Is this the start of the stock market crash 2012 version? Let’s take a look at the chart and a key indicator and see what we can learn from Friday’s close:
Stock Market Crash 2012 – SPY Chart
In the “exhaustion gap” entry I was looking for a smooth consolidation back inside the blue line. Once a sign of support was present, you would have a buying opportunity. You may have heard the phrase “don’t try to catch a falling knife” before. The S & P 500 hundred qualifies as a falling knife after Friday’s close. You can see on the chart that last weeks bar was tall and closed near the low. This signifies momentum to the downside.
The good news is the S & P 500 remains above the principal value zone marked by the horizontal green and red lines. This zone of prices separates a bear and bull market. If the market can recover and hold aboe this zone with a strong reversal bar, you may still get a buying opportunity. With the growing uncertainty it will take some positive news to spark the reversal. Let’s take a look at the fear index and see what information it is showing.
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What to do with Gold Now
What to do with gold now may be a question you’re asking yourself. We’ve seen the inverse head and shoulders base fail, and now the principal value zone has been compromised on a weekly close. Fundamentally interest rates don’t appear to be heading up anytime soon. This would continue to support a bullish case for gold, but technically price has issued a warning. In 2008 you would’ve thought that gold would’ve been a safe place during a banking crisis, but it experienced as much volatility as anything.
What to do with Gold Now: The Chart of GLD
This week finished with a tall bar on the chart moving down with momentum. The price moved through levels that typically would have brought buyers into the market. Gold is now extremely oversold and will likey draw a bounce soon. The question is will the bounce draw more selling or aggressively move back throught he principal value zone that separates bull and bear markets? Regrettably there is no definite answer at this time, all we can know for certain is that volatility is likely as the struggle plays out. Which still leaves us with the question what do to with gold now?
You need to define your purpose for owning gold first. If you are collecting gold as you would real estate then you already know the answer. If you are speculating in gold to build wealth or grow a nest egg, then you should probably act to hedge your value. If you do not wish to trigger a taxable event, then you should use options. If you are in a tax deferred account you can move to the sidelines until the volatility has played out, and gold moves back through the principal value zone to the upside.
Once again there is regrettably a cost to any scenario. Options cost money to purchase and expire worthless if not needed. Selling now only to re-purchase later at a higher price results in a loss of value. If you decide that this is a shake out, and you believe gold will bounce back you can always sit through the volatility. Just understand your risk is that the gold run is over, and gold trends back to $100 an ounce to stay. You will have greater losses and missed opportunities if this is the case. It is easy to become committed to a position and fail to make the best decision. Sometimes hedging or ridding yourself of the position helps you see more clearly, if staying long was the right choice then you can re-establish your position.
This should help you make your decision. If you decide to act, you should seek the advice of a professional. See legal disclaimer. Next week I’ll revisit the stock market as we continue to wait for it to pull back to a reasonable lower risk entry point. Hopefully you’re better equiped to answer the question: What to do with gold now?
Regards,
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Exhaustion Gap
With a significant long term price level just above, Monday’s higher open and rally certainly feels like an exhaustion gap to resistance. What that means is after a long term rally has taken place, a piece of good news hits the market causing a ”panic” rally that moves the market to new highs. This is typically a target price where many people are taking profits at the expense of those who have waited, missed the rally and are now jumping on board. When the market fails to break through old resistance a significant pull back typically follows.
Above is a chart of the market price stucture of the S & P 500. Risk of a pull back increases as price approaches the significant level marked by the horizontal red line above. Once a pull back begins it is likely to come down near the blue line as the principal value zone marked by the green and red combo lines advances from below. This would be a level where one would look to “buy the dip.” Please see legal disclaimer.
Exhaustion Gap Illustration
If you take a look at the daily chart you can see Monday’s gap opening is what I am referring to as the exhaustion gap:
Gold has rallied off the right shoulder target. Time will tell if this rally will continue to new highs. Have a great week.
Regards,
The inverse head and shoulder pattern continues to set up for the gold market:
Gold has now entered an oversold condition as measured by Wilders RSI in the lower panel. The next condition needed is a rally that leads to a reversal confirmation. Then we’ll see if the inverse head and shoulders pattern can lead to new highs for gold.
The stock market continues to roll, longer term resistance is approaching and maybe the catalyst that triggers a correction back to the longer term moving averages. Please see legal disclaimer.
Have a great week,
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