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Great stock trades based on fundamentals and technical analysis.

Sunday, June 06, 2010


Test Failure! Focus on Gold, Silver

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:

This stock market weakness has rewarded those who went long gold and short the stock market based on the monthly GLD/QQQQ buy signal we posted on May 2

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.

With the news flow getting even more negative on Friday, rather than less negative, the VIX and bonds moved right back above their uptrend lines that were broken earlier in the week:

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.

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