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September 1, 2009

Something is Different

This morning's action produced one of the greatest pump and dumps the market gods have ever thrown at us. The NDX was strongly leading the S&P 500 higher, typically a sign of further strength to come, and the buck was oozing lower, supporting the view. And then, of course, stocks began rallying. The SPX popped 12 handles in less than an hour, the NDX, more than 25. It certainly seemed like our short squeeze scenario was about to materialize.

Just after 10:30 the dump began, and it continued with hardly a pause for nearly three hours. At the end of the swoon, the SPX had coughed up almost 30 handles, the NDX, more than 50. I don't know what changed, but something did. Something important. There was no apparent news to spur the move, and that's what makes this change so ominous. One of the market wizards... I don't remember which... mentioned that strong moves occurring without the support of coincident news are usually the ones worth following because they betray the undercurrents. I must say, subjectively, that it certainly feels like something is different.

We now have, squarely before us, the other potential head fake discussed over the weekend... that a break lower out of the coil will not be reversed as happened with the previous two cases. There is certainly supporting evidence. Remember the weekly view? I mentioned that if the SPX tagged the 75WMA and then turned lower into a new bear leg, you would find me weeping over how easy the short side could have been with a little more patience. My lips are starting to quiver:

s&p 500 weekly chart

The SPX also closed below an important pivot:

s&p 500 daily chart

Banks broke strongly lower, turned down right at an important pivot level:

banking stocks

The recent swoon in China's market cannot be a good sign for the global outlook:

china stock index

Whether coincidence or precursor, the dollar index ralied strongly while stocks fell today. Perhaps we all should have paid more attention to the charts provided by nummy yesterday:

Oil Price Channel

Dollar Price Channel

The dollar broke out to the upside... not good for the equity bull case. If the buck's minor wave 5 down has aborted, it means we are now embarking on a larger wave 2 countertrend rally, and some serious pressure will remain on stocks.

But guess what assets did not fall as the dollar surged higher today? That's right. Precious metals. Silver closed above $15 and gold edged up a half percent. If gold and silver can buck a major countertrend rally in the dollar, what will happen when major wave 3 down unfurls?

Interestingly, only two days after GDX was turned down by the upper bound of its triangle, it found support at the lower:

gold mining stocks

Gold and the miners are certainly pushing these consolidations to the limit.

The next few days could be exciting. I'm wondering if the divergent behavior between precious metals and just about everything else is cluing us to some nasty news being about to hit the headlines. I'll also be watching how the S&P 500 behaves if it approaches its 65DMA. Ideally, we'll get a little crawl before it cracks, giving us a chance to swing for the fences. I'm also going to be very curious to see if gold and silver can withstand a further dollar rally. If PMs hold up while energy prices fall, the markets will produce an environment ripe for mining stocks once the dollar renews its decline. I'm guessing that decline will initiate from the dollar index's 200DMA.


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