A Test Of October Lows?

Finally, a "bullish triangle" pattern forming on SPX broke to the downside. First, I'd like to say a word about patterns on stock market indices. The simple fact is that in most cases they are completely irrelevant. SPX index is a weighted sum of 500 stocks and any triangle, cup with handle, double bottom or any other pattern formed on such an index is more of a coincidence. It's usually much better to follow the accumulation-distribution pattern which has been strongly in favor of bears recently.

Anyway, I'm almost certain that the first intermediate bear market rally has topped and we should be facing gradually lower prices for at least another 3 months. The first downside target is around 1125 on SPX, where buyers came in during the first decline. In anticipation of these levels I opened an SDS long position (2x inverse SPX). Although I don't believe the October lows will hold for long also, I don't want to make any bold predictions until my first target is met. Any minor rally from current levels early next week should provide an excellent opportunity to open some additional short positions in my opinion.

As seen from the SPX chart above my market direction system has been pretty solid in the past few months. Although it produced several consecutive signals in a very short period of time, which is not desired, it has generally kept me on the right side of the market. I'm especially confident of the last sell signal as these kind of "sell-off - wedging rally" topping patterns have proved as extremely reliable in the past. Also, a triangle on SPX turns out to look like a head and shoulders topping pattern on COMP, which is another strong distribution sign.

I've been talking about the possible triangle formation forming on gold for quite some time. If this turns to be the case I think precious metals are in for a monster rally in 2012. If, on the other hand, gold breaks below MA150, which was a strong support for 2 years, I believe we'll have to draw another support below the September low. Which is quite possible as it better coincides with the anticipated stock market low in early spring 2012. It is still too early to say anything in particular, though. Right now, gold is on a sell signal and should be headed for a corretion.