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Monday, November 09, 2009


Rally as Expected, Another Gold All-Time High

Given the recent history of the market rallying sharply short term after a VIX spike above its upper Bollinger Band and a spike down in the NYMO, combined with the upward market bias heading into the FOMC announcement, there's a good chance the market will move up into that announcement tomorrow afternoon. If recent history is a good indication, the market also should continue higher over the next few days.

As expected, the market rallied into the FOMC announcement, and then continued higher the next 3 days. In the 4 trading days since our last post, the Dow has rallied over 450 points, making a new 52-week high. The S&P 500 hasn't yet made a new 52-week high, but is within 8 points of one and broke the September high.

This updated chart of the VIX and SPX shows the sharp short-term rally we were expecting after the VIX spike above its Bollinger Band:

The VIX has dropped sharply from the lower 30's to the lower 20's, which has been a strong support area recently, so this sharp short-term rally may be nearing its end.

The updated chart of the TICK 10-day EMA shows that it's once again approaching the 600 level:

As we said after the last peak over 600, "Since the first peak over 600 on the TICK 10-day EMA, back in March, there have been 9 straight higher highs marked by subsequent peaks over 600 on this EMA." If we get a 10th higher high with another peak over 600, we'll then look for another short-term pullback, and see if that pullback will be yet another buying opportunity, or a trend change with a lower low.

Friday's small NYMO change had us expecting a big move early this week, and today was a very big move, both in terms of points and breadth, marking a strong 90% upside day (we first discussed 90% upside and downside days here). This chart shows that today was actually an 18-to-1 day in terms of NYSE Volume:

While the breadth of today's rally is impressive, there were also impressive 9-to-1 downside days in late October on higher volume. Those selloffs proved to be buying opportunities, so it's possible that this rally could prove to be a selling opportunity. However, if there are more 9-to-1 upside days in the near future, the market could be headed significantly higher.

Watch for a bearish cross on the weekly PPO and a break of the weekly uptrend to signal a more significant market correction. If the TICK 10-day EMA can't reach the 600 level on the next bounce, or the market fails to sustain a rally from oversold NYMO levels, the medium-term trend could be changing.

This updated weekly S&P 500 chart shows we haven't yet had a bearish cross on the weekly PPO, and though the uptrend line from the March low was broken in late October, the early October low held, keeping the weekly uptrend intact:

We should see soon whether the TICK 10-day EMA reaches the 600 level and whether this rally from oversold NYMO levels lasts. While it won't take much of a drop in coming weeks to trigger a bearish cross on weekly PPO, we won't be comfortable looking for a significant market correction until we get such a cross, along with some other indicator confirmations. A failure to make a new high in the S&P 500 would be the first indication of a more significant market correction, with a break of the October low a confirmation.

This expected short-term rally has brought some mixed signals. The new Dow high and strong breadth are positives, but the lower volume and negative divergences are negatives. In the very short term, the high closing TICK and very low closing TRIN indicate likely weakness early tomorrow. The market action in coming days should help point to the next significant move direction.

As expected, gold and silver have continued higher, with gold closing over $1100 an ounce for the first time ever today. Gold has had a very strong rally recently, so a short-term pullback can happen at any time, but the longer-term trend continues to be higher.

As we've been saying, "The precious metals could be in for an extended rally period on this breakout. If so, the miners should be in for a strong bull move." The XAU and HUI mining indices both closed at new 52-week highs today, and junior miners have continued their recovery.

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