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February 17, 2009

Gold's Sign is Taurus

Finally, we got our drop out of the 805-875 congestion zone that pestered us traders for over a month. On one hand, I'm a bit frustrated at not having a larger short position in front of a move I saw coming... the piles of calls I sold had lost most of their value already... but on the other hand, we have a resolution we can work with. If the break is valid, price should not get back above SPX 805 any time soon. Along those lines, I sold even more OTM calls to be stopped out if the S&P somehow manages to re-enter the old zone.

I'm not sure what the late-day pump and dump was all about, but either way, the daily SPX chart looks even uglier than before:

stock index chart

There is only one day this bear market closed lower than the current session: the November low. That low should now act as a magnet for price. As for the full target, tfyisrich pointed out in the comments that a long-term trend line should provide support for the SPX just over the 600 level. Triangle targets are mushy, so his estimate is just as viable.

It is interesting to note that the put/call ratio once again warned of a significant turning point, yet despite the 10% swoon in equity prices over the last week, the ratio has hardly budged:

stock market indicator

It may be useful to step back and take another look at the monthly view, as well. A couple weeks ago, I illustrated how SPX 800 was the baseline for a major M-pattern.

stock index chart

Personally, I was expecting a little more of a struggle over SPX 800, so even though the daily chart is looking weak, I'm not going to place any huge short-side bets until we have our monthly close. There should be plenty of time to position since a back-test of the pivot is a reasonably-high probability.

I've been a little slow in recognizing the bull move in precious metals. I have valid excuses, though listening to Gary Savage is not one of them. I certainly hope some of you were swayed by his excellent analysis. One of my excuses for demurring was a consolidation pattern on the CRB which I expected to resolve bearishly. It did.

commodity index chart

You will forgive me for expecting precious metals to have at least a slight correlation to the commodity sector. Now take note of RSI on the chart above. Let's suppose that in the coming days commodities in general print a near-term bottom and start a rally. What do you suppose gold and silver will do? If you said "go down," you are hereby evicted from the club. Just because precious metals have been rising while commodities fall does not mean there is an inverse correlation. Nope, if commodities start rallying, precious metals will go up even faster.

Circumstances look more and more like I will be chasing the PM bandwagon late. My delay is unfortunate since there was obviously some nice coin to grab over the last few weeks. I can use this development, though, to harp once again on the virtue of having a core position in a major bull market. With a significant portion of my total net worth buried (<== like the choice of verbs?) in precious metals, I haven't really missed anything other than a trading opportunity.

In any case, when I do make a move, I intend to buy silver futures. All of the bull runs during the past seven years have occurred from late fall into spring, and all of them have been characterized by the outperformance of silver in the latter stages of the run. Since the gold/silver ratio unwound swiftly in favor of gold during last year's liquidation, silver should really turn on the after burners in the latter stages of the current move.


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