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May 23, 2010


It was quite a week on Wall Street, and truth be told, it's been quite a three weeks. After creeping higher day after day for nearly three months, the S&P 500 has treated us to three consecutive weeks of 100-point whipsaws. The sell-off, which has unfolded in conjunction with some nasty developments in Euroland, has everyone on edge over another liquidation event. Current cycle analysis, which I cover in painstaking detail in this weekend's Member newsletter, is sitting in a rare state of providing no high-probability directional bias. One of the two possible interpretations, however, favors the blow-off moves in gold and stocks I have discussed for several months, and I'd like to spend this post covering some indicators that support such an outcome.

Beginning with sentiment, we can see that put buying is now at its highest level since the midst of the crash:

stock market technical indicator

The spike in put buying tells us that the panic is getting stretched, but does not provide a timing signal. However, concurrent indicators tell us the market is due for at least a snap-back rally.

stock market technical indicator

The bullish percent index is also sitting at a level that marked the lows of previous corrections during cyclical bulls.

stock market technical indicator

And the banks are back-testing a long-term pivot:

Banking stock index chart

Turning to stocks themselves...

s&p 500 stock index graph

Nasdaq 100 index

And finally oil:

crude oil price chart

Whether or not oil makes a quick dip to the $67 target, we should see price retrace at least to the $75-79 mid-point consolidation range, and this rally will be very supportive of stocks. It remains to be seen whether oil will then fail or manage to form its own blow-off rally.

As for the precious metals arena, I will note that the next swing low in gold should mark the commencement of a new daily cycle, and with stocks and gold moving up together, we should see a rapid recovery from the damage done to mining shares this week. I will also note one warning sign: platinum and palladium suffered major breakdowns. During the first phase of this commodity bull... meaning up to the 2008 liquidation event... gold and silver tended to follow the leadership of the other white metals. Their leadership has been less effective recently, so I would not put as much weight on this development as I would have a couple years ago. It is, however, action which warrants caution.

Despite all the evidence supporting price recovery from this point, there are no guarantees in this business. However, the next few days should betray the market's intentions. But keep in mind we are seeking more than just a bounce. The market should begin its rally in a forceful manner in order to trap bears in their positions. Only in this manner can the rally extend to the heights conducive to blow-off moves. A market that spends a few days moving timidly higher will actually be a negative development since the next impulsive move would then likely be down.


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