Line in the sand

It's been an interesting time in the markets recently and I have been very absent from writing.  But one thing that will always get me back is interesting markets.  I will write this quickly before the things I am talking about COULD happen, do.

DEFLATION.  The scariest word in economics.  Commodities are plummeting, the stock market is getting shaky, and the fed is set to end QE in the same month that most market crashes have historically occurred.  Complacency has turned to fear overwhelmingly in the market and it has been a rather fast transition.  Let's just jump to the SPX chart.

As you can see above, we have had a violent back and forth consolidation in stocks for the last few days that has held at 1925 for now (*As I write this at 10:26am EST, we were flirting around 1920 and just let go, now already down to 1915.  I would be willing to bet we will probably drop another 10 today to 1905 before buyers come in.)  If this level just above 1900 does not hold, things will begin to look even shakier for stocks, as that would signify a break below a 5 year trendline.  (We'll get to that chart later)  We got a sell signal on the SPX about 1 month ago when the 10 day EMA crossed below the 20 day.  Indicators have all been trending lower confirming our sell signal.  As fear became the overwhelming emotion in the market, volume began to increase.  There is no reason to think that the 1900 level will not hold.  For 5 years straight now, the market has continued to make higher highs, so it would be foolish to expect anything different until the market SHOWS you otherwise, but in the event that it does, it will have broken major support, leaving a lot of space until about 1825 which could make for a fast, sharp, and very scary sell off.  It will also have made a lower low and that could be the start of something bad.

Lets take a quick look at the long term trend line I was talking about that a move below 1900 will break.  Pretty self explanatory.  But there is a lot of air between where we are and major support between 1400-1500.  That could mean for a 25% drop.

Lets quickly look at gold, and to do so we will use the GDXJ.  It has been interesting.  We received a sell signal in early Aug, around $40, which I pointed out and hopefully saved you from the losses for the next few months cause it is down about 25%.  We broke below the June low of 32 and and looked to be headed to test the low made back in Dec near 29 when the FOMC mins were released the other day and shot everything higher.  Since then, the SPX is right back to its prior lows (now breaking them) but gold and silver have held on, and so far (and just barely) so have the gold stocks.  It is hard to make an argument for higher gold in the face of all other commodities being taken to the wood shed UNLESS there is a major fearful event in stocks, which we could be seeing right now.  We still dont have a buy signal of any kind yet, but this is worth paying attention to as the miners are insanely cheap at these prices and can provide a much more profitable way of playing lower stock prices than just shorting the market.

Wrapping this up, today is Friday which means traders are closing positions.  Being that things have been mostly down for the week, I would venture to say this could mean a lift for everything by the close as short sellers rush to cover.  However, if we do see things close lower today, that should just reinforce to you the fear in the market right now.  I am expecting next week will be very interesting. 

-Jonathan M Mergott