Several weeks ago I wrote about the death cross phenomenon. The death cross occurs when the 50 day moving average crosses the 200 day moving average on the downside. These patterns, when combined with other technical indicators can predict major market downturns. You may have read articles from the bullish camp and from many technicians contending that the death cross is not a proven or a contrary indicator. I however assert that this warning indicator prevented many wise investors who heeded its signal from losing their life savings in 2008.
The recent Post-Fed free fall is confirming the death cross as this will be the third major failure of the 200 day moving average. When a technician starts seeing bearish signs, it is important to look for subtle clues in chart patterns. In this case the clue was the bearish rising wedge: it is a rally that trades up on decreasing volume. This bearish rising wedge took place concurrently with the right shoulder formation of a head and shoulders pattern. This breakdown coupled with bearish price volume action confirms that selling pressure far exceeds buying. When all these signals happen at the same time, you can expect a rapid downturn to follow. This correction is putting pressure on the 200 day moving average slope. If that moving average begins to slope down, it becomes a heavy area of resistance and will confirm the death cross from early July. The odds of a long term downtrend are becoming highly probable. These signals could possibly indicate the start of a twelve to eighteen month down cycle.
Gold, on the other hand, has shown great relative strength despite the general markets correcting and negative sentiment about the economy from Washington. On July 28th, I wrote that gold was reaching major long term trend support and when everyone was selling, it was exactly the time to be buying. That day proved to be a pivot day for gold.
Gold is breaking out compared to the general markets and especially to the Euro. It has significantly rallied over the past couple of weeks and has broken above its 50 day moving average which showed little resistance. Now that 50 day has been broken to the upside, it should act as support as it builds a base to challenge new highs.
Junior mining stocks that corrected significantly in the 2008 downturn have shown great relative strength during these past two weeks, demonstrating that this time will be different. July 28th was an inside bar day, or Harami pattern, which shows a loss of momentum of the previous downtrend and reversed higher. It is clear to see the uptrend and strength of junior miners during these past two weeks as the Fed has made it clear our economy is rapidly weakening. The Fed will continue to ease and print money which should be excellent for junior mining gold and silver stocks.
We may expect that during this crisis more people will become aware of the benefits some of these explorers can offer to shareholders during a currency devaluation. Some of these companies are significantly outperforming the bullion and investors should become aware of these strong junior miners.