a great weekend!

TLT

Watch Bonds and Utilities

Here's two trade ideas for the new year. Keep an eye on both bonds and utilities. They tend to have an inverse relationship and both are interest rate plays. Longer term bonds (and short term as well) have been pretty bearish lately and are looking like they are heading for a steep decline in the near future. Here's the chart for Barclays 20+ year bond etf (TLT): If that support at the 87.70 gets taken out, expect a sharp move. What's moving bonds lower? Long term interest rates are moving higher after hitting record lows. Bond traders are anticipating higher long term rates, creating a steeper yield curve. As long as bond traders believe this, bonds will fall.

Utilities (XLU) look poised to pop right now, which acts as confirmation of the short bond trade. Utilities have been incredibly strong during the month of December and now, after a little consolidation, they look ready for a move higher. Here's the daily chart of XLU:The bond market is saying that the stock market is heading higher and utilities are confirming the bond trade. I'm currently short bonds (via TBT) and I might take a position in XLU if it drops down to the buy zone that I highlighted above.

One thing that I want to touch on real quick is the relationship between bonds and utilities. I stated that they tend to have an inverse relationship and that this is because they both are interest rate plays. Don't just take my word for it, lets take a look at it. Here's a 1 year chart showing the relationship of TLT and XLU:I'd say that the above chart shows a pretty close inverse correlation.

As always, we'll see how this theme plays out. I hope everyone has a Happy New Year!

TLT