Sulaman Chaudhry and Andy Cole send: Last week was very interesting for a number of reasons, the main one being that many of our trendlines remain intact:

The S&P 500 has been forming a rising wedge over the past six months now, and is eventually going to be forced to breakout to the upside or the downside within the coming months. There are two things we need to take note of here: the first being the negative divergence we are seeing in the MACD, the second being the increase in selling volume over the past few days. Looking at this objectively, this is definitely bearish for the markets.

As we mentioned a few days ago, we have seen gold (ETF: GLD) consolidate a bit over the past few days. On a daily chart, the GLD formed a double top, and proceeded to break out of an uptrending channel that had been in place since two weeks ago. We would look for a bit more selling in the GLD from here.

Similarly, the UUP dollar ETF has experienced a double bottom over the past week or so and looks to be headed higher from here. Again, we mentioned the heavy increase in volume on the UUP in the last post, and it looks as though that did prove to be a short-term bottom. Keep an eye for clues such as this to help determine future trends.

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Sulaman Chaudhry and Andy Cole send: Hope you all had a great weekend. Let’s look at a few charts:

The S&P looks to be forming a rising wedge of sorts. A break to the downside would definitely be bearish, but until that happens, which it most likely will, the trend is up and continues to be for now.

After that high volume breakout on the Gold (ETF: GLD) chart a few weeks ago, we’ve seen a nice bit of consolidation around that 100$ level. For those traders banking on a move past 100$, this is definitely healthy in order to have a sustained move higher.

The head and shoulders that we have been on top of since February is still in play. A break above 100$ should lead us to a target price of 115$ on the GLD over the course of a few months.

There was a strong surge in volume on the U.S. dollar (ETF: UUP) last Friday. Whether this will form some sort of short term bottom remains to be seen, but it’s something to keep an eye on.

Finally, take a look at Hecla Mining (HL). This stock has seen a surge in buying volume over the past few weeks as it completed a cup and handle breakout, which was no doubt influenced by the pennant breakout in gold. We would look for a retest of $3.90 on the downside as nice entry position.

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Sulaman Chaudhry and Andy Cole send: Let’s watch this to see where it breaks out. We did make new monthly highs Thursday across the board. Keep in mind, however that it was on very light volume.

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Sulaman Chaudhry and Andy Cole send: Well after a somewhat extended and very much needed summer break, we getting down to business again. As you have probably noticed, we’ve seen some volume come back into an otherwise dry market, and we are beggining to see some very defined trends starting to form. Let’s take a look at a few charts and see what we can break down:

We have seen some volume come back into this market over the past few days. However, given yesterdays action, the signs do not look favorable heading into the remainder of the year. We’ve had a massive rally bottom to top, and it is safe to say that we are due for a correction sooner or later. Also, take not of that broadening formation on the S&P 500, as that could be a possible area of support in the coming weeks.

In our last market analysis, we mentioned the posibility of a bear flag formation on a monthly chart. As of right now, that observation still stands, especially given the general lack of volume on this rally.

Gold (ETF: GLD) broke out of a triangle formation that had been developing over the past few months. The volume across the Gold sector was tremendous today, and it looks at though $1000 could be within reach very soon.

Gold had a huge move today, breaking a number of technical resistance levels. Volume is flowing into anything Gold-related these days, and it is slightly foolish to not have at least some part of your portfolio dedicated to this sector.

The Gold Miners ETF (GDX) looks to be in the forming an ascending triangle over the past few months. There is signifigant resistance at $42.5 and it is likely we will see some consolidation before that level is broken. A break above it, though, should lead to some increased buying.

The U.S. Dollar (ETF: UUP) continues to see selling pressure. Volume has actually increased, though, over the past few weeks. Could it be a short-term bottom? Or just consolidation before another move lower? Time will tell, but odds are this move lower is far from over.

And that’s about it from here. We leave you with this:

Congress members hard at work debating the budget. So much for change.

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I haven’t said much about what I’ve been doing personally here of late. In sum, the general theme is that I’ve been scaling out of positions the entire summer, and am now 100% cash. Had I not sold anything, I would be up more on the year than I am at present – but that’s pretty much par for the course in a rally that has been as sharp and persistent as this one.

There’s still a strong undercurrent of disbelief at this rally, so in that sense not much has changed since March, when the world was bearish and nothing but pain existed for equity holders. The difference now (besides much higher prices) is that there’s a growing contingent with a belief that the recovery is at hand, or their more speculative counterparts who don’t believe in a recovery but are afraid of missing a higher move.

A growing number of financial stocks that are essentially worthless have seen their option values multiply several-fold; the well-documented list includes Fannie Mae (FNM), Freddie Mac (FRE), AIG, Citigroup (C), and Lehman (LEHMQ.PK), and August trading volume has been heavily concentrated in those names. I’m not discounting the option value of a stock; real-world outcomes are probabilistic and stock prices should reflect that. But it does speak to speculation returning to the market, and that’s a sign of caution in a time of great uncertainty – and make no mistake, the short-term bandages are only hiding long-term problems.

Good investing is not about having a myopic focus on maximizing returns, it’s also about managing risk. Winning is important, but so is not losing. With the feedback loop of the last six months, market conditions are such that it’s very easy to forget that losing is a distinct possibility in an era of debt deflation. Although inflation has been the headline worry of Fed watchers, I’m not convinced; the intermediate concern (2-5 years) that seems underestimated is deflation. Central banks are small in comparison to global capital flows, and although we might try to stimulate like crazy, it will be difficult to offset trillions of dollars in irresponsible lending being rationalized.

In light of this, I’m looking at convertible securities that offer yields of 6% or more (about 500 bps over 2-year Treasuries) in industries that will have above-average profitability in the case of an economic recovery. My assumption is that the yield alone will offer an attractive return, and with most at a discount to par, the total return potential approaches double-digits over a two-year time frame. If I’m wrong about the immediacy of a market recovery, the convertible option offers a hedge on rising stock prices – in sum, a better balance of risk and reward than either a straight stock or bond allocation.

A final closing note: I’m going to change up my policy about writing, since I often spend dozens of hours studying something only to determine it is a dead end. So, in the future, I’ll comment on those, instead of just the scarce opportunities I end up acting on.

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