Failed Confirmation In Equities, Gold & Silver Weekly Trends
July 10, 2011 1 Comment
I did a video before the close on some of the action from Friday’s trading but tonight I will follow up on that analysis and update a few new items that have developed since the close on Friday. As shown in the video analysis on Friday, the markets had above average volume in the morning session during the gap down off of the dismal jobs number, but immediately after a 200 MA pierce on the 10 minute chart, a buy program pushed the market higher and volume soon dried up which lifted equities into the closing bell. My interpretation of this is that since most of the Wall Street financiers tend to take it easy on Fridays, (which is partly why Friday’s are historically known as positive days due to less volume) the large bank and HF’s were just waiting to hear the jobs number so that they could trade based on it, and then proceed to stay out of the market for the rest of the day.
Simply put, Friday’s action was nothing but profit taking. I think we’ll see some more downside early next week but remember that it is an options week so expect violent swings. We are still very overbought at the moment and usually the institutions take the market in the opposite direction that the market is headed in going into options ex.
On Friday the managed money took profits off of the jobs number and then largely stayed out of the market for the rest of the session. The reason why I believe we’ll see some more selling next week is because of options expiration which usually includes high volatility and high volume that generally favors the downside. We’re also overbought going into the expiration which could take for some very wild swings in both directions. More importantly, I think we’ll see more downside because we’ve only had a one day pullback. If you are up 7-8% in less than 2 full weeks, the jobs number just becomes an excuse to take profits off of the table, but you wouldn’t try to buy back those stocks you were up on if they had only pulled back .5 – 1%. You would most likely wait for them to come back in at least 3-4% for a 50% retrace before trying to buy the dip.
Additionally, as you can see on the chart above, the SPX failed to confirm above the critical 1345 level on a closing basis. A failed confirmation means that it needs to come back in again before it can retest this pivot.
The failed confirmation also extends to the weekly chart. Yes, it did confirm above the 20 MA, but whenever you have two levels that are that close to each other, you should always consider the farthest level as the most important one. So, in this case, 1345 is more major and the 20 MA is minor.
The Q’s also could not confirm above a major resistance and the level on this chart is even bigger than the one on the SPX. We’ve now hit a quad top (triple top on the weekly) with Friday’s close because the Q’s failed to close above Thursday’s closing price. The $59 level on the QQQ has not once been confirmed above since we initially tagged it in February. A retrace this week should take it to $58 at the least.
Adding more pressure to the market will be Italy, which appears to be the next pig nation to begin making headlines. Some European officials called for a $2T aid package which is double the size that the original plan was supposed to be and the EU has now called for an “emergency” meeting to discuss the unsustainable debt levels and perhaps how to attempt to contain the contagion. In short, pressure on the Euro, means a stronger dollar and a weaker equity market.
The Euro is near the lower end of a symmetrical wedge with support at $141 and a tight resistance level of $143. Any move this week should be decisive because the trading range is so tight, a breakdown and confirmation below $141 would send the SPX lower while a gap above $143 would continue to hold the current situation steady.
Moving on to gold, there has been a lot of noise this past week surrounding a possible breakout in the PM’s. I touched on this Friday but I do not believe that this is the case. Gold is still extended from the 3 year trendline on the weekly chart and has not completed the current down cycle. I’m actually somewhat surprised that gold has rallied over the last week considering the lack of news out of Europe, but nonetheless it is where it is. I think the absolute lowest it gets is $1450 and it will do that within the next month. I think it’s likely that Gold will rise to somewhere just below $1700 (possibly $1675-$1690) before ending the year around $1650 give or take.
I haven’t looked at the weekly chart for silver on a long term basis for a while but I really love this topside trendline that extends back to early 2009. With the recent surge, it is likely silver tests and fails a break of the 20 MA on the weekly though it is possible it gets as high as $38 in the process. It will then continue the leg down into the lower trendline and make a long term bottom. Speculation past this is too far ahead to make any guesses as silver trades much less like clockwork than gold does but as of right now silver is predictable enough to trade, and for the long term investors, to buy during the dips.
A week or two ago I said that TLT would be a buy for a move up above $98 if it had a pullback. Granted, the move down was sharp and I did not expect it to move so violently, but I did nail the bottom in this to the exact day and it is now 3% off of the lows after recently piercing the 200 MA. Treasuries recovering could spell headwinds for equities and TLT also negated a possible bear flag on the daily chart. It is now back above the 50 MA with Friday’s high volume surge and can confirm with another positive close tomorrow.
TLT had a sharp decline on the weekly chart as well but it also failed to confirm below the 50 MA as well as $95.20 which has been a master level for the last 3 years. So that’s two rejected pierces of major support levels on TLT with Friday’s move.
As you can see, the story this week has been all about confirmation and particularly, the lack of it. which is why I still favor the downside going into next week. The market defied taking the stairs up and the elevator down by instead doing the opposite, but now it is time for a bit of rebalancing. Certainly it’s possible that the market can still move higher after coming in first, but I would be amazed if the SPX managed to get back to 1370 this week and the Q’s to broke above $59.21 given the current overbought status, the rally in treasuries, and the pressure on the Euro.