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Just a quick note to point out that gold and silver continue to break out, with gold at a new all-time closing high both on the daily and weekly charts. This is what a strong bull market looks like:
Silver has even been outperforming gold recently. Since our last update, silver is up over 3 times as much as gold, and still has quite a ways to go to get to even a new high on the year.
The Silver/Gold ratio had a bullish MACD crossover earlier this month, and has now broken above its 20-day EMA. Watch for silver to continue to outperform as long as this ratio remains above the 20-day EMA. Investors are beginning to realize that silver is money, too, and is a far cheaper alternative to gold.
For the stock market, since our last update on the SPX testing the 1105 area, it sold off to retest the February low at the 1040 area. After a successful retest of that support, for a nice double bottom, the SPX again tested its 20-day EMA and 200-day moving average this week after the VIX broke down badly from its uptrend. Unlike last time, this time the SPX broke above those moving averages, passing the test with resounding success.
With these successful tests, we now have the summer rally we were looking for earlier. As long as the SPX remains above its 20-day EMA and 200-day moving average, odds favor the long side in the stock market. For month end, the 12-month EMA remains in the 1090 area, and remains critical support for next week. With some more strength likely early this week after the news of the lifting of the China Yuan peg to the US dollar, the market would be short-term overbought and due for a pullback, but as long as any pullback is shallow, the summer rally should resume.
Watch the VIX downtrend in addition to these moving averages. When the VIX next has a strong break upward, it will likely mark the beginning of the next stock market selloff, which would be confirmed with breakdowns of the aforementioned SPX moving averages. There's a good possibility of such a selloff beginning by fall, after this summer rally ends.
The next test will be the 200-day moving average at around 1105.
On the other hand, another break of the 1090 support area probably means more selling is ahead before the market stabilizes.
On Thursday, the SPX rallied right up to 1105, where the 200-day moving average is, but couldn't get through that key level. On Friday, in reaction to the poor Non-Farm Payrolls report and more bad news from Europe, the SPX dropped well below the 1090 support area, selling down all the way to 1065 for its lowest close since February:
The SPX couldn't even make it up to its 20-day EMA before Friday's carnage.You can see from the chart that using above/below the 20-day EMA as a guide to favoring the long/short side has worked well.
The QQQQ chart only could muster one day above its 20-day EMA, as Friday's selloff moved it back well below that moving average:
This action, as well as the SPX drop below its 12-month EMA, favors the short side for the stock market as long as these EMA's remain above current prices:
The SPX will likely bounce around with high volatility, but if it can't close this month above the 1082 area, that would likely indicate this weak period for stocks could last a while.
Meanwhile, both gold and silver remain above their 12-month EMA's, as well as their 200-day moving averages:
While we thought the stock market might enter a more stable period with a successful close over SPX 1105, Friday's poor news and horrible reaction killed that possibility for the near future. The 1105 test for the market was an abject failure.
We continue to believe that investors and traders who favor the long side will be better off focusing on gold and silver during this period of stock market instability. With the global debt problems and currency devaluations, the fundamentals also favor these precious metals that have served as real money throughout history.
Today, the market action at the SPX 1090 resistance area was significant. Instead of selling off hard from there, as it did yesterday, this time the market rallied right through this resistance area, closing over 1098.
The next test will be the 200-day moving average at around 1105. There's also an inverse head & shoulders pattern on the hourly SPX chart, which will get a confirmed breakout over 1105.
If the SPX can get through 1105, the market could be in for a nice rally. The VIX, bonds, and the the Put/Call ratio all look like they could drop quite a bit in a more stabilized stock market environment, as long as the news flow gets less negative.
Below is the QQQQ chart we posted last month in our warning to switch from stocks to gold. Now, with some follow-through rallying tomorrow, we could be exiting an unstable stock market period and entering a more stable period again.
Notice that MACD got a bullish crossover in February at the beginning of the stable February-April period. Now, an up day tomorrow would confirm another bullish MACD crossover, and would also move QQQQ over its 20-day EMA. You can see from the chart that using above/below the 20-day EMA as a guide to favoring the long/short side has worked well.
Here's a similar chart for the $VIX, which normally moves in the opposite direction of the stock market:
The $VIX looks like it's broken its uptrend and had a bearish crossover on MACD. If the VIX continues to drop, the market should be much more stable.
Here's one for TLT, the ETF for 20-year bonds:
Bonds, which have rallied during this unstable period because of their "safe haven" status, also could be breaking their uptrend and also have had a bearish MACD crossover.
And here's one for the Put/Call Ratio:
The Put/Call Ratio is also coming down from an extreme level. Selling panics feature increased put buying, whereas market stability features more balanced put and call buying.
There are lots of people calling for a market crash coming any day now, and they may be right, but these indicators are pointing to market stability instead if we get some follow-through strength in coming days, especially tomorrow, and especially over 1105 SPX. An up day tomorrow would also be the first time we'd see 2 consecutive up days since April, which would be another sign of renewed stability. On the other hand, another break of the 1090 support area probably means more selling is ahead before the market stabilizes.
If we do see a summer rally, that would keep the SPX above its 12-month EMA (if it lasts until at east the end of June) and keep this cyclical bull market going for at least a little while. This chart shows that the 12-month EMA has done a pretty good job of identifying the trend over the last 10 years:
It's still a dangerous market, but if we do see some follow-through strength tomorrow, it should become a lot less dangerous for a while. We believe any summer rally would be a selling/shorting opportunity, but if it happens, you won't want to short too soon.
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