More Weakness Coming?

I don't have much to say, just a brief update of my prospects for intermediate term future.

As I expected, gold found short term support at the black trendline, defined in my previous post. Now, if this trendline will hold or not is everyone's guess. Gold may consolidate and break out or violate the trendline and search for support lower. I don't want to make any bold predictions right now. Let's just wait and see if gold can sustain a pattern of higher lows.

The stock market doesn't look too healty also. Black resistance line on Dow Jones got touched only once and then price quickly fell off and never came close to it. I guess lows at around 10600 will be breached soon and then it should only be a matter of time before market plunges another 10 to 15%. A logical technical support for Dow Jones lies at arround 9000, but I wouldn't bet on it. The main point is that with virtually no stocks setting up and leaders selling off into strength it looks like the stock market will need at least two more serious 10 to 20% drops before prices become cheap enough for smart money to start accumulating. The only reasonable position right now is cash or mildly short exposure.

Support Lines For Gold

It is now pretty clear that gold has started at least an intermediate term correction. Two very strong down days on Thursday and Friday sent gold more than 10% below its all time highs, which is a correction that, historically, should not recover in just a week or two. And not speaking about silver, which got totally crushed and is now 40% below its all time highs.

So, now that I'm convinced that gold finished its three year bull run, I want to take a short break of trading and look at possible long term support lines for gold. Figure below is filled with trendlines but should be clear enough to read. As I expected gold finally got denied by the long term high channel line that was defined by the first two major tops back then in 2009. This week price also sliced through the blue support line connecting previous three intermediate tops, which means this line will now act as resistance in the future. I think that if dollar had not broken out so viciously out of its month long consolidation, gold would consolidate above the blue line and and break above the red line also. But this has not happened and now gold will have to find another support.

The next logical technical support is a black trendline that has held every intermediate decline all the way from March 2009 up to now. However, I do believe that this line will get violated. Gold has completed its climax top and when these break down, they break down hard, and tend to break the first few "logical" suport lines and convince everyone the bull is dead.

So, the next support line in case of black line violation is green trendline that connects previous intermediate top with previous intermediate bottom. If this one falls the ultimate major support is pink line, connecting an even older intermediate tops and bottoms. I don't even want to think about pink line violation at this moment, so I did not draw lower support lines. If price slices below this one, gold will not see new highs for several years for sure. A new trend will get established at the end, but broken parabolas are not as predictable as clearly established trends.

Speaking in numbers, I think the most probable price reversals lie at about:

• 1550 (black)
• 1510 (green)
• 1390 (pink)

We'll see if any of these numbers actually hold. As I said, broken parabolas tend to violate technical supports and establish a completely new trend. One thing I do know. It will be very difficult to spot the final bottom. I will be looking for specific signs that marked bottoms of past corrections. I will get to that when gold comes any close to forming a reversal pattern. For now it is best to be just an observer and wait for the right moment.

Everything Is A Sell

Gold and stocks are going to gap down big today on open. Anyone holding positions deep into the day is on the risk of further sell-off. I'm issuing a SELL signal on both.

A Sell-off Day In The Stock Market

Unfortunately markets could not keep the gains made last week. MA50 obviously provided enough resistance to reverse indices on the short term bases. However, action in many leading stocks still looks pretty promising as they are trading near all time highs above any resistance. A test of August lows should provide enough time for these stocks to complete there bases. After all, most of them look pretty extended right now and cannot be safely bought. Tuesday's buy signal was maybe a little bit too fast. I should've wait for confirmation, but the behavior of liquid glamours is often more telling than day-to-day general market noise. Anyway, in anticipation of short term reversal my market model is neutral again. For the next week or two I will be closely monitoring if leaders that broke out will be able to build buyable bases. Also, my watch list of top stocks should extend to at least double of its today's size.

Buy Signal On Stock Market

In my last post I speculated how stock market may be fooling us into thinking it is strong, where in fact there is more distribution going on in the background. The action in last few days completely changed my view. Observe the following charts.


Apple, Chipotle, Amazon, Lululemon... There are a number of big cap leaders of the past bull market breaking out into new highs or out of from some sort of consolidation patterns. Let me remind you that a failed late follow through day is usually a very bad sign. I suppossed this will happen soon. However, a consolidation following it is a positive sign. Yesterday's very low volume down day and todays break above new intermediate highs suggest there is still some strength in this market. Add to this all these glamour leaders breaking out and I think market could try an assault into new highs by the mid fall.

However, let's go one step at a time. All mentioned names are now too extended to be bought. Any pullback in these names should thus be a buy opportunity unless something changes my view again. From now on stock market is on buy signal.

Is Market Trying To Trick Us?

Five consecutive up days on good volume. This is what the last week brought us in the stock market. Indices successfully tested sell-off from the beginning of August, established ascending trend line and now Nasdaq is the first on breaking above resistance. Also, market momentum has drastically improved past three weeks as we had only one major distribution day on September 9. I guess this week confirmed that selling before 911 anniversary was mostly due some fear of attacks. Also, my watch list of stocks that are or could get into buyable zone has also extended to seven stocks. All in all, the picture seems to be improving.


Now if anyone is questioning then why don't I issue a buy signal for the stock market if everything is so great, my answer is because I've seen this before. This market has been topping for five months after a two year bull market. 20% corrections don't recover that easily. A sell-off of that magnitude indicates that institutional investors are leaving the market. There was still no major accumulation at the bottom after the sell-off and many leaders of the past bull are broken down or at least look very very toppy (AAPL, NFLX, BIDU, CMG and FOSL just to name a few). This rally is fueled by broken leaders rallying from severely oversold conditions and low-priced, low quality stocks taking the lead.

My studies of the past market behavior indicate that this rally doesn't have much more to go. It is already 10% off the lows and if my predictions are correct we should now see a slow grind higher for maybe another week or two before new distribution days start to pile in. Maybe we even get a sort of consolidation pattern, maybe even a breakout, but the fact is that market cannot rally substantially higher without real leadership behind. And $10, 200k volume stocks cannot be leaders. What we need is major accumulation by instituonal players in high quality, big capitalization stocks. Such accumulation would be cleary seen on all indices as high volume close to the bottom, followed by many breakouts in high quality stocks. No such thing for now. I think we may be in for a very boring fall as the second phase of bear market develops a fake rally before another drop. If I see any short-term further potential in this supposed-bear-market-rally, I may buy a stock or two. But I'm not giving an outright buy signal until I'm absolutely positive that this bear market is over.

Gold Not Acting Well

I don't like today's action in gold. US dollar clearly went into a correction after last weeks huge gains which should be an opportunity for gold to complete its climax top. But instead of rallying hard gold sold of below the minor swing low and it looks like it's going to close beneath it. I think chances of a completed double top on gold are now pretty high, that's why I sold my GLD shares today. I may buy it back later if I see significant improvement, but from now on gold is on neutral signal. If weakness continues I will issue a sell signal without hesitation.

Summer Comes To An End

I haven't been posting lately simply because nothing changed from the last outlook. This time I'd like to take a look on dollar first. For four months the buck has been in a no man's land and it was everyone's guess whether another leg up or a rally out of the three year cycle low will follow. I'm pretty sure we have an answer now. A monster five day rally pushed dollar through the MA200 and left little doubt that dollar should now enter an uptrend for at least a couple of months.

What does this mean for stocks and gold? Well, first of all, it should be noted that US stock market and gold price in US dollars tend to be in reverse correlation with the dollar. If dollar rallies, stocks and commodities fall and vice versa. Don't take this too seriously as there were and will be occasions when this pattern does not hold, but in the long term trends, the inverse correlation is pretty accurate.

So, now as dollar probably entered a new uptrend we should expect both stocks and gold fall? In the intermediate term yes, but not necessarily in the short term. The fact that both stocks and gold held support levels while dollar was rallying suggests that in the short term one final push higher may follow for both issues before a serious plunge happens. If this prediction is correct, gold should complete its cyclical bull market top and stocks should rally up to MA200 during pullback in the dollar.

Of course, all my prophecies may change in one single sell-off day. But, the point is that at the moment I see absolutely no reason why one should sell gold. I don't really recommend buying now as the risk with the dollar rallying seems to be pretty high. But until I see sings of topping I will hold my GLD in RGLD shares.

Similar concept applies for stocks. Shorting is out of the question right now as indices seem to be consolidating. But on the other hand, no obvious accumulation, no leadership and no momentum suggest that every rally should be short lived and a fake out.

For now my market signals stay as they are as we wait for more evidence to confirm or reject my expectations.

Is Gold Ready For Another Push Higher?

Gold has been very nice to us recently. It is actually acting suspiciously well. In my last post I made a speculation how gold could consolidate in an ascending triangle pattern and that's exactly what seems to be happening right now. Yesterday's drop was obviously heavily bought and today we're seeing a nice rebound. However, I think gold is not quite ready for a breakout to new highs yet. The pattern is still too obvious. Another shakeout below the trendline or even below the last minor swing could be enough to shake off all the remaining weak holders which should free the way for a parabolic top.

Keep in mind that gold rarely obeys technical patterns. It simply cannot be traded based on them. As long as we don't see any big sell-off day on GLD or a violation of the last major swing, I think every down move is a shakout and a buy opportunity. I'm setting a buy signal on gold in expectation of a breakout.

Everything Neutral

I reviewed my buy signal on Nasdaq Composite index from the last week and noticed that I have made a mistake. I was too quick thinking that a minor accumulation day could be counted as a follow through day. A 15% plus corrections require more time and stronger accumulation than we just saw. I've been consufed at ambiguous signal I was getting from the market. But now I think everything is on the right track again. Today's down day trigerred a neutral signal on its own and luckily, no big damage has been done to my portfolio. I'm not buying any stock until we get a real buy signal. I will use any rally to sell my TNH long as I still believe this bear market has more downside to go.

To gold. Looks toppy, for sure. Double tops are generally pretty reliable patterns and volume pattern in GLD supports that view. Note that I've been speculating about three possible scenarios for gold about a week ago. It is now clear that the third (no new highs) scenario is off the table. However, the triangle consolidation case is not yet off the table as you might suppose. I was again too careless thinking that triangle consolidation could only be in the form of symmetrical triangle. Again, this is not true. Gold rarely conforms to exact technical patterns. In my opinion it could still consolidate here in some sort of ascending triangle consolidation. The selling today was not impressive and I think there is a chance that gold cosolidates and makes another 15 to 20% push higher. A more negative scenario would be a steady drift higher. In this case I think the percentage gain will be much lower. Any sell-off day would increase odds for the double top case. So there is plenty of ambiguity in gold also. Enough speculation, though. My plan is to wait for a couple more days for additional signals that would confirm any view. For now I'm keeping my stop below the last swing at about 166 on GLD and proclaiming neutral signal on gold.

What's The Next Move

I don't have much to say today, just a little prediction for the next week. I noticed in the past that last two or three days into the holidays are usually down days on moderate volume. This is easily understood, as traders try to reduce the risk and liquidate positions before holidays. The same happened last week before the Labor Day in the United States. I also noticed several times that most often the first day after holidays determines the trend for the next couple of weeks. Traders usually return to the market not to fight but to ride the current trend. The current short term trend is obviously up, so I hope Tueasday will be an accumulation day, which would be a very positive intermediate term sign. Let's wait and see.

However, even if we get a follow through day tomorrow, my personal outlook on markets is bad. I've been shaken out of HANS, TNH is performing poorly, there are virtually no real leaders and my top watch list is comprised of three stocks only. My past experience dictates that real uptrends can develop when my watch list extends to fifteen or above. So, whatever you do, I suggest you be cautious. High volatility could continue for weeks until more leaders develop constructive bases. At this stage the only buys made should be truly the best stocks possible. In bull markets four out of five stocks will go up. In bear markets almost everything will go down. In high volatility choppy markets, as is right now, your chances of scoring are 50:50 even with the best merchandise as most stocks tend to display violent swings in both directions.

First Tests Of Resistance

All major stock market indices are testing the first resistance. In the past I've noticed that Nasdaq Composite is usually the most reliable index to use for accumulation/distribution studies. The Dow Jones on the other hand seems to draw the most reliable trendlines. In the following days I'll be closely monitoring how indices behave in the vicinity of resistance lines.

Nasdaq is already in the buy zone from last Friday accumulation day. This is the first positive sign. The second is that no distribution has been spotted in any index during this rally. The third positive sign is that, after facing resistance, the market seems to try to consolidate before a breakout. On the negative side, all other indices except Nasdaq are still in neutral mode as no major accumulation day has been seen in these. The two leading stocks I bought, TNH and HANS, are not really performing as champions. And the third, the most negative, my top tier long watch list is virtually empty. I really don't see any high quality setups developing in the leading stocks right now. From my perspective, this still looks like a bear market rally. But, we should wait at least a couple more weeks to see if markets can penetrate through resistance and keep the gains. If this shall be the case, another bull market might be on the way. For now, I'm staying about 40% invested in stocks and 20% on gold and have no intention to increase exposure until conditions improve.