By: Fernando Gonzalez, EvolutionTrading.net, 24 November 2009
The US equities markets have gone into a near comatose state as the Thanksgiving holiday approaches. For almost 2 weeks now, the market has been permeated by extremely narrow range trading, and very short-lived, 30-minute price spasms one way or another. These are, no doubt, signs of drying liquidity and deteriorating breadth.
In sharp contrast, the precious metals market, Gold in particular, continues its ride into the stratosphere and has taken center stage for excitement in the financial markets. The events over the last 14 months between equities, money and fundamental economic progression (maybe regression) gives new meaning to the old curse “may you live in interesting times-” these are all downright bizarre. It feels like someone kicked the monopoly board and we are all in a state of figuring out where all the tokens belonged. Perhaps that will end soon, as we hit some important technical milestones (it’s not the Dow 10,000 level, so long out of fashion!).
Let’s take a look:
CHART: SPY Weekly ~3 years window
Blue line: 50% retracement to All-Time-HI (ATH)
Yellow Line: 50% extension-Time (ATH to Mar09 LO)
Orange Line: Primary Trendline from ATH
Blue, Orange and Yellow intersect, right at major holiday, market is not likely to move large prior to holiday. We look for a change in character of the markets once we have past the “intersection.” A change in character is realized by change in volatility. The Technical picture favors bears, and market is vulnerable for greater than 10% decline.
As we attempt to measure short-term breadth, we compare the DOW, an index of 30 stocks, with the Russell-2000 on a Daily chart going back to the Mar09 LO. You will observe that in October, most stocks did not participate in the DOW’s move to new Hi. Although it is not always the case, key equity market peaks are often accompanied by deteriorating breadth, as money crams into only the top stocks. By contrast, long-lasting trends are almost always a broad movement as there is great interest in equities in general, and “appetite for risk” is broad as well.
The Monthly chart above going back over a decade compares GOLD to its nearest relative, PLATINUM. The chart is already marked with notations to introduce our concept. When a market moves to new, all-time High’s, it is always difficult to estimate where it will encounter resistance (even if it is just temporary Resistance) because we do not have the luxury of liquidity-based Resistance from HI or LO point at these levels in the past. Some may attempt to derive theoretical Resistance through mathematical formulations; however, we find through much practice in the past that first order of deriving Resistance should be to look to the closest related market, before going into mathematics. In this case, we have the luxury of looking into Platinum, which experienced a tremendous downward impulsion in 2008 – we look towards its 50% retracement (standard operating procedure) for Resistance, and then apply the timing/pricing to Gold. We see that first order of Resistance after the recent breakout in Gold is only a stone’s throw away.
Between equities and the precious metals, the market arrives at some important short-term crossroads that is likely to be sorted-out post Thanksgiving Holiday. These technicals favor the Bears.
Happy Thanksgiving to all!
