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June 5, 2010

Waterfall Decline

Friday's sell-off has certainly put a new spin on things. Stocks have repeatedly failed to produce a rally off severe oversold conditions, nor hold onto any gains that seems set to spark a rally. In fact, the daily pattern formed over the last two weeks looks ominously like a mid-point consolidation of a waterfall decline:

s&p 500 technical analysis

The extension of this potential mid-point consolidation matches a long-term pivot at SPX 875. We would then likely see a rapid back-test of the consolidation zone as equities bounced out of a significant low, followed by a resumption of the secular bear trend. I would go so far as to say that the bounce out of the low will be induced by a panicky Fed cranking up the presses again or perhaps something larger such as global, coordinated invention.

banking index technical analysis

If this scenario were to play out, I have no doubt gravity would take hold of precious metals and their related stocks, as well. However, the bounce out of that low would likely see PMs outperform to the upside, especially if I am right about central bank intervention.

Keep in mind that we still need to break lower out of the mid-point to trigger the second half of the waterfall decline.

 

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