The stock market has now plunged to levels not seen since 1997, and gold has benefited as investors seem more confident buying metal than paper. According to what I see on the charts, I don’t think this overall trend is likely to shift just yet. Gold is overextended, and I’d be cautious if I were buying right now, but I think new all-time highs are possible.
As I approach my chart analysis, I like to look first at a very short-term chart such as a 360-minute chart, then pull back and look at the bigger picture through daily, weekly and monthly charts. The 360-minute chart is better for giving day-traders faster entry and exit points. So let’s take that approach in the S&P 500 futures. I have applied the 144-period, 55-period and 34-period moving averages to an intraday chart of the March E-mini S&P futures, and this chart is telling me the market is clearly in a downtrend. When the market is in a downtrend, you want to sell rallies. I’d want to sell around 761 to 757 if the market bounces up and hits these levels.
The market is flirting with the November 2008 low at 737.25, and any close below that level would be very bearish. A two-day close below that level would suggest a horrendous downturn is possible. We haven’t much of a buy signal at all on the chart, as the market has been below key moving averages for some time. This market has been volatile, so it’s very important to use stops as you can get caught buying highs and selling lows, a recipe for disaster.
Looking at the cash market and pulling back a bit to a monthly chart, you can see just how big this downturn is. I haven’t seen anything like it in 15 years. We are obviously in unparalleled times. I am trying to pick a level where this could stop. Longer-term I’d look for 690 as support, then 605 and 545 in the nearby futures. My point of no return, where I would change my mind in regard to this outlook, would come with a close around 844, the 144-period moving average. Until then, I still recommend selling rallies. The high of the longer-term chart pattern for the S&Ps is at 942, with and the low 737. The difference is roughly 202 points. Subtracting 202 from the low gives us a target of 550 on the downside. I’m not saying that’s going to happen, but a close under last year’s low would make this a possible target.
For the market to sustain a more bullish move the economy simply has to turn around. To confirm a market bottom, we have to see signs that the hemorrhaging of jobs is stopping and see a glimmer of optimism in the economic data. From a technical point of view, a close above 786 in the March futures would make me a little more optimistic longer-term.
If I see the market plummet to 690 in the next few says, I’d also want to buy, as I think the market will be sharply oversold. If we continued heading down at that rate, the market would be at zero in a few weeks. As bad as things are, I don’t see that happening.
Gold Bubbling Up
The antithesis of the S&P is gold. The chart of April gold looks like nearly the exact opposite of the S&P chart. Gold has breached $1,000 an ounce in recent days, and looks fantastic right now. At these levels, would I be nervous about buying up here? Of course. The time to be buying gold was really a few months ago. The market is overextended, so if you buy, keep a tight leash. But for now, the fundamentals look supportive. The U.S. Treasury is going to have to borrow $2 trillion this year to maintain its operations. Who is going to buy this debt? The Far East has been a major player in buying this debt. If China ever says “we don’t want it anymore,” that would be a serious issue. That would force the Federal Reserve to buy the debt.
That being said, gold has a shot at very high levels. Looking at past bubbles (from the Nasdaq to housing), we have seen parabolic increases more than gold has seen. Who’s to say gold can’t be the next bubble? Be ready for a volatile ride. This market can move quick, so when the bubble bursts, like any bubble, it can deflate far and fast. If you are buying now and aren’t aware of the risks, it could be painful. Again, use proper risk management and don’t consider trading if you aren’t confident in your point of view. If you take the trend high at $1,034 and subtract the low of the pattern at $681, we can project a possible target of $1,400 in gold. I am not saying the market will go there, but this a realistic projection based on technical analysis.
Keep in mind, you can mitigate some of the risks in trading futures if you take out of the issue of leverage. Instead of posting your minimum required margin, and risk losing that or more if the market chops around, you can put up the full contract value, or even half the contract value. (At current levels, full contract value is roughly $99,300.) If you are a longer-term buy-and-hold investor and want to be able to withstand short-term dips, this is a valid strategy you may be more comfortable with. If the market closes under 976.20 for two days in a row, then, I’d be watching for a more extended correction and would rethink my strategy.
With the exception of gold, wherever the S&P 500 goes, most other commodities have been going too. The S&P is acting as a leading indicator right now. Commodities in general have been impacted by the global economic malaise. However, the demand for consumable commodities is likely to rebound quickly once the economy regains some footing.
Watch for Commodity Rebounds
One market in particular that I think could be one of the first to rebound is soybeans. The demand for soybeans is likely to increase at an alarming rate. If I see the S&Ps bottom and start to turn, I’d recommend buying soybeans with both hands. This market is down about 50 percent from last year’s high, and these low prices could discourage planting this season and cut into supply. Whenever a consumable commodity such as soybeans goes down as much as it has, one is consumed by just about everyone on the planet, this warrants my attention. Any type of growing problems could push soybeans quickly back to 2008 highs.
Blake Robben is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. Please feel free to contact Blake at 800-266-0551 or via email at brobben@lind-waldock.com with any other questions you might have about the markets.
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