Short Takes

Traders use moving averages to filter out day-to-day volatility, allowing them to focus on longer-term trends. The 200-day moving average is commonly used as a bull/bear filter. Conditions are most favorable when price is above the 200-day and the slope of the 200-day is positive.

As shown below, following the recent announcements of additional money printing from the Fed and European Central Bank, silver’s 200-day moving average is beginning to tick higher in a bullish fashion (see green arrow).

The chart below provides some perspective on recent bullish and bearish turns in silver’s 200-day. When the 200-day turns down (red arrows), it indicates a bearish longer-term trend. Conversely, after the 200-day has turned up in the past (green arrows), silver has experienced big gains over the subsequent months.

Video covering numerous ETFs, including SPY, GLD, SLV, GDX, JJC, DBC, EWI, EWG, EWQ, EFA, & VEU coming tomorrow. Weekly “risk-on vs. risk-off” charts will be included, as well as CCM model updates. Information will be of interest to both bulls and bears. Will post here when completed.

This morning before the open we said:

Some firmness in commodities and materials stocks would also increase the odds of the recent breakouts holding (S&P 500 > 1,370).

We have it today (as of 12:44 pm) - good sign, especially if it holds into the close.

On March 5, we noted concerning trading action in Apple. On February 29, we highlighted similar concerns about gold and silver. It is only a matter of time before central banks print more money, which means we want to keep an eye on gold for a possible entry point. Wall Street is already looking for the Fed to ramp up more QE in April.

The gold ETF (GLD) is near support around 162, which includes the 200-day at 162.72. Given the current daily DeMark counts and the chart below, even if gold bounces soon, GLD may eventually head toward the 155 to 157 range. The chart below is as of Monday’s close.

If you were in commodities in 2008, you remember the July waterfall declines, which offered little in the way of countertrend rallies. The collapse in commodities was a bad omen for risk. The S&P 500 dropped from 1,250 to 666 over the next eight months. That is an extreme example, but the concepts still apply to the present day.

It is also hard to forget the crash of silver in May 2011. The S&P 500 peaked simultaneously before dropping 20% over the next six months.

We have no idea what will follow today’s high volume sell-offs in gold and silver, but we do know recent history tells us to pay attention and be very careful with risk assets. The gold ETF (GLD) had a four-minute span to remember today. Today’s drop was void of any real countertrend rallies and it occurred with almost a three-fold increase in volume relative to a typical day. GLD normally trades 12.1M shares per day; today’s session saw 34.9M shares change hands.

The silver ETF experienced a mini crash today losing 9.7% in about an hour and a half. SLV’s average daily volume is 18.3M shares. Today an eye-popping 91.1M shares traded.

Both gold and silver experienced high volume and sharp sell-offs in spring 2011. As shown below, the stock market also experienced rough seas in the following six months.

We have no idea what tomorrow will bring, but we do know it is prudent to respect high-volume, waterfall declines in any market. A close this week below 1,354 would add another check to the list of correction concerns. The bulls are still in control, but they may be losing their grip a little.

Gold is up $46 since this post. Looking for bullish MACD cross on GLD (not there yet - still hurdles to cross).

The 60-minute chart of the S&P 500 leaves the door open to 1,372ish.

You can think of the ratio of copper to gold as an economic confidence index. Both copper and gold can be used as hedges against inflation since they are “hard assets”. Copper has more industrial uses than gold. Therefore, when the economic outlook is positive, copper’s performance relative to gold tends to rise. Conversely, when the economic outlook deteriorates, copper’s performance relative to gold tends to weaken.

The chart below shows the S&P 500 at the top. Copper’s performance relative to gold is shown at the bottom. Notice the S&P 500’s performance in the weeks that follow weakness in the copper/gold ratio (see red arrows). Even in the cases where the ratio worked well as a market indicator, it should be noted there can be a lag before stocks become weak, which can last as long as a few weeks.

We mentioned Wednesday that we were interested in the charts of gold and gold mining stocks. Gold mining stocks responded today with sharp gains. Given that more money printing is on the way (much more), we added gold and gold mining stocks to our allocation today. Gold has been correcting for two weeks allowing for an improved risk/reward entry. Gold remains $195 below its peak made last year, and $37 below its recent early February peak.

There are numerous takeaways from the chart of gold below:

1. There are three steps required for a basic change in trend. Step one is a break of an established trendline. Gold had been in an established downtrend for four months as shown via the blue trendline. Step one, a trend break, was completed in January (see orange arrow).
2. Step two is to make a higher low, which may be happening now near the pink arrow. Notice how gold held at the up-trending pink dotted line, which may be acting as support. Gold also bounced Thursday at the thin black trendline dating back to early 2012 (above pink arrow).
3. Step three will be completed if gold can exceed the early February high of 1,766 (near green arrow). With the ECB due to print even more money at the end of February via the second round of unlimited three-year loans to insolvent banks (see video), there is a sound fundamental case for gold.
4. Today’s candlestick is known as a “hammer”, which often occurs near a point of reversal.
5. The 200-day moving average, which was recaptured in mid-January, continues to have a positive slope, which is indicative of a rising trend.
6. A retest of the 200-day is possible, meaning more downside is possible in gold.

What is the biggest short-term risk for gold? If the market feels an “all clear” has been given in Europe, gold may drop further based on the perceived reduced need for safety. Regardless of what the market feels, the odds are remote any perception of “all clear” will prove to be lasting relative to Europe’s unsustainable debt levels (see December video).

In the chart below, the three steps for a trend change appear to be in place for gold mining stocks (GDX): (1) a break of the orange downtrend line, (2) a higher low, and (3) a higher high.

If GDX can continue higher, it does have to contend with a downward sloping 200-day moving average, but that is still 3.6% above Thursday’s close. If GDX can move back to the top of the pink channel, it would represent a move of 7.4%. The green arrows above show a series of higher lows which mark the uptrend off the late 2011 low.

Gold’s rally looks like it may be ready to take a breather, which may coincide with a period of “risk off” beginning relatively soon. Note price action after the orange arrows.

Sentiment, especially when it reaches extremes, can be a good contrary indicator. A new record high in bullish sentiment qualifies as an extreme. According to Steel Market Update:

Steel Market Update (SMU) Steel Buyers Sentiment Index rose +9 points since the middle of December and is now at +41 the highest level recorded since the index began in November 2008. The previous high for our Index was +40 which was recorded the first week of April 2011. One year ago SMU Steel Buyers Sentiment Index was 16 points lower at +25.

The last record was made in early April 2011. How did the steel ETF (SLX) and S&P 500 (SPY) fare in the next six months? SLX was down 48% and SPY lost 15%. Extreme bullish steel sentiment aligns with our January 10 comments relative to possibly cutting back on our long positions (IJR) and considering the short side of the market.