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June 27, 2009

Apocalypse Now

Friday's action played out as a narrow-range spinner in the equity market, but don't be fooled by the price action. If this action were consolidating Thursday's rally, we should have seen volume subside. Instead, volume accelerated and probably set us up for a reversal come Monday or Tuesday. If the market gods manage to hold off the selling until Tuesday, then Monday will likely unfold as another NR day since we need to stay below SPX 930 on a closing basis to keep the near-term bear case alive.

On a weekly view we can easily observe the failed breakout from the trading range of the past two months:

s&p 500 wekkly chart

Despite the late-week recovery, price failed to get back above the zone... or even positive on the week for that matter. Volume has also been quite unsupportive of this whole rally. In order to confirm a turn, we need to see price fall and close below the aforementioned trading zone on a significant increase in volume. I'm going to go out on a limb and say that such a candle will paint the coming week.

On a monthly view it is much easier to see how volume has shrunk away from this rally.

s&p 500 monthly chart

As the S&P 500 works its way down to a sub-500 price, it will begin to dawn on the masses that we are in the midst of a far more dire financial situation than what our politicans and media are willing to admit. Unlike the 2008 liquidiation, I suspect U.S. government bond prices will not rise, but rather fall in a flight from junk. Likewise, we should see gold and silver prices rocket as those with cash seek protection.

Keep in mind I am not predicting that all these moves are going to start in the coming week. The ride down for stocks will be quite bumpy, filled with wicked shake-out rallies, and events in the various markets will unfold over months, not weeks. Don't be surprised if the SPX breaks down to 800, draws in legions of short sellers, and then crushes them with a rally to test the 950 high before commencing a more sustained decline. There are definitely rough waters ahead.

Crude oil prices should recede in the face of the continued decline of world economies.

oil price chart

natural gas price chart

As for precious metals, I'm not convinced their near-term decline/consolidation is over despite the fact they rallied most of the week. The move appears quite timid, and the action in gold miners tells of another selling wave:

gold miners stock prices

Again, if GDX manages to reconquer that trend line on accelerating volume, I would change my stance. In the meantime, the most prudent position is interlocked fingers with thumbs twiddling.


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