Saturday, February 6, 2010

Stock, Gold and the Dollar Market Updates

Friday was a wild day in the markets so it feels like a good time to provide an update.

First up is stocks.  The S&P500 started the week off strong, with up days on Monday and Tuesday.  Wednesday was basically flat followed by a massive sell off on Thursday and a close on the lows for the day. Friday was another massive down day for much of the trading session before a huge rally in the last few hours resulted in a positive close for the day.  Before this massive rebound, we were predicting weekend rumors of a Black Monday style sell off during the next trading session.  Because of the late day rally, however, that possibility looks to be nullified.

Five day view of the S&P500 (click on images for larger views):

In December, we noted that the S&P500 had moved clearly above its 500 day moving average, an important technical level over the past decade.  Since that time, the market has dropped back down and bounced off that line, fell below it, and has now rallied back to the bottom of the line.  If this level starts acting as upward resistance over the next few weeks then stocks could be in big trouble:

The VIX has risen some but is still well within its downtrend.  We will continue to watch this closely, with a breakout being another major negative for stocks:

Next up is gold.  We have been bearish on gold since exiting our profitible position in early December.  We projected a fall in the spot price of gold over the next one to two months to $1000 and $100 on GLD.  Gold fell to around $1050 ($102.28 for GLD) on Friday before rebounding to $1064 ($104.68 on GLD) at the close.  We are still looking for GLD to fall below its 200 day moving average over the next few months, which is just below $100/$1000 an ounce, whereupon we will be large buyers:

We did add a small position in GLD on Friday when it fell below $103.  We entered this position because (1) our dollar index projection had been met (see next section) and (2) we noticed that, while gold and stocks were massively down at the time, most gold mining stocks were up big.  The gold miners typically lead the price action in gold, so we played the divergence.  If the dollar begins to fall while the miners continue climbing then we will hold on to our small position and may even add.

Finally comes the dollar.  Since December we were looking for the dollar to rise into the 80-82 range.  This area was reached on Friday, where the dollar closed at 80.21.  We have no real conviction on the dollar right now, though if it rises to near 82 in the next few weeks we will probably grow bearish:

In summary, stocks are at a very dangerous level but it is a bit premature to call a new bear market.  Gold has fallen far and fast since December and may have bottomed for now but the final bottom of this correction may still be several months away.  The dollar has met our upward target and we have no current projections for this index.
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