Gold Weakening

How things change. About a week ago I've talking about gold possibly setting up for the breakout to the upside. I know many traders like to buy "in the face of an upcoming breakout", just in case price gaps up at the open, leaving latecomers behind. The problem with this strategy is that one presumes a breakout as inevitable. In other words, you become bullish on stock before you even get a bullish sign, which of course is a breakout itself. My experience shows this is a poor strategy. I made this mistake several times and almost always regretted it. But not this time.

In light of this short aside, gold seems to be negating our bullish outlook from the week ago, as it is now on the verge of breaking down. Now again, I'm not saying it will, but last couple of day's action suggests there is more weakness coming for the precious metals. Several ascending trendlines could be drawn. If our interpretation on the chart below is correct, a break below the triangle bound would be a red flag for gold. The final confirmation of failed short term cycle and thus possible continuation of correction would be a close below the last support (green line). We'll get back to this later.


Stocks are not behaving any better than gold. The two-day coil-consolidation right below MA200 broke to the downside on a sell-off distribution day, which is negative, of course. On the other hand, Friday produced a pretty strong reversal, suggesting Thursday was just some panic selling on bad news. We'll have to wait a little bit more for a consolidation and a breakout or a wedging rally, followed by another sell-off. With a little bit subjective view, I suppose price could easily meander between MA50 and MA200 until the end of the year. Definitely not an environment for a momentum trader. Additionaly, there is still no buy signal more than two weeks into the rally, which is sign of caution by itself. I still believe stock market will continue its bear market trend soon.

Gold Has To Decide

I'll start today with gold. Yesterday it sold off, which almost made to post something about gold probably breaking to the downside. But today it is rallying hard back up. I have absolutely no clue on earth what's the next move for precious metals. Luckily we have a pretty decent pattern to watch. The triangle is getting squeezed to the apex and gold will have to make a choice soon.


Today's news driven market is very unfavourable for anyone trying to grab a share of a trend. Not seen on the daily chart below, but intraday charts are ful of wild swings in both directions, causing breakouts and pullbacks to fail, only to reverse later in the day and fail the very next day again. In such environment it is best to stick to the larger perspective and trade longer term swings. There is nothing on charts that would change my mind about stock market being in a cyclical bear. I still expect the current rally will top some time in December and roll over down to at least October lows. The problem is that now we have resistance at previous top but also support at previous lows and MA50. So this chopfest may continue for quite some time, trigerring several false alarms in both directions. I think we should not a expect a textbook technical top. However, I would love to see a failed breakout above MA200, because this would give us a very reliable stop for short positions. All markets still neutral.

Cards Shuffled Again

I must admit the last week's rally in stocks surprised me. I fully expected any bounce will be just a short term short covering rally, but for now the last five days look more like the beginning of a new short term cycle that should move above October high.

First of all, the swing at the bottom was extremely powerful. Second, after a day of mild consolidation, market just slashed through the MA50 on huge volume, closing at the high of the day. This is the basic definition of a follow through day, that often starts a new uptrend. And third, market was able to keep the high levels for the rest of the week, confirming the follow through day.

However, my scepticism still prevents me from announcing a buy signal. A really huge volume on indices is usually not a good sign. Often such too-good-to-be-true-looking FTDs will fail two to five days later. And we are officially still in a bear market. I just don't think that bullish sentiment has been cleared enough to pave the way for new bull market. So, for now stock market will stay in neutral mode. Things should get clearer by the end of the next week. If MA50 stays and maybe even MA200 gets conquered I will start to believe that the bear is at least temporarily over. And I mean temporarily. The biggest problem right now is the leadership. There are virtually no constructive bases in big cap leaders seen at the moment, which means that chances for a sustainable, many month rally, are low. Indexes are being pushed up by oversold stocks, which is usually not a good sign.


Moving forward to gold. I guess we now have a confirmation that many investors see the same picture as we do. Yesterday gold tagged the descending trendline perfectly, sold off a little bit, but stayed mostly neutral for the rest of the day. I suppose this is a bullish sign. A partial retrace-consolidation just below the trendline would set gold, silver and mining stocks for a powerful breakout. I'm starting to lean to the bullish side. The fact that gold is probing resistance levels and not selling off probably means the sellers have been exhausted. If price breaks above yesterday's high, I will definitely buy a stake in precious metals and proclaim a buy signal.