Market Timing Brief for 4-12-2013: SP500 Index Breaks Out as Gold Breaks Down Further

A Market Timing Report based on the 4-12-2013 Close published Sunday April 14th, 2013

UPDATE 4-19-2013 @ 2:41 pm: SP500 Index is testing support at the 50 day moving average and several past lows that fall there as well, around 1540.  It’s bullish that it’s survived, but more strength above 1554 is required by the close to prevent a resumption of the sell-off.  The chart is below (image from 2:39 pm, not the close):


SP500 Index taking a stand at 1540ish.

UPDATE for 4-15-2013 @ 6:34 pm: I said gold (GLD) was a sell on Friday as tweeted.  I had no trading position prior to the drop Friday and reduced my long term position by 30% today.  This is a risk management decision as I have significant gains at these levels.  I will sell more at lower levels if we see them. 

Decide for yourself what your pain tolerance is for a further correction.  I know some sold on Friday per my advice and avoided today’s pain.  There could be other days like today, perhaps not tomorrow, but no one can make guarantees unfortunately!  Where gold is valued now depends on mostly non-technical issues. The cost of production was stated by a CNBC article as being $1200, but it could fall below there under the selling pressure.  It does give you an idea that gold could find support between here and there.  Could.  In the meantime, the SP500 Index lost the prior breakout above the 2007 high.  This gives the edge to the Bears for now.  More on that below…

The following WEEKLY chart shows there is more room to fall for gold (GLD) to fall on a technical basis:


Gold falling rapidly over two days after breaking important support.

I thank Worden Brothers for the charting system. If you want to know more about the charting system I use every day, go to my “Other Resources” page here:
My Chart Source

And now for this week’s text…

Gold has reached a “Bear market” in common market timing terms of a 20% correction or more.  You can see on this week’s gold ETF chart (GLD), which is a weekly chart, that when the volume spiked as high as it was this week back at the end of 2011, there was an ensuing rally.  With that volume spike there was a break on a closing basis at least.  What happened?  The market rallied back a bit and then fell to a marginal new low and bounced in a big way.  The gold miners (GDX) were a hint of worse things to come in gold as well as the poor commodities index behavior I pointed out in last week’s issue.  The commodities index was a SELL in last week’s issue.  Still is. 

The GLDTracker™ chart can be accessed via this link:

Market Timing Charts

Although gold could do the same thing this time as it did in 2011 and recover, we’re left with a weak technical picture and no reason to buy it yet.  It must first either recover back above those 2011-2012 major lows in a definitive way (several closes above) or form a new bottom here or lower.  Fibonacci wave numbers don’t really work well here unless you consider the prior three up waves to include an “extra 2 wave” up.  There were three waves up in other words.  In a classic two waves up pattern, the subsequent wave is the big one, which is the 3rd wave down.  If that happens, gold holders will suffer.  I believe the smart thing to do is to average out according to your beliefs and tolerance for intermediate term losses.  Gold corrected in 2008 and then recovered.  Is it going to be different this time?  The Bulls on the economy say yes.

Although we have good reason to believe the Fed’s experiment will end badly with resulting high negative real interest rates and a flight from bonds and Treasuries to gold, we cannot be certain of the time frame.  Some of you may believe you should hold gold as much as you should hold US dollars or any other currency.  Gold is now more of a currency than a commodity may be your view.  Then continue holding it.  Decide for yourself and you’ll be far happier, but I advise writing down your decision (email it back to yourself and file it in your “investment decision” email folder).  You’ll improve quite a bit with practices like that.  If you sell only to see gold skyrocket when the next fiscal crisis in Europe starts, make a note of it and learn from it.  It’s better to preserve profits than to take losses beyond your ability to withstand them.  Some investors use a hard stop at a certain point.  The number used varies from 8 to 25%.  Some use bigger stops on more volatile positions up to 50%.  Do what you feel comfortable with, but don’t ever, ever give up most of your profits on a solid trade!  What if gold were to go back to $1000 per ounce?  Would you be holding it?  I wouldn’t be.  At least not much of it.

In the meantime, the SP50o Index (SPY, SPX) is doing a whole heck of a lot better than gold.  It managed a major breakout in nominal terms (non-inflation adjusted) during the final 3 trading days and now is 3 days into the breakout which is very good for the Bulls.  One could see how the whole thing could turn over here too and this could become a false breakout, but I am 70% invested vs. my maximum equity position, because of the strength that the market is showing.   The SP500Tracker™ Chart can be seen via the above link.

But all this is happening with some weirdness in the backdrop that gives one pause.  The most important is the 10 Year Treasury Note (TNX, TLT, TBT).  It is RALLYING when it should be falling if we are actually now simply going to have the economy continually recover and see rates rise rather than fall.  Could the Fed be responsible for this fall perhaps?  It’s unlikely because they really have no vested interest in keeping rates this low.  This is “smart” money hiding and it does not bode well for the “Great Rotation” from bonds into stocks thesis.

Check out the rally in the 10 Year Treasury Note at the above link, which is called the “Bonus Chart of the Week.”

The VIX volatility index of investor fear is back testing the Sept. low.  It will have to break that and the March low for this rally to continue.  There is still room to drop on the chart, all the way back down to the 2007 lows (in which case the stock market will be going UP).  The VIX will be very telling this week.  [VIX rose strongly as fear rose on Monday 4-15-2015 in the face of the ugliness wreaked on Bostonians by cowardly terrorists.]  And earnings so far have been mediocre for the few companies reporting, Alcoa’s results were actually OK, but the stock has fallen a bit.  Wells (WFC) and JP Morgan Chase (JPM) are both down less than a percent after their earnings.  Wells had light revenues and Chase missed slightly too. Chase is spending $200 million this year on cybersecurity.  The internet has its pluses and minuses.  Next week is much bigger for earnings.

Sentiment went absolutely nutty BEARish this week!   The AAII Survey (see data at Bulls fell from 35.49% to 19.31% and the Bears went from 28.17% to 54.48%!!!   The spread went from +7.3% to -35.2%.  These are numbers typical of bottoms in the market!  This was startling and prompted me to write an important blurb in last week’s report on Thursday (click link to upper right in article list to read it please).

Key Takeaways:

  1. Gold is not a buy.  It just had a bad break and you must determine where your sell stop will be at this point. [calling a bottom would most likely be a mistake; wait for it to form unless you have your own way to value gold]
  2. The SP500 Index made an important breakout.  A reversal would be taken very badly, but we’re 3 days into it, so the Bulls have the ball now [The close below prior breakout, until scaled again, gives the edge to the Bears now].
  3. The Treasury Market is signaling something bad is about to happen. [as we saw today; the move started last week in Treasuries]
  4. AAII Investor Sentiment is amazingly Bearish at this top, which favors a further rally [short term at least, the individual investors are right so far in calling a top; it would be a rare event]
  5. Large US companies including Big Tech (QQQ) are back to buys this week in the “Market Trend Table” below [reversed by close today with reversal of the breakout in both Big Tech (QQQ) and the SP500 Index (SPX, SPY)].

Have a great week investing and/or trading!

Standard Disclaimer: It’s your money and your decision as to how to invest it.

The above is the text from this week’s free report.  To receive future reports ahead of publication of the text shown above AND much more market timing information, please subscribe for free here:

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This entry was posted in banking stocks, Bonds, gold, gold etf, gold stocks, investment, investor sentiment, large cap stocks, Market timing, mining stocks, S&P 500 Index, small cap stocks, tech stocks, trading, Treasuries, volatility index and tagged , , , , , , , , , . Bookmark the permalink.

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