Mixed Signals

Thursday and Friday of the past week brought quite some ambiguity regarding the favourable direction of the stock market. Thursday was pretty strong distribution day on S&P 500, Dow Jones and NY Stock Exchange, but not on Nasdaq, which is the most important index in my opinion. Volume on Nasdaq was very low on a down day and consequentialy gave us a buy signal on Friday as index advanced strong on increased volume. Although I would very much like to see a stronger follow through day on all indices, the action we are seeing still looks promising as volume slowly subsides. However the price volatility is still high, meaning a battle between bulls and bears is still in place. For a sustained uptrend price action should stabilize.


Let's take a look on gold. On Thursday gold pierced through ascending trendline, but closed strongly above it, which is an indication that the trendline break was heavily bought. On GLD, the most widely traded gold ETF, this was seen as a gap below the trendline and advance for the whole day. I noticed in the past that technical levels on gold often get breached, before final advance into intermediate tops. The volume on this accumulation day was good, but not very high, which is normal, as not very many big institutional traders are willing to buy into parabolic tops. However, the trendline break, solid volume and strong close indicate that gold might try another stab into new all time highs. Maybe even as high as 2000. A follow through on Friday and a swing low were enough for me to issue a BUY signal on gold and I even took a position in GLD, with a very safe stop below the recent swing low.


There is only one thing I would like to make crystal clear to anyone reading this. I DO NOT expect any big profits from this trade. I only took a position because gold gave me a logical stop area. I think many traders shorted the recent top and their covering could fuel this rally. And any move into new highs would also fool many traders into thinking that this is some sort of a breakout and that gold will just advance from here for years. Parabolic tops ALWAYS break down when the loose support of institutional players! There are never any exceptions to this rule. It is only a matter of time when everyone decides to take profits and lets the price fall. Any breakout into new highs would thus issue a SELL signal for me and after that I would trail my stop higher. I still believe this is a parabolic run into long term top that should roll over soon. If and when it does, the drop should be breathtaking. I strongly advise anyone wanting to accumulate on gold for long term investment to wait for a more considerable correction into a weekly cycle low and then start to buy. We should not wait too long for this to happen. Just don't let be fooled by media pundits that gold will just rocket to 3000 from here.