Nov 21st, 2009 by Doug Tucker
Stock indexes tried to push to a new recent high early in the week, but mostly feel back on Thursday and Friday. The last three impulses up have been quite evenly space and symmetrical, as can be seen on the chart to the left. The blue lines over the prices are the Ehler’s Mesa Adaptive Moving Average, which I use as a simple definition of trend. The previous drop in prices had those lines just crossing down but quickly turned back up in the direction of the main trend. Using technical indicators is not an exact science. I would consider this uptrend still intact as it is still forming a pattern of higher highs and higher lows. This will of course end at some point. The failure of much follow-through of the recent new high could be interpreted as the end of three drives up and have a bearish implication, but the same could be said of the previous tops. You can see a pattern of negative divergences in the adaptive CCI in the lower sup-graph. (For those not familiar with the CCI click here for basic understanding, and also refer to the other CCI articles on this blog for details on the adaptive version.) Negative divergences can precede a change of trend, but there can be a long string of negative divergences that fail to signal the end of a trend before a successful negative divergence develops. Be aware of this when back-testing, as the successful divergence seem to pop off the page, while the failures get glossed over. The eye can play tricks when looking at past data. As much as I feel this market is overdone on the upside, there is just not sufficient evidence to conclude a reversal is at hand yet.
To help get some perspective it is always helpful to look at the next longer time frame. The chart above is an update of the weekly S&P etf that I posted a few weeks ago. The middle red line is the 50% retracement back up of the entire previous downswing. This area has now been slightly surpassed after it turned back price on the first attempt a couple of months ago. The uptrend is clearly intact on this time frame. Also, the adaptive CCI in the lower sub-graph has remained above the plus 100 line (dashed cyan line) so this indicates, not guarantees, but just indicates that the uptrend is still alive and well.
One negative is on the chart above of the financial etf or XLF. The indicator in the lower sub-graph is a version of the Money Flow (there are several formulas for this indicator). You can see a series of negative divergences, with the money flow now almost at the neutral, or zero line. I see the Money Flow indicator weakening on many stocks and other indexes as prices remain near highs. Also, the Standard Error Band indicator over prices is rolling over. (Click here for article on that indicator.) The red horizontal line under prices would be the line in the sand for bulls. If support doesn’t hold there could be a greater impulse down that would most likely drag the broader stock indexes down. I know it sounds like I’m suggesting the market can both go up and down. It is rare that conditions are 100% on one side or the other. There are always cases to be made for both sides. Making a decision on direction is usually weighing all the evidence at hand. When all the evidence points to one clear conclusion, most likely all traders are loaded up on that side of the trade and prices will most likely soon reverse direction.
There seems to be no stopping gold. It is clearly entering bubble territory. The dollar carry trade is predictably creating bubbles. Most likely much of the money going into the general stock market is a result of near zero interest rates. The money needs to go somewhere. But the perception of an ever lower dollar will create bubbles in other assets, which seems to be the case now with gold. If the dollar were to rally at all, and interest rates bumping up a bit could case this and cause the carry trade to unwind, there could be an exodus out of gold. It is difficult and unwise to fight the trend, but just beware that the bandwagon is fully loaded. Of course all the reasons why gold will keep climbing higher are well known and discussed at length on gold related sites such as 321gold. Fundamentals usually come into line as prices peak and stay bullish long past the peak so traders often don’t understand the beginning of a turnaround. I have no clue how high this can go, but it might be a good idea to hedge the downside as this market can unwind quickly and without warning. I remain a long term bull on gold, but I think currently gold has gotten way out of line with reality. It may very well go much higher, but just don’t assume it will be a straight ride up to the moon.