Round 2?

So the last 6 or so trading sessions saw the stock market ROCKET higher off of the lows it hit last week.  You'd almost think the laws of physics don't apply to the SPX.   ( Now remember what I said Friday about the difference between bull markets and bear markets? BEAR markets sucker people in with massive moves higher, and then they sell out as momentum stalls and it hits new lows.  Bull markets are the opposite, quite crawls higher and quick chops down that shake out the weak hands.  This is what keeps market trends going.  As long as that action continues, the direction of the market is able to refresh itself in a way as the "suckers" provide the trend with new buying or selling as it makes new highs and lows)

So onto the chart.  We made a low on the SPX at 1820 area and shot up 140 points in 6 trading sessions.  The move is typical of a counter trend move that will likely stall out soon.  I was looking for today to be a day we begin to see the overall trend begin to reemerge (Which again, I believe is now down).  We continued climbing yesterday afternoon into resistance near 1940, which is not only where the downtrend line from the recent highs sits, but also directly where the 10 and 20 week moving avgs lie, which are now crossing over and will begin to head lower if the SPX can not better this level.  Right now, the SPX is a little lower, but this is the first day in 6 it hasn't been MASSIVELY higher.  It's a little early to say the up move is over or that a new down turn has commenced, but we need to watch this level carefully.  A move above this recent high in the mid 1940's will likely turn everything rosey for the market again.  But a move below support at 1920 begins making all short term indicators turn down again, and will likely spell out a retest of the 1820 low.  (And if that gives way, we could be looking at 1750.  If that occurs, we have now made a lower high and a lower low and stocks are likely in big trouble.)  Below is the hourly SPX.  There are a lot of lines drawn on this so I know its a bit muddy, but bear with me.  Note the trendlines, and resistance and support points drawn out.  The 20hr moving average sits right at 1920, so if the SPX breaks below that level, it will begin sending those shorter term indicators headed lower once again.  From that point, holding 1900 would be the last line of defense for the bulls before a retest of the lows is in order.

Let's look now at gold, which is barely holding on, and silver which is dropping back to the 17 level.  The miners are also slipping and have been under performing the metals in general which is never a good divergence to see.  As I previously said, we can begin to see gold pick up momentum if the market sells off as people rush to some sort of safe haven, but it will be unlikely to expect anything spectacular there quite yet.  Gold has been in a bear market, and a generally hated asset for quite some time now.  Those trends don't just reverse themselves overnight (usually).  The GDXJ REALLY needs to hold on to this level here near 32 or it runs a serious risk of dropping back to retest the low near 30.  As you can see from the chart, all major resistance converges at 34, so it is very important for the bulls to capture this level to make the technical picture turn in their favor.  I know the chart is messy with a lot of annotations and lines, but please take a min to look at each point and you'll see what I mean.

A quick note on Gold seasonality; We have become use to the fact that gold typically rallies in the fall, specifically Sept to Oct, and has a tendency to stall out by Nov into Christmas.  Spring is also historically been a strong time for gold as well, and can rally usually till early summer, which we typically see as a weak season for the metal.  In the last few years the exact OPPOSITE has been the case.  In 2013, gold found footing and began moving sharply higher in late June into Aug, a time we typically aren't use to seeing that.  As Sept came around, the metal had put in its highs and recommenced its move lower again which lasted till the end of the year.  Come Jan of this year, gold kicked off with a bang and rallied into the months of March and April, then stopped and headed lower the rest of spring.  Come June again, as the seasonally bad time of summer rolled around, Gold once AGAIN sparked a rally that lasted till Aug.  Then this fall in Sept things headed lower again.  Now as we sit near the end of Oct, I think it's safe to say the opportunity for a fall rally in the metal is lost.  We are trying to find some footing here on the GDXJ, but it being a "boring" asset to begin with, as we head into the boring holiday season, we might not see much occur here till early next year (again).  In the time in between, we could slide to retest the lows put in around Christmas last year near 28.  Even if we do slide slightly more, it still seems we are very close if not at what will likely be a generational low.  Time will tell, I'm just saying, prepare for either circumstance and let the market show you which will prevail.  Below is a chart of the GDXJ for the last couple years to illustrate what I mean.

Wanted to keep this short, so I'll wrap it up.  As I'm writing this, Gold is picking up ever so slightly as the SPX begins to roll over, now down 9 at 1932, Dow down  over 100.  What happens at 1920 will determine whether we want to short this market or not.  GDXJ really needs to hold this level near 32, and so far the slight pick up in the metal is not helping any.  This is not yet the time to be going long Gold stocks, unless you're just straight up gambling.  There is no firm indication the bulls have this market yet.  I know they're cheap, but $3 stocks can still lose you 20% of your capital by dropping to $2.40.  (And $3 stocks typically do that).

Be careful out there and mind your stops.

-Jonathan M Mergott