Stocks drop, gold continues higher

sp0907.pngWeaker than expected non-farm payroll data caused a large gap down opening today on the stock index futures. It wasn’t long ago that such a report would have caused a rally instead of a decline. The prospects for a weak economy would be bullish for stocks because it would mean the Fed would probably have to ease, especially going into an election cycle. However, the Fed has already signals intend to ease, or at least stay on top of the situation, with the discount rate cut and injection of funds. The rally up has already discounted the ease to some degree, and there are calls for a more aggressive ease, which could send the signal that the Fed is worried. A worried Fed could be bad for stocks no matter how deep the cut in rates. If they are too far behind the curve on rates they could get into the situation of pushing on a string, which doesn’t work too well. But that’s all after the fact, as my reason for interest in the short side of the S&P today was the reversal in momentum and the rolling over of the regression channel. The red dots on the bottom sub-graph indicator, with those same dots repeated on the price bars to make it easy to reference, shows where the reversals came in. This is a very short term indicator and is prone to many changes in direction. However, when there is a divergence and confirmation with either trend or other dissimilar momentum indicators, the signals are often worthwhile. You can see a divergence up about three weeks ago, accompanied by double stochastic divergence and a reversal candle bar. Yesterday there was divergence down, again accompanied by the double stochastic, and at the lower error band on the declining regression curve. The double stochastic warned of this a day earlier. There wasn’t as much follow through to the down-side as one would expect. A very late day recovery took the indexes well off their lows. Volume picked up a bit on this break. The Nasdaq/QQQQ was down a bit more on a percentage basis, although the structure of that market still looks better than the other indexes so I’m still only wanting to trade that from the long side on the next upturn in momentum.
spw0907.pngHere is the same S&P ETF but presented as a weekly chart with the bars squeezed tight to get a longer view of the uptrend that has been in place for some time. The last little push to a high about eight weeks ago was accompanied by a huge divergence in the double stochastic in the sub-graph. There wasn’t a divergence back up, but the up-trending regression curve held most of the down-move, with the exception of the panic spike. There isn’t a lot of evidence from this chart that the up-move is over, at least not yet. There is much talk about a retest of the recent lows. I suspect they won’t be retested yet. Nobody is talking about a retest of the recent highs. That might be more likely. If the Fed fails to act, or acts too aggressively all bets are off. Next week will probably have many reversals as traders try to sort out what the Fed may or may not do. This makes it tough to use daily charts as many reversals occur during the trading session and appear random on the daily bars.
dollar0907.pngGold was up again today, but off the highs of the day by about $7. Momentum is up but very overbought. I know many gold analyst are citing all the fundamental reason for the bounce, such as jewelry demand in India and a flight to quality due to credit conditions in US and some renewed Middle East tensions. I think the only thing driving it is the falling dollar, and some technical fund buying. I thought the dollar was looking like a reversal back up was in the works, at least on the daily charts. But the dollar started heading for new lows over the last few days. To get a longer view I include a monthly chart of the dollar index. It has stayed in a very even down-trend under the lower error band for the last couple of years. The purple line is the low made at the end of 2004. Today the market closed under that level, and under the meaningless but round number of 80. The trend is certainly down in the dollar and up in gold for now. Gold can make quick reversals down. It is a very emotional market. As soon as you hear the radio ads suggesting getting on board now before gold goes to $2000, it will probably be time to stand aside. For now I nibble at the long side on pullbacks. Momentum indicators show extreme overbought readings on daily charts, and momentum just starting on weeklies, so there is probably some room on the upside in the coming weeks and months, but would welcome a shake-out over the very short term.

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