First a little memo. I'm on vacation next week, so there will be no posts. Also, I probably won't be able to do any trading, thus no trading plan this week.
After six weeks of steady falling the stock market was finally able to produce an up week - an incredible 4% gain! However, the action we're seeing is still pretty much neutral. Volume increased as market stopped falling, but a doji candle closing below the middle is not exactly a reversal sign. I don't want to make any long term predictions, but I strongly doubt that we will get a quick reactive rally. At least it doesn't look like we should.
I think two scenarios are most likely. If market starts rallying next week without any real signs of accumulation behind, it could be in for a head and shoulders top. The main property of such rally would be a very slow grind higher on weak volume. It should slowly top in nicely rounded manner without any signs of mass distribution also.
The second scenario is a couple of more weeks of increased volume and no more downside price progress. If market then just shoots up with a solid follow through, it could even go into new highs. Of course, these scenarios are just guessing, I'll touch them again when we get any sort of confirmation. For now, it's way to dangerous to short, especially if SPX undercuts 1250, and I will also not buy anything without seeing a reversal on several indices.
A quick look on gold. As I suspected several weeks ago, a May 20 follow through day was a sign that gold wants to go up. I also predicted that it shouldn't go much higher after a nasty top reversal and a bottom reversal in US dollar. I thought a double top may be a possibility.
Indeed, a GLD produced a wedging rally on lower and lower volume. Meanwhile, dollar successfully tested May lows and should now be ready for a substantial move up. I would officially proclaim that double top on gold is out of question if this week didn't have a look and feel of a shakeout in an uptrend. A long tail hammer candle on a volume increase says that gold may still have a chance of grinding higher along the green trendline for some time.
However, I'd much rather see a triangle consolidation instead of a double top. A double top would probably pull the rug under gold and such a plunge would be very difficult to bottom fish. A triangle consolidation on the other hand would provide a very clean entry point. In any case, my intermediate target on gold is a touch of the blue trendline and until we come any close to it, I'm not even considering to buy and precious metals.
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