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July 4, 2009

Moving Averages in Play

What a great way to head into a long weekend. My energy and equity shorts rang the register all day while precious metals got nicely cheaper. Leave it to this crazy market to spin so many bearish setups into wins for the bulls, only to finally break on one of the most seasonally bullish days of the year. And can anyone tell me what frequent pivot level halted the decline in the S&P 500?

s&p 500 daily chart

Seriously. Are there any regular readers still paying attention to the archaic notion of the 50DMA? Anyway, I suspect the 65DMA will fail on this second approach, but I really, really hope we get a couple of narrow-range days crawling on top of it before the break. Such action would setup a fat pitch for stacking the short chips.

s&p 500 weekly chart

I suspect this decline will now visit SPX 800 before any meaningful bounce forms. At that point, we should see a back-test of the 65DMA. As all this action unfolds we can adjust our expectations to speculate on whether a larger rally will unfold or whether stocks roll over and dive to new bear market lows.

Oil painted a solid down day and closed below the previous swing low, an indication that the larger sell-off we've been expecting is underway.

crude oil chart

By the way, where exactly did oil's last gasp get turned down?

oil weekly chart

While I'm a strong believer in the case for $200 oil, I do not think we'll see that price during a global depression. This commodity bull market still has years to unfold... from 4 to 9 more if history is any guide. One could reasonably expect oil to chop sideways for 2 to 5 years before making its next gigantic run. My plan is to continue to game the energy markets until a clear base is formed for a larger bullish play.

Speaking of energy, I'm glad I stopped myself out of the natural gas play once the trend line broke:

natural gas price chart

natural gas weekly chart

I'm not confident enough in a bearish case to take a short on natural gas. A this point, I'm just going to wait for another constructive setup to get long again, noting that it could take many months to appear.

Precious metals took another knock, with gold down 1.2% and silver slapped for nearly 3%. I mentioned earlier in the week that I was stalking a panic sell of 60-70c on silver to mark a near-term low. Well, two 40c down days do not qualify. When panic hits, silver will drop 6% in a single session, and gold will not be spared the selling wrath. The best hypothesis I have read regarding the action in gold came from Gary Savage's subscription service a couple weeks ago. He speculates that gold is forming a huge continuation triangle. The upper bound is defined, and I have made my best effort to draw an equally-sloped lower bound in order to estimate where a panic sell could be halted:

gold price chart

gold weekly chart

So, various markets are offering a multitude of confluent indicators and a rare display of reasonable target prices. It may not all play out so neatly, but at least we have a tidy framework within which to frame expectations. See you Monday night.

 

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