Gold up, Stocks up, Obama down

I’ve received more than a few emails asking if I’ve turned my blog into a monthly report. Well, I’ve been in New York since my last post. I was going to bring the laptop, but decided I needed a complete rest from the markets. We have a mid-town timeshare just south of Columbus Circle. We are steps away from some of the finest museums, concert halls, theaters, and restaurants in the world. When I lived in New York full time I often needed to get away from the big city to calm down. Now that I live in sleepy little Seattle, I feel I need frequent revitalizing by getting back into the energy and culture that only New York can offer. I suppose the grass always seems greener. The problem with Seattle is there is just too much of it. While away there were many swing trading opportunities available. Even the neutral option income trades made money. But all without me involved. Sometimes it is necessary to clear out positions and have a complete rest rather than always being in trades. But fortunately I still held a small core long position in gold.
Gold has been getting more and more attention as it climbs upward. I’ve often said in this blog that it is best to trade in the direction of the trend, however sometimes that trend gets into nosebleed levels. We may be approaching that in gold at this time. It is worth keeping an eye on possible triggers that could cause this market to run into trouble. I don’t advocate trying to pick a top and shorting a strong uptrend until that trend has actually reversed. When I first started trading is was very compelling to try to pick turning points in markets. I have a contrary nature and enjoy the challenge of going against the herd. Many indicators and techniques can indicate perfect reversal points in uptrends, after the fact. The successful counter-trend signals seem to jump out of the charts when looking at past data. It is a bit more difficult in real time, as the eye will gloss over the more numerous failed signals. Bottoms are a bit easier to pick as lows are often made in a panic and price rejection can be easier to spot, at least in the markets that the public is involved in such as stocks and gold. Tops are a bit trickier as greed can last longer than panic.

However, when warning signs occur it is best to be on one’s toes. The above chart of the daily gold etf in the upper sub-graph shows the beautiful breakout of the triangle (red lines) that was displayed on this blog several posts ago. One short digression here: when I posted this chart back when the triangle was forming, prices were at the upper region of the chart window. It has always been difficult for me, and I know many traders agree, that when a buy signal comes in after an already extended move, and prices are bumping their head on the upper edge of the chart and monitor screen, it is difficult to visualize prices extending further upward. It’s a psychological problem. To overcome this I tried centering the last price so there would be lots of room in both directions, but it squeezed the price bars too tight. Now I just keep in mind that there is room above what I can see on the chart. In this case, after prices broke out of the triangle, what looked like a high price now looks like a low price. This may seem simplistic, but it is important to keep in mind that the markets can move to levels that are difficult to imagine, especially when looking at the confines of a chart window. Perhaps my use of range bound indicators has caused this visual impairment. But I am aware of the problem and fight to overcome it when viewing charts in extended uptrends. But I still looks for clues to indicate exhaustion.

The chart in the lower sub-graph is the XAU, an index of gold stocks. You can see the divergence between the recent push to a new high in the gold price, and the failure of a new high in the gold mining index, as seen by the diverging yellow lines. I’m not one who generally believes in inter-market analysis, as I’ve seen far too many long standing relationships get a divorce. Even like minded markets like gold and silver, or wheat and corn, can have fundamentals that cause them to separate. And there certainly are fundamentals that can cause the companies that mine gold to not participate in excalating gold prices. Some factors are bad hedging practices by the mining companies, labor problems, environmental issues, and a long list of many other issues. For many years the XAU has been a good leading indicator of gold prices, and with the impulses in the miners having quite a bit of leverage to the actual gold price. Many more products are available today to participate in that market, so perhaps that relationship is changing. But it is still worth keeping an eye on failures to confirm new highs or lows between the metal and the stocks that mine it.

Another divergence is indicated in the chart above of the gold price in Euros instead of US Dollars. (Chart courtesy of Click chart for link to that website) Much attention has been made of the move to new highs, but the price of gold is not yet making a new high if prices in Euros, or in Australians Dollars, Yen, and many other currencies. The main impulse move from 2005 to the previous peak was generally made across most all of the currencies, so this last push really only seems to be a result of the dollar falling. This can change, but so far the story only seems to relate to gold prices in dollars. If this holds and the dollar should rebound, gold could come down hard. I’m not forecasting that by any means, but it is something to keep an eye on. It is just a piece of the puzzle.

Finally, the S&P made a nice correction, but appears to be resuming the uptrend. The chart above shows a large uptrend that was recently broken. I normally don’t like to use rigid lines for a trendline. The market is more fractal in nature, but rigid trendlines are used my most analysts. The red line shows three lows where the trendline can be connected. The red line was clearly violated a couple of weeks ago. It is common for trendline breaks to rebound to retest the breakdown point. So far the market has rallied back up to that point. I also drew a linear regression channel from the spike low to the recent high. The channel width was determined by the low in about the middle of the chart. The most recent low supported almost to the tick on that lower channel. If the market can roll over hear I’d expect that channel to be broken to the downside. This market has shown much resilience, so nothing would surprise me. Another leg up is possible, but it seems this market might need a rest. At the moment it seems to be sitting at a crossroads. I will let the market tip its hand before picking a direction and strategy. The trend indicators are starting to roll over, and have done so on many individual stocks. If the trend turns down I’ll look to go short rallies. But that is a big IF at this point.

On the political background, there is big vote coming on communized health care in the house. That would be a plus for Obama, who has had a rough week. Despite Nasty Pelosi calling the Tuesday election a victory for democrats, there does seem to be a shift of sentiment. In other words, the Obama kool-aid seems to be wearing off as evidenced by the many republican victories last Tuesday. Also, you may have seen this article from of all places a Chicago NBC (National Barack Channel) reporter. It is on his insensitivity to the horrible shooting in Texas. If you haven’t seen it please click here to read article. It is truly astonishing that this man got elected. I don’t think I need to say more. The actual video is widely available.

Also, there was a good segment on Glenn Beck with Lord Monckton discussing the global warming hoax. It is broken up into seven short segments, and the last one is a little jumbled, but it is worth viewing. Click here to view.