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August 13, 2008

Interesting Juncture

After this morning's post, the Nasdaq 100 made another run at the 1950 level and failed again. Short-term RSI also continues to be very overbought.

stock chart

Now, if the rally out of July is only a bear rally, as I believe it is, RSI should not be able to hold these levels for long. On the other hand, it is quite impressive how equities held up today in the face of crude rising $3. That said, tomorrow's action is very tough to guess, and there is really no point in doing so. We traders can wait to position with more confidence. I see one of two scenarios unfolding here. Either oil's rally continues, thereby immediately derailing the equity rally or oil's rally fails, producing the needed impetus for the NDX to break through 1950. Given the currently overbought nature of the daily chart, however, I see the potential for a breakout to be a bull trap.

So, how about oil and other commodities? Well, now would be a very good time to throw the field a curve ball. Many folks were gunning for the $110 level for the end of the current oil decline. If we start higher again tomorrow, I think we'll see some forceful short-covering drive price even higher. Also, gold bounced off its 75 WMA, which has contained all declines in this bull to date.

gold chart

There is a subtle clue on this chart showing why this time may be different. See it? All previous instances during which gold tested the 75WMA, it was already setting higher lows. This time it tagged the average with a lower low. I think the 75WMA will fail after a quick sucker's rally, and when it fails, there will be slaughter. Surprised gold bulls will panic, eager bears will rush to short, and $700 gold would not surprise me. Now you see why I am so eager to short any impending rally in PMs.

On a final note, let's look at the miners, which have been mostly useless over the past year or so.

stock chart

Monday's panic volume in conjunction with a test of the previous decline's closing low gave us a big clue that a bounce in the metals complex was at hand. I strongly suspect we'll see GDX approach the $42 level (a roughly 50% retracement of the recent swoon) before heading to new lows. That $42 line also looks like the neck of a huge H&S pattern for those of you who watch for such things. So, this is one to keep an eye on for a timing clue for shorting metals.


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