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June 21, 2009

Winds of Change

Like many blogging traders, of whom many are much more seasoned than I, my calls for an end to the stock rally were premature. Despite my own predictions that the bounce out of the March low would extend beyond the imaginations of most bears... stretching technical indicators to new extremes... I was taken in by a series of heavy SoS numbers back in May. I do not think those numbers were a fluke. Heavy SoS is a leading indicator... just not commonly by more than a month.

More signs are now creeping into my chartbook that things are changing. For one, the SPX finally posted a weekly swing high:

weekly s&p 500 chart

The daily chart also sports a bear flag on the heels of the drop earlier in the week:

daily s&p 500 chart

As you all know, I've been expecting this retreat to bring the SPX to its first encounter with the 65DMA since it was conquered nearly 3 months ago. How price behaves at that juncture will tells us whether the decline will unfold as a correction or a larger sell-off.

Lending weight to the idea of a larger sell-off, crude oil is looking quite toppy:

oil prices

weekly oil prices

This fervent rally in oil does nothing but damage any chances for an uptick in economic activity... as if there weren't already enough impediments. In fact, I see this year's pop as nothing more than a reaction to the historic sell-off witnessed during the second half of last year. There is absolutely no fundamental support for higher oil prices. There is monetary support, however, and if oil can successfully back-test its mid-point consolidation in the low $50s and then start higher, we'll all have to reference the stagflation chapters of our economic texts. Maybe a new word will be invented... something like disasterflation.

The near-term outlook for precious metals is bearish. The gold and silver charts are sporting bear flags of their own, and despite Friday's pop in mining shares, the group's prospects of leading the sector higher do not presently look all that great.

gold mining shares

GDX should not go slicing through that hack zone to quickly, but long-term holders should be prepared to weather a retreat as far as the base of that zone at $27... a price that provided three pivots between November and January.

See you all tomorrow.


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