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In Market Analysis on August 23, 2010 at 7:38 pm
The rise in equities from March 2009 to April 2010 lacked one key ingredient in a bull market: volume confirmation. There were many technicians who pontificated why the lack of enthusiasm of the uptrend existed. Some said that it was the 2008 de-leveraging of hedge funds that caused the decreased participation. I was never convinced of this far fetched argument because on each correction volume increased significantly. I’ve been skeptical of the claim that this time will be different. While studying charts over the years, one indicator I am always loyal to is volume. It is the enthusiasm in a market which shows if a rally or decline is convincing.
The H&S pattern is one of the most reliable chart patterns. The S&P 500 is showing an apparent head and shoulders top with volume confirmation. One way of affirming the validity of this formation is by checking the volume on the right shoulder, because the right shoulder is the first rally in the bear market. The low volume shows a lack of confidence in the previous bullish trend.
The sharp breakdown of the S&P 500 following after the rising wedge pattern tells me that this bear market is likely to continue. Several indicators, namely the bearish death cross, break in trends and poor price volume along with the bearish head and shoulders pattern and rising wedge all combine to weigh heavily against equities.
GLD is experiencing a “v” formation after coming to long term support and a 50% fibonacci retracement. On July 28th, many of you have read my views and why I believe gold was at a buypoint, contradicting the consensus of market timers at the time. Now I believe gold is in need of much needed respite in the trend and a shakeout before continuing into new highs. Gold buying has also gotten some TV airtime from a few famous commentators who are now turning bullish on the metal. That really concerns me, as it is a contrary indicator. We may see a healthy correction so that GLD can clear the previous resistance and make a move into new highs. A healthy correction could also provide an excellent market entry point for a trader who wants to add to their gold holdings before a new breakout. If you study the move into new highs from September of 2009 you will see the coil formation where it had three pullbacks to support. These formations are bullish as they provide the conditions to generate a high percentage move. For specific stock selection visit my website at http://goldstocktrades.com.
GLD is overbought and if you are trading short term, do expect a pullback to at least the 50 day moving average to find support or possibly shakeout the traders who bought in after it crossed the 50 day moving average.
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In Market Analysis on July 27, 2010 at 8:08 pm
Gold is now reaching long term trend support after falling the last few weeks as investors returned to bid up the Euro and equities. The bounce in equities, especially financial, retail and real estate may be short lived as volume indicates that there is not much conviction from major investors on the upside. Gold has recently been the safe haven as investors sought shelter away from the Euro when it was having the sovereign debt issues. Now that those issues have been quelled, gold has had some selling and it has now reached an oversold condition and a long term trendline which is acting as major support.
Stock prices move in trends. In a bull market, it is quite often easy to identify the ascending bottoms. Being familiar with trendlines allows the investor to enter long term bull markets when they are oversold and at key support. An investor must always be aware of a stock’s underlying long term trend. This can be counter-intuitive and awkward, as most times when it comes down to support you have to think against the market herd and buy when others are selling. It’s like buying a winter coat in the heat of summer. Gold is on sale, and presenting a low risk, high reward trade, but it requires non conformity with the crowd which is not an easy task for anyone. Many of us like to be in what’s hot now situations, rather than seeing the bigger picture and entering into a trade when it is uncomfortable.
Gold is now at my buy point of the rising long term trend support line. GLD touched that line 6 times, which signifies that this trendline is a reliable point of support. The significance of this line is that it is not steep, which also brings a higher probability that GLD will find support here. It is also oversold. Continued weakness here and a break below this long term trend would be troubling and highly unlikely. If there is a break most likely it would be exhaustive, meaning that it will shake out a lot of shares before the next move higher. I do not see $1200 as a top in gold as there are no technical signs of a major top.
On the other hand, financial stocks may be finding key resistance here following a low volume rally. As investors are digesting earnings reports that claim credit is improving and lending is increasing, consumer confidence is weakening and the unemployment rate is still very high. A jobless recovery is what many are considering we are experiencing. It seems that this recovery has been good for wall street while main street has not seen an improvement. The financials have found resistance at the 200 day moving average and have now failed four times, significantly breaking through this point of resistance. Historically speaking, after a few failed rallies a major drop could occur.
At the writing of this article, housing has also had a significant reversal after recent data showing an increase in pricing in some metropolitan areas. Investors are selling home building stocks on positive news, which indicates that there is some caution over what the real estate market will resemble after the home buyer tax credit expires. The chart shows a clear reversal and I expect that the rally in equities will be coming to an end and that gold’s poor summer performance will be different this fall as many weak hands were shaken out. An explosive fall rally into new highs is expected as I still have a target of $1400 by year end.
Disclosure: I own shares in gold and silver mining stocks.