Stocks mixed, gold higher

q0208.pngStock indexes were mixed on Friday, with the Dow and S&P lower, and Nasdaq higher. Yesterday I mentioned that the Nasdaq opened on Thursday into the rejection area from the Jan 23rd candle, and quickly recovered to create a reversal bar up. This was a rather weak reversal bar as prices were unable to hold any upside momentum. But on Friday prices were able to open high and close still higher, near the upper end of the Thursday bar. I drew a red line from the area of rejection on the 23rd. The yellow line shows area of logical resistance, which also coincides with the slower moving average line. The shortest momentum indicator that I watch turned up as of the Friday close. There is a slight divergence in this indicator with price, although price didn’t drive to a new low, the indicator did turn up from a higher relative area. The red and green dots on the zero line of the indicator are painted when the raw indicator line crosses its signal line. This momentum indicator is based on three day momentum, the double stochastic is that I usually put on these charts is a 10 day, which would track a 20 day cycle. That has not yet turned up, but is oversold and could set up a divergence as well if price rallies a bit more. The upturn in short term momentum along with the price rejection is setting up a possible rally in the Nasdaq. The trend is still down, so if this rally occurs it is just a counter-trend bounce. There is very little evidence so far to support much of a rally, but this is the first clue I have so far. The advance/decline ratio is still negative, but like the double stochastic it could turn soon if the market doesn’t get hit with another wave of selling early in the week. With very little evidence it is not worth assuming a turn is at hand, but enough of a tradeable bounce might be in the works. If more of the indicators turn up there may well be a challenge of the yellow line of overhead resistance. If that could be overcome there might be a more meaningful retracement back up.

The S&P is less clear. The drop in the S&P over the last week has so far held at about the 50% level of the rise from the Jan 23rd low, but momentum in all the indicators that I watch is still pointing in the southbound direction. Sentiment from the media on stock in general is getting a little too much on the bearish side, which leads me to believe a rally could be in the works. I’m not expecting too much. The primary trend is down and counter-trend moves are trickier to trade that with-trend trades.
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The gold market rallied again on Friday. I pointed out the existing uptrend and the momentum turn back up in the direction of the trend. I’ve been cautious of this market as the trade has gotten more and more crowded with the fast momentum money. A big cause of concern is the divergence between the gold price and the gold mining stocks. The chart to the right shows the gold etf in the upper graph, and the gold miners etf in the lower graph. Usually the gold mining stocks will lead the price of gold and accelerate at a faster pace than the actual metal. You can see a clear divergence, with a glaring failure of the last high in gold to be confirmed by the mining companies. The trend lines have actually turned down in the mining index. I know that gold bugs will give all kinds of reasons why this is happening. They will say that people in gold stocks are being forced out by the decline in the general market, supposedly to meet margin calls. What a bunch of hogwash that thinking is. There is no evidence to support this. Also rising costs of mining is keeping the miners from making as much profit as they should. Again, this may be a bit of a factor, but not enough to cause this much of a divergence. Mining stocks should have about a three to one leverage over the actual metal price. Higher production costs would if anything give the stocks even more leverage to a rising gold price. The highest cost producers usually make the highest percentage gains when the gold price goes parabolic, as they have the most to gain. Another excuse is that the etfs have become so popular that investors or buying that instead of the stocks, and that forces the etfs to purchase gold, so the mining stocks get left behind. There is probably a bit of logic in this, but again not enough to support such a divergence, in my opinion. If I were long gold at these lofty levels I’d be very cautious of a failure around the previous recent highs. It is encouraging for the gold bulls that this last push up was done in the face of a stronger dollar. Maybe gold is now following wheat prices, which has been limit up for the past several sessions. Maybe that’s another bubble in the works. Grains have a habit of reversion to the mean, in a very mean way. High prices have a way of curing shortages as farmers reallocate and big crops follow. Look at any long term grain or soybean chart and you’ll see spikes followed by years of flat prices back in a normal range.

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