Stocks down, Gold up

Stock indexes gapped higher, then spent the rest of the day grinding their way lower after nearly every rally failed to take hold. The result was an outside reversal day down on most of the indexes. The range yesterday was small and on lighter volume. Today the range expanded while volume contracted even further. After the amount of movement from the lows earlier in the week, some backing off was not too surprising. Trends remain down, while momentum, even with the reversal today, remains up. This is the most difficult combination to expect an easy trade. Swimming against the current is always more difficult. The best scenario going forward would be a re-test of the lows followed by a rally that takes out the intermediate high pivot. That might be too textbook for this market. If momentum turns back down in the direction of the trend I’d favor the short side with a close eye on the recent low to see how the market acts around those points.
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The gold market has been getting more and more attention as it climbs higher into an all time high, at least on a dollar basis. There seems to be strength beyond just the inverse relationship to the dollar. The above chart recaps prices back about four months. I used the gold etf to avoid continuous contract problems. There was a textbook case, well defined triangle, drawn with the red lines. I started posting that triangle on this blog when it first started forming. At the time my gut feeling was a break to the downside, but the market had a different idea. The trend indicator, the blue lines, went very flat during all the indecision around the triangle. When momentum bottoms started forming at higher levels, and the trend indicator started edging upward, an upside break looked more probable. The a minor divergence at the peak of the momentum oscillator indicated some downward movement, which occurred a little against a very strong uptrend. It’s so much easier to trade with the trend. When momentum turned back up from the oversold level, and prices found support at the trend indicator, prices advances sharply over the next few days. At the time of the oversold momentum kinking back up in the direction of the trend, I suggested a likely test would be the recent high, which is where we are now. Price climbed over that resistance by a little bit, but then failed to move beyond, and closed slightly under that line. The chart of the Comex day session, the 24hr CBOT session, and the stock hour session of the GLD etf all show a little different pattern here. But the point is they all probed new high ground and all failed, so far, to hold and advance. It can be expected that profit taking on a Friday afternoon would cause some downmove after a few days of advancing prices. But this new high not holding is something to keep an eye on if you are long this market. On the bullish side, the trend is strongly up and momentum is still up and increasing and nowhere near overbought. On the bearish side is the pattern just described above that has a very high success rate of calling major turnarounds, as well as sentiment being absurdly on one side of the trade. If the market can overcome this on Monday then perhaps this advance still has legs, and the failure will be attributed to Friday afternoon profit taking. But if momentum turns around there would be quite a divergence and much air could be let out of this bubble. I have no guess which way it will resolve.

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