Stocks down, Gold up

spy1107.pngThe chart to the left is the S&P 500 SPY etf. After that last low and subsequent rally, I suggested that if that low were taken out the market structure would have changed and the trend could be considered to be down. Today that low was taken out, as can be seen by the break of the red horizontal line drawn from that low. I placed the Mesa Adaptive Moving Average over the prices. I often look at that as a trend indicator in conjunction with the standard error bands and regression curve that I usually show on the chart. The lower sub-graph shows the double stochastic. The red down arrows just show where that stochastic turned down from the overbought reference line, in conjunction with the downtrend action in the moving averages. Once those averages flip over, in this case with the cyan line under the blue line, then overbought readings in the double stochastic are often good places to go short (reverse for longs).
Closing under that line confirms that there is now lower highs and lower lows, which is one definition of a downtrend. I changed my market mood photo from the bubble child taking a bath to a bear. This may be premature. It seems that after these large down moves the market somehow finds the strength to rally right back up. One day shake-outs are common in bull markets, and this may be another case of a quick shake-out to knock traders off the cart.
My gut feeling is that the real bloodbath is going to be in the Chinese stocks, the handful of tech stocks making headlines daily, and crude oil. The chart to the right is the China FXI etf. This uptrend has been much stronger than almost anything else. The price action is still bullish, but there are divergences developing between price and the double stochastic, and with many other momentum indicators. These divergences have been false signals many times in the past on the China indexes, as the Chinese stocks always seem to come roaring right back up into their uptrends. They will continue to do this until at some point they don’t, and at that point many inexperienced traders and investors will try to exit out of a narrow door. I recently have intermittently put up a chart of the Nasdaq advance-decline line to show the huge divergence in that index. A small handful of tech names have been holding up the index and getting all the attention. There are many bubble here waiting to be popped. Cisco came out with earnings after the close today and the stock is down 12.5% with the after hours session taken into account. Cisco made a new recent high yesterday, and if the after hours session prices hold through to tomorrow’s day session, over two months of constructive price action will have been erased. And Cisco, while a decent performer lately, is not by any means one of the bubble stocks. Oil is also in severely overbought territory. The oil stocks are not nearly as overbought. The stocks seem to be pricing oil more correctly at about $60. Oil did try to reverse a little of the upmove today. One clue that would happen is that CNBC had barrels of crude on their set today. The cameras kept showing these two dumb barrels sitting on the set like they were guests. They didn’t say much. But the talking heads sure were. I think they were disappointed that it didn’t break $100 today.
The above chart shows the cash Euro Currency Unit in the upper graph, and the lower graph shows the net position of the large, reporting traders, such as hedge funds, commodity pools, and Gisele. (in case you don’t know about Gisele, read my blog on Monday – just click the date on the calendar in the upper left corner.) I have placed standard Bollinger Bands on both prices, and the net large trader position. Often when the large trader position touches one of the bands, which is two standard deviations from a moving average, and if prices also trade to a band on the same side, a significant move can occur. You can see this occur on the last impulse up, as the bands squeezed together as price touched the lower band, and the net large trader blue line also touched the lower band. However, there has been a series of divergences between the net large trader long position and prices going to new all time highs. I’ve indicated this divergence with the yellow lines. Sentiment seems to be one sided to the long side in the Euro and against the US Dollar. I chose to show the Euro commitment of traders net position rather than the US Dollar directly, as the open interest is much greater in the Euro. Many trader suggest the COT data for the CME traded Euro is not meaningful as most trading activity occurs outside of the organized futures exchanges. I’ve been following this data for a long time and do find it to be a good, but rough guide. If the dollar corrects back up, I’d be very careful with long gold position. Gold is ripe for a significant correction, even if the long term bull market still has a long way to go.