Stocks rise, Gold falls

spy0201.pngThe stock rally continues, at least in the major indexes. I have been skeptical of this rally as trends are still down and short term momentum is overbought. In the S&P this is shaping up to be a very rare “V” shaped bottom, at least it appears to be on the chart. That spike pivot from last Wednesday that I referred to as a point to be watched was indeed overtaken today. Bar range and volume declined, but that pivot has to be respected for now. Prices are coming into a possible resistance area where there was minor congestion and a small pivot about three weeks ago. My gut feel says this is a trap and there will be another wave of selling to retest the recent lows. So far my gut is wrong. The three day pivot (yellow dots) has done a good job of defining this uptrend, with the exception of the open on Thursday. Also, the 10 period double stochastic (black line in sub-graph) has moved steadily higher, although now in overbought zone. The 5 period (white line) did kink down as a warning, but since has turned back up. My trigger to go short would be a kink back down in both the 5 and 10 period, with a price below the three day pivot. Until then I will sit on my hands.
gold0201.pngThe gold market had a little air let out of its bubble. I had been warning of a breach of that pivot where I drew the yellow line. It did break that level today. The trend is still sharply up, but there is now a momentum divergence in addition to the pivot break. In the past I would short this type of set-up. It is a high odds trade. However, even with high odds, it is not a winning strategy in the long run to try to pick tops or bottoms. Tops are even more difficult to pick as bullish sentiment being driven by greed is much harder to turn around than is bearish sentiment driven by fear. There can be numerous divergences before a top is in place, often frustrating those trying to pick the top, usually resulting in giving up just prior to the divergence that finally does work. I may miss a great selling opportunity, but experience tells me that it is best to wait for the trend to first turn down, thus possibly missing the first impulse down, and then sell rallies against the new downtrend. I view this divergence and pivot break as a warning, and probably a place to lighten or eliminate any long positions, but not a short against the trend. As always, they could put the air back into the bubble by taking prices above recent highs, but I think that would be very dangerous territory to be in with the crowd that could be herded into the slaughter. After all, this is the gold market. For those who’ve traded this market for any length of time, you know what I mean.
The US Dollar has been pushed back down toward the all time lows after the recent feeble rally has ended. The momentum to the downside doesn’t seem to be there even with the Fed pushing rates lower. There may be a basing period in the dollar, and as European nations decide that they better join the party in lowering rates to try to avoid the natural and inevitable contraction in growth, the dollar could actually rally in a more meaningful way. I really get tired of hearing Paulson and others in the administration saying how they believe in a strong dollar, but taking no action to support the dollar. It’s like listening to a CEO try to talk up the prospects of his company and encourage investment, at the same time he is selling his own shares and possibly negotiating a huge compensation package for himself while the company is about to declare bankruptcy, leaving the stockholders holding the bag. This happens all the time, and it is happening with our currency. The way to prosperity is not by destroying the currency. It is not in lowering interest rates to bail out real estate speculators in an obvious bubble, and those too dumb or lazy to read their loan agreements. There is a natural order. There are natural cycles, even in economics. It is as pointless to try to control contractions as it is to try to control tides coming in and going out. Our government should not try to bail everyone out, and they should stop diluting the money supply and trashing the currency. Respect for the dollar is more important than the increase in export revenue from a sinking dollar. Don’t they get it? They say they do, but their actions don’t support what they say.
I don’t normally show stock charts here, but I’ve been warning for some months now about the bubble in the handful of momentum stocks that everyone seemed to be piling in to. Those include AAPL, BIDU, RIMM, and of course GOOG. Here is a chart of Google showing a complete retracement of the move up from last fall. After the high was in place, at point number 1, you can see two more pushes up, completing a classic three-drives-to-a-high pattern, and in this case with the 2nd and 3rd high lower than the previous. Trend was clearly to the downside after the 3rd high, and all rallies should have been shorted. At the very peak I remember all the positive comments coming out of the bulletin boards, Cramer banging on his desk to “buy, buy, buy”, and one of my favorite contrary sentiment indicator being the coffee shop indicator which indicated a top was at hand. Nearly every day after the market closes I go to my neighborhood coffee shop to read the Journal and relax. It is located in an affluent part of town, and there seems to be many investors or traders that go there to talk about their winning stock picks. I often eavesdrop on these conversations. The hot stocks are always being discussed. In the last year about the only stocks I heard being talked about were the four mentioned above. Most of those doing the talking were too young to have experienced the washout following the previous bubble burst, and were probably toddlers during the 87 crash. At the peak of the move last fall they were overly enthusiastic about all the reasons this move was just getting started, and they were spouting out supportive comments they’d just read on the various investor bulletin boards or chat rooms. It was clear much air was being pumped into these overstretched balloons, and it was just a matter of time for the balloons to find a pin. The always do, eventually. Trees never grow to the moon, but greed always overtakes common sense as bubbles are at their fullest. It is fun riding these momentum impulses, but it is always a good idea to look for signs of the inevitable pin that will pop the bubble. Few investors do. Instead they seek out reasons to justify still higher prices, and their greed gets fueled by fantasy. I always seem to miss the fun part of these moves when the rise becomes exponential, but I also usually miss the pain of the aftermath. But I must say that it took a few times of experiencing the pain of the burst bubble aftermath before I learned my lesson.

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