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Gold and Silver Bull Market Rages On

While there are lots of questions surrounding the sustainability of the stock market advance, there seems to be little resistance ahead for commodities, specifically gold and silver.  The U.S. dollar is the primary variable.  As you can see from the charts below, gold and silver seem to have no boundaries to the upside.  Every time the dollar shows any strength to the upside, it is met with heavy selling and back down it goes.  Those same consistent headwinds for the dollar are providing gold and silver with tailwinds and the bulls are taking full advantage.  Below are three charts, reflecting the long-term downtrend for the dollar and the major upswing for both gold and silver:

We don't have to guess or try to figure out the reaction in gold and silver.  It's very simple.  Both will react inversely to the dollar's movement.  So if we figure out the dollar, we can figure out commodities.  One glance at the long-term picture of the dollar probably tells us all we need to know.  If the trend is our friend, then it stands to reason that the dollar's path is downward.  That leaves but one option for commodities - higher prices.  There will be intermediate periods of dollar strength, which will temporarily cool off commodities.  But don't expect any sort of bubble-bursting move to the downside in commodities until the dollar has clearly reversed its downward spiral.  I just don't see it happening anytime soon.  The Fed has said repeatedly that it will keep interest rates low.  Europe has begun to hint that interest rates there need to move higher.  That combination alone will keep pressure on our currency.

I would expect the U.S. Dollar Index to fall back to retest the lows in the 70-71 range sometime in 2010.  That should provide more opportunity on the long side in commodities.  I'd use any short-term weakness as an opportunity to enter your favorite positions within this group on the long side.

LARGER CORRECTION LOOMING FOR GOLD?

Gold prices are obviously rising, and they are rising rapidly. However, given the move has begun to go parabolic in its 8-year of rally - we have to question how much higher gold prices can go in both the short and intermediate-term. To this end, the monthly charts adds some perspective in our mind.

First, let us state that we are not gold bugs, although we do believe they are headed sharply higher in the years ahead - hence we're intermediate-term bullish, with projections much higher than current levels. Second, in the shorter-term, we question whether prices have become just a bit too frothy and are in need of a correction. During the bull market since 2001, the 5-month RSI has reached into the 80-to-90 range on several occasions, which in each case corrected rather sharply lower back towards the 50-level before trending higher once again. Presently, the RSI stands at 84. It can go higher; but history has shown the risk-reward of buying gold at current levels may not be the most opportune entry point. Lastly, we would point out that gold prices are now a rather "stout" 45% above their 50-month moving average at $773/oz. Recent history shows us the once the 50% level is obtained, then we should become rather worried about a larger correction unfolding. At today's prices, this would roughly mean another $60/oz rally towards $1200/oz, which is a nice "big number." At that point, we're surely to see the media become even more lathered up than they already are about gold. Then, one should consider pulling back from the market for a bit as the undercapitalized players at taken to the woodshed for a quick beating - pushing prices lower into the oft-tested rising 20-month moving average currently rising through $921/oz.

In other words, those who chase this rally...keep your stops tight; or trade less than normal. In our opinion, there will be a better entry points in the months ahead.

Dow Hits Top of Channel

The Dow has been moving higher the last three months with surges early in the month and pullbacks later in the month. Notice how the Dow bottomed in early September, early October and early November. Also notice how the Dow peaked in mid September and mid October. Here we are in November with an early month advance and the Stochastic Oscillator overbought. As long as the Stochastic Oscillator remains above 80, it should be considered both overbought AND bullish. Notice how the indicator remained above 80 for two weeks in September and two weeks in October (yellow areas). Currently, the Stochastic Oscillator has been overbought for two weeks in November. The red dotted lines show the Stochastic Oscillator moving below 80. A similar decline below 80 would be short-term negative and argue for a correction within the bigger uptrend. Until such a move, expect overbought conditions to remain and the short-term uptrend to continue.


Click this chart for details.

TRENDLINES AND 50% RETRACEMENTS REACHED

The following three charts show the three major U.S. stock indexes having reached formidable overhead resistance barriers. Charts 1 and 2 show the Dow Industrials and the S&P 500 having retraced 50% of their bear market declines. More importantly, both indexes are testing major down trendlines drawn over 2007/2008 peaks. Given the fact that the market has rallied 60% in the last eight months without a meaningful correction, that's some cause for concern. Chart 3 shows a slightly different picture for the Nasdaq market, but the message is essentially the same. The Nasdaq Composite has reached important overhead resistance along its early 2008 trough around 2200. That puts all three stocks up against meaningful resistance barriers. Combined with the fact that numerous short-term divergences are starting to appear among market groups, and the recent rotation toward large-cap stocks in the consumer staple and healthcare categories, it looks like investors are starting to lock in or protect some yearend profits. That could lead to choppier market conditions.

STOCKS STILL OVERVALUED

Stocks have been in the overvalued end of the normal P/E range since the early-1990s, and this condition shows no sign of abating. Below is an excerpt from our daily earnings summary that will offer readers a better perspective. I have outlined the 2009 Q4 results because that is the first quarter not distorted by the huge loss reported in 2008 Q4. While the results of the current quarter are not final, 90% of companies have reported, and I don't think there will be any surprises from the remaining companies sufficient to change the estimated results a substantial amount. As you can see, valuations are projected to be well above the overvalued limit of the range (P/E of 20) through the first two quarters of 2010. If the market continues to rally, the over valuation will persist into the foreseeable future.

Since price movement over the last two decades seems to have little relationship to P/E ratios, why pay any attention to values? In fact, Decision Point's trend-following models consider price movement and nothing else. Nevertheless, we still want to be aware of the condition of the fundamental foundation of the market, and we believe that investor ignorance in this regard will only lead to more pain. After all, investors have been ignoring valuations for nearly two decades, and the result has been a stock bubble and two major bear markets. Most have not fared well during this period.

At each price top for the last two months I have been expecting a correction to begin, yet price declines have been relatively small and each top is followed by a higher top. Frustrating! I am not trying to identify a shorting opportunity, because shorting is not recommended during a bull market. The only reason that a decent correction is important is that it will provide a lower-risk opportunity to open new long positions.

For two weeks the market has been rolling over into what could be another short-term top. Or it could be the beginning of the long-awaited correction. Negative divergences still abound, but, as I told a subscriber, these conditions are usually not too serious in a bull market. The market is vulnerable, but it is not a time for shorting. We could reasonably expect the rising wedge pattern to break down, but you can see that there is support just below the wedge.

Bottom Line: Market P/E tells us that there is no fundamental foundation under the market. This information is not useful in timing decisions, but it does tell us that there is more pain ahead in the long-term. In the short-term the market is topping again, and a correction is still possible.

Healthcare showing relative strength

The Healthcare SPDR (XLV) broke above its October high two weeks ago and continued above 30 this week. Even though stocks were weak across the board on Thursday, healthcare managed to show relative strength with a smaller loss. Eight of the nine sectors were down in early trading Friday, but healthcare was sporting a small gain and again showing relative strength.


Click this chart for details.

How can I compare two securities?

There are two ways to compare securities using SharpCharts. The first method is simply to analyze the price plots together, one overlaid on the other. Another security can be overlaid by choosing "price" in the indicator box, entering "$SPX" for parameters and choosing "behind price" for position. Any symbol can be entered here. I chose red for color contrast.


The chart below shows General Electric (GE) in black and the S&P 500 in red. Both moved higher from July to September, but started to diverge in October and November. Notice that the S&P 500 recorded higher highs in October-November, but GE formed lower highs. GE is not keeping pace with the S&P 500 and shows relative weakness. 

Click this chart for details.

The second method involves a ratio chart. Choose "price" in the indicator box and then enter the two symbols you wish to compare for parameters. I want to know the performance of GE relative to the S&P 500 so I enter the symbols as a ratio (GE:$SPX). You can use any two symbols. I elected to show this indicator below, but you can also choose to view is behind the main price plot (GE in this case).


The chart below shows the relative strength comparative or ratio plot for GE and the S&P 500. Notice that the ratio peaked in late September and declined the last two months. GE started lagging the S&P 500 in late September and continues to lag as long as this ratio moves lower. A break above the November highs is needed for GE to start showing relative strength again.

Click this chart for details

An island reversal in MDY

With a gap up on Monday and a gap down on Thursday morning, the S&P 400 MidCap ETF (MDY) has an island reversal working on the 30-minute chart. There were no trades around 127.6, which creates a floating island around 128. Even though this gap is negative, MDY landed right at support from last week's low. Further weakness would reverse the short-term uptrend.

Click this chart for details.

Regions Financial Bounces off 200-day SMA

Regions Financial (RF) is showing signs of life with a high-volume bounce off the 200-day simple moving average and a key retracement. Notice that the Sep-Nov decline retraced a Fibonacci 62% of the Jul-Sep advance. The stock firmed around 4.75 in early November and surged over the last three days. 

Click this chart for details.

DIA enters retracement zone

With the advance above 100, the Dow Diamonds (DIA) entered the 50-62% retracement zone. Such retracements can be measured using the Fibonacci Retracements Tool on Sharpcharts. These zones can mark resistance areas and price action merits a close watch.



Click this chart for details.

Scanning the Aroon oscillator in the market carpet

Friday's mailbag answered questions on the Aroon oscillator, which is a trend identification indicator. Basically, a strong uptrend exists when the oscillator is above +50 and a strong downtrend exists when the oscillator is below -50. Even with the market gains of the last few weeks, I was surprised to see so many negative readings in the Aroon oscillator. The sector averages are negative for finance, energy, consumer discretionary and materials sectors. 

Click this chart for details.

Nov. 16th, 2009 @ 2:00pm - ChartStyles Database Goes Offline Unexpectedly

The database that keeps our ChartStyles data - i.e. all the stored settings for the stored charts that our members use - stopped responding for some reason.  We have restarted that server and things have returned to normal. 

If you are still seeing incorrect charts, please try clearing your browser's temporary file cache and restarting your computer.  If that doesn't work, please check back here for any updates.

We are investigating why that server went offline unexpectedly.  We will post a follow-up message here when we learn more.  Thank you for your patience.

UPDATE: 3:00pm - The ChartStyle database continues to work fine now.  We have changed how it uses its memory in order to avoid this problem in the future.  Again, our apologies for the earlier problem.

What's the difference between the Aroon indicators?

The Aroon Oscillator is simply Aroon(down) subtracted from Aroon(up). It is positive when Aroon(up) is greater than Aroon(down) and negative when Aroon(down) is greater than Aroon(up). The oscillator can be used as a stand alone indicator or in conjunction with Aroon(up) and Aroon(down). As noted in the chart school article, Aroon means "dawn's early light" in Sanskrit. Tushar Chande, a serial indicator developer, created this indicator to determine the direction and strength of the trend. You can find formula details in the chart school article.

A strong uptrend is present when Aroon(up) is above 70. Upside momentum dissipates when Aroon(up) declines below 50. Similarly, the bulls have the edge when the Aroon Oscillator is positive. This bullish edge increase as the oscillator becomes more positive. Oscillator readings above +50 signal a strong uptrend.

A strong downtrend is present when Aroon(down) is above 70. Downside momentum dissipates when Aroon(down) declines below 50. Similarly, the bears have the edge when the Aroon Oscillator is negative. This bearish edge increases as the oscillator becomes more negative. Oscillator readings below -50 signal a strong downtrend.


 Click this chart for details.

In the example above, Citrix (CTXS) shows Aroon examples of a strong uptrend, a consolidation and the start of a downtrend. First, the Aroon oscillator was between -50 and +50 during the consolidation. Citrix could not establish strong direction as Aroon(up) and Aroon(down) remained close together. Second, a strong uptrend started when Aroon(up) surged above 70 and the Aroon Oscillator moved above +50 (yellow area). Third, Aroon(down) recently surged above 50 and the Aroon Oscillator moved below -50. This move suggest that a downtrend is starting for Citrix. You can also find "Stocks in a new uptrend (Aroon)" signals on the stock scans page.

PerfChart for 10 Currency ETFs

Year-to-date, the WT Brazilian Real Fund (BZF) and the CS Australian Dollar Trust (FXA) are by far the top performing currency ETFs. Of these 10 currency ETFs, only the DB Dollar Bullish ETF (UUP) is in negative territory. Even the CS Japanese Yen Trust (FXY) climbed back into positive territory in September.


Click this chart for details.

New "Free Charts" Page is Now Online

We've updated our "Free Charts" page with a completely new version that is more functional and fits with our updated site design.  Please take a moment to become familiar with it - kick the tires, etc. - and then let us know what you think! (Members: Don't be fooled by the name, this new "Free Charts" page is very useful. Check it out.)

Nasdaq AD Line Is Lagging

With the surge over the last 1-2 weeks, the NY Composite and the Nasdaq are both trading back near their October highs. However, the Nasdaq AD Line remains well below its October high and shows some relative weakness. The NYSE AD Line is also below its October highs, but still looks strong as it surged back above 12000 last week.


Click this chart for details.

Twitter Feed Added

If you prefer to use Twitter to get notifications about our blog updates, we now have our own Twitter feed ("stockchartscom") that you can follow.

A Bull Flag for Cisco

Cisco (CSCO) led the market higher with a big move above 24 last week. While the S&P 500 continued higher the last three days, Cisco stalled with a falling flag taking shape. Bullish flags slope down and form after a sharp advance. A break above 24 would signal a continuation of last week's advance.

Click this chart for details.

Loyalty Badges Added to Members Page

We've added special badges to the members page for people who have subscribed to our service for more than one year.  Right now, those badges are pretty much just decorative - soon however, they will become more valuable.  Stay tuned...

Yield curve widens

The difference between the 10-Year Treasury Yield ($TNX) and the 3-month Treasury Yield ($IRX) widened significantly since early October. Short-term rates fell ($IRX), while long-term rates rose ($TNX). As a result, the yield curve is the steepest it's been in months.

Click this chart for details.