S&P Closes Below 50 Day MA For First Time In 6 Months

The market was extremely rattled today as investors flew out of equities and commodities and into bonds and the dollar. I think that this is the beginning of more dollar index strength but the moves in the precious metals sector today were beyond irrational at least of the precious metals producers, some of which were down 10% or more for the day while gold and silver bullion was down one and two percent respectively. The precious metals sector was well overbought from a technical perspective and has been due for a pullback, but some positions were way oversold today and I believe that they will continue lower for a few more trading sessions.

The S&P 500 closed at a monthly low of $1295.11 which resulted in a close below the 50 Day MA – something that had not happened since September 1, 2010. This may be the beginning of a correction in the equities market, and the I believe that the stories which I have covered recently are coming together as expected. On Monday I said that in the near future I see stocks slowing down or perhaps peaking, the dollar reversing vs. the euro, and continued strength in commodities as PIIGS countries face sovereign debt issues. These particular markets appear to be unfolding as I have forecasted. As far as the move today in precious metals, the pullback was well overdue (I also had previously stated before that I expected one to happen soon) and I firmly believe that it will not last for any significant amount of time.

The S&P broke the 50 Day MA as well as the 6 month trendline that it had previously used as support. On Monday, I mentioned the divergences and the RSI and MACD – it appears that the wedge that was setup along with those divergences has also broken down and the volume behind the trading has been in favor of the bears for the last 2 weeks at least.

Those who follow my work know that as a contrarian play, I’ve picked the dollar to rally against the euro. Today the dollar index was up $.77 as the euro fell $1.09. The dollar is also up $.90 for the week and the ETF UUP can complete a key reversal on the weekly chart that’s pictured above with a positive, flat, or slightly negative close tomorrow. In any case, even if it closes substantially lower and misses on a key reversal, it is likely to still be bullish engulfing which means the market has rejected the absolute lows and is giving us a buy signal.

Conversely, the euro index is forming a bearish engulfing pattern for the weekly chart and can breach the lower trendline in the rising wedge pattern that I depicted monday. The catalysts for the weakness in the euro have been the Moody’s downgrade of Spanish debt, the sharp rise in Greek bond yields, and the inevitability of a Portugal bailout this spring. I see these trends continuing for some time and I believe the best way to play this is from the long side of the dollar index.

Gold and silver were slammed hard today with gold losing over $19 and silver losing $.84. Shares of mining and royalty companies were hit extremely hard, some being down 5-15% which is a clear cut indicator that we are only in phase 2 of the bull market.

Gold broke its month long trendline with volume on GLD only slightly above average but the move was a big one nonetheless. Gold found support at $1400 and rejected the lows which were fought off right at the 20 Day MA. The momentum is in favor of sellers and the next support level is around $1380. I expect to see some weakness here but the situation in Europe will bring money back sooner than most people think.

It was a shock to see some of my silver positions down over 10% today however a second look at the market’s activity assured me that there was no reason to panic. First of, despite this bigtime selloff we’re still trading 6% above the 20 Day MA and 15% above the $30 support. In addition, intraday lows of nearly $34.50 were rejected and we’re still overextended from trendline support.

It would also take a roughly 6% selloff tomorrow to close below the previous candlestick on the weekly chart. So despite all the action today, even the short term momentum is still intact (from a technical perspective) though I do believe that the trendline on the daily chart will likely break before silver makes a run at $36. Based on the current direction of the 20 Day MA, we should find some type of support around $34.20 – $34.50. Currently, I am waiting for this market to give me a buy signal, until then, I’ll continue to watch the market correct lower.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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