Stock market sell signals triggered this morning

On Mon I wrote an article looking at the 3 major indices, the Dow, the S&P and the Nasdaq.  I noted that we were getting certain indications that the market is getting ready for a decline, citing overhead resistance on the Dow and S&P as well as declining MACD and RSI.  The Nasdaq, which has been the out-performer to the upside, has been getting hit much harder than the other 2 indices, which is not a positive sign for the future of the stock market in general.  I wrote on Mon that we should look for the Nasdaq to rally to about the 4200 level this week, and wait to see if it fails at that resistance level and begins to roll over.  That is exactly what has happened now.  Price rallied up to 4170 on Tue and consolidated there Wed, and Thurs.  This morning it has begun to break down and we have gotten a sell signal on the hourly charts.  Let's take a look...

Although all indices gave us the same sell signal this morning, we are going to focus on the one that is leading, in this case to the downside.  So looking at this chart we can begin a short position at these levels with a relatively tight stop at initial resistance where this weeks high was at 4170.  We had a recent low at just under 4,000 that has held, so that is our initial target price.  If support there fails, we could see price cascade down in 100 point jumps till it finds a level where buyers begin to step back in, but first things first, lets see how it reacts at 4000. 

-Jonathan M Mergott

A look at the broader equity markets

We are at an interesting cross roads with the US equity markets as well at this point in time, so lets take a look at the charts of the 3 main indices starting with the Dow.

First things first, we can see an overall uptrend within this chart.  When we look closer we can see this resistance level we have not been able to get above at 16,600.  We can also see it has twice tested the 16,000 level recently and rallied off of that.  This level is also where our trend line meets that support point.  The first cause of concern is that RSI and MACD are trending lower as price consolidates.  This is negative divergence, and may be spelling out that this rally is about to turn lower if it continues this way.  The main key points to watch to see if that will be the case is the 40-60 level on RSI.  Typically, a market trending higher will never really dip lower than 40 on the RSI.  It will range from overbought to a low of 40 as it climbs higher.  A market headed lower will never have RSI rally above 60, it will range from oversold to a high of 60.  So we want to look to see if RSI begins having trouble getting above the 60 level, and then falling through the 40 level.  It held just recently at the 40 level when it bounced off 16,000, so lets see if it begins to falter here.  On MACD, a market going higher will typically have MACD never dip too far below the zero line on corrections.  Then the signal lines cross over and price moves higher.  Again, a market going lower is typically the opposite;  MACD will not rally much higher than the Zero line then cross below and begin falling again.  We can currently see MACD trending lower, and recently reached the zero line and has crossed higher.  If bulls can not get this market above the resistance level it is currently being stopped at, MACD will lose momentum, and cross lower.  I'm reminded of the old adage "What doesn't go up MUST go down". It might not seem to make sense, one minute were in rally mode on a long uptrend that fails to make a new high right away, why would that mean such a drastic turn?  But it typically does.  If momentum fails to the upside, selling will increase fueling momentum to the downside.  Let's watch these key levels and indicators to get an idea where this is headed.  We should have an answer within a week.

Next up, the SP-500

The SPX looks stronger overall than the Dow.  This has been a theme for a while, as the Dow is made up of giant "slow poke" companies, who focus more on dividend paying than growth.  The SPX has typically out performed the Dow for the last 5 years.  We can see the same sort of pattern here as in the Dow.  RSI and MACD are trending lower, as price goes higher/sideways.  We can see here we had a break higher that reached 1900 and was then instantly pushed lower again.  We can infer by that rejection, that 1900 was a level that people overwhelming wanted to sell at, so as the range tightens, we must look to see whether sellers decide 1825 is good enough to sell at, pushing the market lower, or if 1900 is suddenly a good reason to buy at, driving it higher.  (The latter seems like a stretch though)  Let's watch the same indicators and the 1900 and 1825 level for a resolve.

And finally, the one I REALLY wanted to talk about; The NASDAQ...

What's important about this chart is the obvious.  For a very long time the Nasdaq drastically outperformed both the Dow and the SPX, until recently when it has been very much UNDER-PERFORMING.   The failure at 60 level we are looking for in the DOW and the SPX for the RSI level has already occurred here on the NASDAQ.  Price has already broken the trendline, MA's have already crossed lower and MACD has already fallen below the zero line.  If the Nasdaq is typically the outperformer, and leading indicator for the rest of the markets, this is definitely not a good thing.  However, there is pretty good support right at 4000 where we have recently caught.  I would expect we rally from here.  MACD will attempt to retake the Zero line, RSI will attempt to get above 60, and price will attempt to get back above the trendline at about 4200-4300.  I think as all these levels are reached, it will roll over and again head lower, taking the other indices down with it.  So, I will be watching over the next week at the NASDAQ especially to see if we make a stab at that 4200 level.  If a failure there occurs, and it then begins to head lower, you can take an opportunity to open a short position there with a stop just above it's recent high near 4,400, leaving you with very little risk on the position.  

Lets watch this as the week goes on.  As things progress I will post shorter term charts so we can fine tune our entry and exit points, if we are given the signals to do so.

-Jonathan M Mergott

Looks like gold is indeed headed lower

On Saturday I wrote that I thought the recent rally in gold would likely fade out this week and it seems that's exactly what is happening.  Gold fell nearly $30 and broke below $1300/oz.  It looks like this is probably just the beginning so be prepared for more this week.  Lets take a quick look at the GDXJ.

First things first, the consolidation between 36-38 we had going on just gave way to the downside, as I had expected would happen early this week.  We have now broken below just ever so slightly, but enough to cause chart damage.  This level below at 32.50, would mean another 10% down, despite it only looking like a small drop, but just because my analysis is correct SO FAR, does not mean buy blindly at 32.50.  Trading stocks is like Newton's law of motion.  You MUST assume that something going down will continue to go down until a force acts upon it (of some sort at least).  In this particular case, I would expect a large amount of value buying to come in and trigger some quick short covering that will likely result in a very large move higher off of support.  I EXPECT that support level to be around 32, but that remains to be seen.  Point is wait until it stops going down first, and then look for our typical indications of an impending move higher.  (Uptrend in MACD that begins to cross the zero line, and the 10 day MA crossing the 20.)  Currently price is staying below both the 10 and 20 day MAs.  The 10 day is below the 20 and they are both trending lower.  MACD is below the zero line trending lower, and just crossed below it's signal line.  There is nothing about this that says buy right now.  In fact every aspect of every indicator I watch says sell.  So if you have a long trading position  you may want to do so.  For now, the more nimble day traders can look to make some small change shorting this on a very short term intraday basis.  So now we wait...  Patience.  Let the market do the confirmation for you first, and you will cut your risk down drastically.  

-Jonathan M Mergott

This weeks update on the Gold Market

I am going to try to update my analysis on the gold market weekly, as I feel we are right at the cusp of a historic move higher.  Let's get down to it with the Gold chart first...

First we can see the major support area at 1200 and the major resistance we can't yet get above at 1400.  There is also support around 1260, which we recently held just above that level and have moved up to 1325, just below more resistance near 1350.   Looking closer we can see that for a year now MACD has been trending higher while price was moving lower or sideways.  This sort of positive divergence often spells out a major bottom.  We can see that it has just crossed over it's signal line and is headed higher, just shy of the all important zero line.  (*Note I use 12,26, and 5 settings on MACD.  It's standard except for 5 on the signal line, which keeps the signal line tighter to the MACD line giving me slightly quicker signals, which I find useful as MACD is a very lagging indicator to begin with)  So MACD has crossed and is near crossing the zero line, and we can see that the 10 and 20 day MA's are close to crossing higher as well right at the same level in which the 50 day MA sits.  So, our signals are looking nice, as if we might be getting ready to move very soon, but I am not enthusiastic about the move higher we've had the last few days.  It has not really had much fuel behind it and I believe it might lose momentum and we can see a retest of the 1260 area.  If we read between the lines of the COT reports we can see that majority of the rally we had from the lows around Christmas was hedge fund short covering, which is fine, but there was a lack of people buying the market from the long side.  When short covering drys up, so does the rally unless you can spark enough momentum to make those shorts want to jump in long now.  As the rally began to slip at just under 1400 one month ago, those same hedge funds are piling in short again.  Asian buying that sparked the rally as we hit 1200 around Christmas, is not chasing price up to 1400, so now the story is the hedge funds will be pushing price lower until it is countered by some strong buying.  At what level will we find that?  We will have to wait and see but I suspect we will see good support for the price near 1260.  The moral of the story behind the COT analysis is that Gold has yet to convince anyone that the move lower is over.  And until that begins to happen, we will have headwinds.

Let's take a quick look at silver too...

Basically the same as gold.  We can see major support at 19, and major resistance around 25.  So far resistance at 22 has held us back.  MACD has the same uptrend and has just crossed the signal line, headed higher towards the zero line. We also have this wedge formation happening here that could add some extra fuel to the rally when broken.  One major reason in my analysis that's causing me to think we are not quite there yet has been the lack of performance on the part of silver.  When its time for the metals to really shine, silver should be out performing gold fairly significantly, which we have not really seen happen for more than a day or two.

Now on the the GDXJ

Same basic look to it.  MACD is trending higher for a year, close to breaking above zero line.  But notice the pitiful attempt at a rally we have had recently.  Indicators are still moving higher, and the 10 and 20 day MA's look ready to cross but again, i think it lacks strength and that this is likely a fake out.  This recent rally feels similar to the one in Oct (Blue circle)  Which almost crossed higher than faded out.  (And was then drastically exacerbated in the thin liquidity of the holidays)  I think we need to hit a level where value buying floods into the miners and I think that level may be just a little lower.

All in all, if I am right and we head lower first, look for us to establish the low by the end of next week or early into the following week.  Then we can look for a buy signal to occur by the beginning of May and expect the rally to last likely all month topping out around 1400 on gold, 25 on silver and near 50 on the GDXJ within the first 2 weeks of June.  I doubt after such a move higher, that we break that level and confirm the new bull market.  After 2 years of being brutalized, I think the market will need more convincing.  We can probably expect our usual summer doldrums till the end of Aug, when things should heat up.  Gold will probably stay range bound in those months between 1300-1400.  Silver from 20-25 and GDXJ from 40-50 region.  It will likely be our customary Fall rally that breaks things above those resistance levels.  I would be looking for 1550-1650 on Gold, about 28-32 on Silver, and about 70-80 on the GDXJ to then be achieved by years end.

Watch the next few days for a resolve here, and be ready to buy if we get the signals to do so.

-Jonathan M Mergott