Big up day for stocks, big down day for commodities

qqqq0401.pngStock indexes rallied sharply today. The indexes gapped up right from the open and actually extended the range in trend mode throughout the day, and on increasing volume. The chart to the left is of the Nasdaq/QQQQ. I previously posted this developing chart. I noted the change in trend to up, and the subsequent pullback to the moving average, where I placed the up arrow. All this development occurred on increasingly lighter volume. The moving average has so far held the pullback and a nice rally resulted. There is more clarity on this developing price structure in the chart on market profile later in this post. The weird and much advertised double bottom is still a worry to me. I put the baby bull up in the upper left corner. Even if this rally fails I think the bull is warranted. If another down-leg should occur on heavy volume then the bear will have to return. These are very difficult markets to get a handle on, but with the breakaway gap and apparent trend change, it looks like more upside is in the cards. There will probably be many sharp pullbacks as this tries to work higher.
gold0401.pngOn the other hand is the gold chart. I’ve been calling this a bubble for some time. The first warning was the divergence when the gold price passed the magic $1000 level, as noted on this chart. Then the moving averages crossed down, with an expected pullback to the down-trending averages. Meanwhile momentum was in a declining mode. The rally up to the moving averages failed, as most of the analysts were calling the pullback a good entry point on the long side, and then the market gapped down, and continued lower today along with the rise in the dollar.
wheat0401.pngJust to show this drop in commodities wasn’t isolate to gold, here is the May Wheat chart. You’ll notice a textbook case of three drives to a top, all on declining momentum. On each of these drives up CNBC had analyst after analyst spouting the fundamental case for wheat to continue up to the moon. I won’t name names, but many of these analysts were well respected and should have known better to suggest that this bubble would continue forever. All they had to do was look at the commitment of traders report, or use some basic technical analysis. So far the down-move has retrace all of the last leg of this bubble. And that’s just so far.
profiles0401.png
The last chart is something that I use but haven’t mentioned previously as it is beyond the scope of this blog as relatively few traders use this methodology. Please click on the thumbnail twice to enlarge the chart. (When you click the first time it may only enlarge part way. Please click on the fuzzy chart a second time and it should enlarge fully, and should be clear. At least it is on my computer. Let me know if you have a problem viewing it.) These two charts are the market profile. The left chart is of the Nasdaq mini futures, and the right chart is of the gold etf, or GLD. The cyan ellipses that I market on both charts shows very clearly the potential for a change in trend. On the Nasdaq chart you could see the previous profile was not only within the range, in other words, an inside day, but the developing value area refused to work lower than all the previous auctions on this chart. The value area is the purple line to the left of each profile, and represents approximately one standard deviation of the activity or volume of that day. In case you are unfamiliar with these profiles, each bell curve represents a single day session of price activity, with each letter representing each half hour segment of trading. As prices revisit the same price level over time a bell curve will result. The wider areas of the bell curve represent accepted value and the thin areas are where there was little activity or price rejection. In a trend day such as occurred today there will be thin areas where price is moving away for that area in an effort to seek value, or to seek an area where the opposite response will occur. You can see on the day that I market in cyan that the profile was squat and wide, showing the market was rotating back and forth without further progress in the main direction of the trend, which was down. The odds favored a reversal. As a coincidence, the lows also held on the moving average.
The gold chart to the right shows a similar situation in reverse. You can see a two day island top, where I marked it in cyan, which also occurred on the down-trending moving averages. The price bars on the daily chart would show a slightly lower close from the first day to the second, but these profiles show a more clearly defined lowering of the value area. But more important was the squat nature of the profiles, which indicated that the market was not facilitating trade at the higher levels and that the odds were that prices would have to test lower to find trade activity. And the market did. Today the market gapped down sharply. The lack of a trend day follow-through could be worrisome for those holding shorts in the very short term, as the market may attempt to back and fill for a while, but it looks like the back of this bull market bubble has been broken for now. I recall at the height of this move nearly all the gold analysts were wildly bullish and calling for continuation of the up-move, when technical analysis, and especially the profile, were saying just the opposite.

Leave a Reply

Your email address will not be published. Required fields are marked *