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August 18, 2008

Blue Monday

Equities served up a few bearish developments to start off the new week. As anticipated in a post last week, the upside breakout in the NDX has failed. Likewise, the bear flag formed by the SPX over the past month resolved with a downside break. Consider that this selling occurred on a down day for oil, and the market is looking particularly weak at this juncture. Let's have a look at the charts:

stock chart

stock chart

stock chart

A couple of related cautionary notes: First, volume was anemic in today's session. Second, the recent market environment has been littered with multiple head-fakes, so these breakdowns could turn out to be the curveball. Fortunately, both indexes provide fairly close stops for the bearish point-of-view: 1300 on the SPX (or a close back within the wedge) and 1950 on the NDX.

As for our other favorite topic, precious metals, I was encouraged by their strength in the face of falling oil. Gold rose 1.5% while silver and the mining ETF both rose 1.8%. At this juncture I prefer to err on the side of caution by not having any trading position. While Friday's post described my suspicion that a near-term low was in, a final blow-out day on oil could take down all commodities with it. At some presently approaching point, however, I do expect the metals to muster a 2-3 week rally, perhaps back to significant pivot points ($850 for gold and $16.50 for silver). My plan at the moment is to pick a point to short the next rally because I think it will fail and fail hard.


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