S&P 500 Technical Analysis

Stocks have embarked on a relief rally ever since it appeared that the Fed was going to keep interest rates at an ultra low level and the ECB was going to step in and buy up Spanish and Italian Debt. While such actions tend to keep investor fears subdued it does nothing to actually genarate true economic growth. That requires structural reform which includes looking at the tax code, cutting excessive and burdensome regulation, andgetting the central governments to actually exercise some spending restraint.

Traders are of the opinion that the Central Banks will intervene to prevent any worsening of the factors that have precipitated the move away from risk but at the same time, they all realize that serious problems are still lurking in the background and have not really been dealth with.

I am not sure what trigger might set off another round of broad based equity selling but if the market were to move back down towards the recent low near 1075 and fail to hold there, it will drop at least another 100 points before any technical support will surface based solely on the price projection given by the pennant formation.

Equity bulls really need to get the index above the 1250 level to spook the bears and preferably above the falling 50 day moving average at 1275. That seems a tall order given the state of the US economy. Perhaps the best that they are hoping for is to settle for a draw with the bears and bounce the market back and forth in a wide range trade giving the economy time to improve on its own. Then again they might be crossing their fingers waiting for Uncle Ben to give them some sweet whisperings about another dose of QE when he gives his speech at Jackson Hole near the end of this month.

Given the political firestorm that would set off, I doubt we are going to get anything quite that drastic at this point. We would need to see an equity market debacle to given them the courage to do any such thing as that would basically be the last nail in the coffin of the US Dollar. The Fed has been roundly and rightly criticized for the effect that its two previous doses of QE had on the greenback and the subsequent spike in gasoline and food prices which negated any stimulative impact that the easy liquidity might have had, if any.

Gold - 4 Hour chart update and comments

The ability of gold to push past $1780 set the stage for its test of the $1,800 level. The two lines of technical resistance are noted on the price chart. As you can see, the initial approach to $1780 saw gold encounter some resistance from sellers trying to defend that level. After they were unsuccessful, they then retreated towards the $1800 level from which they are attemping to absorb the bids coming into the Comex gold pit. 

Technically, the gold market is now at a crossroads of sort for the short term price action. Volume has been shrinking as it nears $1800 which is not particularly a good sign for the bulls as it reflects hesitancy on their part to get too aggressive at this point. They will need to stand firm here to prevent the bears from getting emboldened.

If the bulls can push price past $1800 and hold it above that level, they have a very real chance at moving back to the all time high. If they falter, then gold will sink back towards $1780 where the bulls will need to step up to prevent it from dropping back to the $1740 level.

The bears are attempting to create a short term double top on the price chart by digging in and holding price near current chart levels; however, to actually validate such a formation, the price would have to be taken down below $1730 and held there.

The big problem for the bears however is that they are running "out of season" for the seasonal chart pattern. Gold tends to strengthen as it moves into the latter part of the third quarter and into the early 4th quarter as the Asian festival season begins, not to mention the Western Christmas season. The sort of physical demand associated with this time of the year then becomes a headache for the shorts in the market, particularly if the conditions which are bringing safe haven flows into the metal continue to worsen.

The bears are going to be hoping and praying for a strong equity markets rally and a lessening of the "fear factors" driving gold higher. Whether they get that or not is unclear.

I should note here that the Continuous Commodity Index ( CCI ) will simply not go quietly into the night. Every time it appears that this index has topped out and is going to validate the deflationists' arguments, it rebounds and moves back up again. By and large, the complex as a whole was higher today bringing the index back up towards the 650 - 655 level which has been acting as a resistance zone on the chart.

The index has been in a very gradual trend lower on its daily price chart but has not confirmed a solid trending move. It still remains a very good gauge of the risk trade vs the fear trade in this regards. When traders are comfortable with risk, the index moves higher. When traders are running on fear, the index moves lower.

With this CCI Chart in mind, take a look at the following silver chart and you might see the type of connection that exists between the two. The CCI peaked in late April; so too did Silver. The fear trades knocked the CCI down; so too did these trades knock down the price of silver. In effect, silver has been held hostage to the broader climate of risk aversion that has been dominating the market for the last few months.

There is a difference however. The CCI has been in a broad consolidation pattern with a weaker bias; however, Silver has been in a broad consolidation pattern with a friendly bias. If commodities were to start another broad based rally, silver would accelerate up and out of its congestion type pattern very quickly as it continues to hold together better than the overall sector as a whole. It will not matter what the stimulus or triggering factor might be -the chart says it wants to go higher given enough impetus or momentum to break it free from its confines over the last month.

Lastly, I once again need to comment on the failure of the HUI to take out this incredibly stubborn 580 level and hold it. It took out that level early in the session today but then failed to build on its gains and moved lower retreating away from the number almost as if on cue. As a trader I must marvel at the obvious footprint being created on this price chart. I can only surmise at the amount of short selling that is being required to hold these mining shares in general from surging higher. One gets the sense that the bears are doubling down and determined to prevent their positions from going underwater. All it is going to take to see a massive short squeeze in this sector is for one or more of these large short sellers to decide that the better part of valor is getting out. The first guy out will win - the rest will get buried. They must all certainly know this.

One last thing - The US Dollar fell down to a major support level (AGAIN) before it bounced slightly higher off of that level. This level near 73.50 is taking on increasing significance. As you note on the chart, it has not spent much time below this area before it moved higher. If, and this is a big IF, the Dollar falls through this level and does not rebound rapidly, things could turn quite ugly for it in a real hurry. I find it rather telling that with all the turmoil and uncertainty besetting the Euro Zone in regards to its debt issues, the Dollar is barely hanging on for dear life. That is not exactly a ringing endorsement of the merits of the greenback in my estimation.

Chavez makes a run at Venezuela's Gold

Both Dow Jones and the Wall Street Journal are reporting this morning that leftist strongman Hugo Chavez plans to nationalize the gold industry of Venezuela. There looks to be little if any influence on the gold price from this news. About the only effect that I can see is on mining companies that have their operations down there.

Gold - 4 Hour chart update and comments

I've moved back over to a 4 hour chart for the time being to try to get a bit tighter view of the recent trading range that gold has been carving out over the last few sessions. The chart resistance and support levels being created detail the range as gold is still finding buyers on dips below $1740 but has not yet been able to clear $1780.

If it pushes through $1780, it looks to me to have enough momentum to try to take another shot up towards $1800. How it reacts there will be extremely important.

The overall chart pattern is still being dominated by that big down day from last week after the market pushed through $1800 but then failed to hold that level after subsequently setting back.

Bulls would not want to see this market spend much time below $1730 or so before rebounding as that would portend a drop towards $1700 initially.

Volume is easing somewhat ( a welcome relief I might add) reflecting a lull in the emotions of traders. After last week's wild ride, a lot of guys are just worn out and glad to be sitting around on the sidelines or trading a bit smaller in size while awaiting some more definitive signals.

One brief note about the action in the HUI in Monday's session. Once again it has pushed right up into a very stubborn and formidable chart resistance level near 580. It has had trouble dealing with this area since May of this year. Going back to the beginning of the year, it had managed to briefly penetrate the level but spent spent less than a month above it before succumbing to selling pressure and failing to hold its hard fought gains.  If it can clear this level now, and if it can hold those gains going into the end of the week, then we should have something to hang our hats onto from a technical perspective. If it sinks back down away from 580 again, it will just further reinforce how significant this level is becoming on the charts. Apparently, there is a lot of pain coming to short sellers if some of the shares rise much further from today's levels and they are making a concerted effort to prevent that from happening.  Any further move higher in gold is going to complicate their efforts immensely.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen to my regular weekly interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/3vqp38d

Margin Hikes help derail gold; HIgher Equities also hurt

I was a bit surprised last evening NOT to see some selling related to the margin hikes announced by the CME Group yesterday for carrying futures contracts in gold. Eventually however, the selling did kick in. Along with the upside move in the equity markets in today's session, that was enough to take some of the wind out of the gold market and bring it back down to earth for a bit.

We have had a nice run higher which was threatening to get out of hand due to the very steep angle of ascent being created on the price chart ( remember what happened to silver earlier this year) so some retreat in prices and HOPEFULLY a bit of stability in the gold price after some consolidation will be most welcome. We also need to give some time to the big physical markets of Asia to get accustomed to a higher gold price. Wild swings higher in price tend to scare some buyers away over there initially until they become acclimatized to the new levels.

This market will remain very jumpy however as any further signs of deterioration out of Europe can and will send gold right back up again. The computer programs at the CME which monitor volatility will be watching to see if additional margin hikes are warranted. As downside support levels on the price chart come into play, these margin hikes will tend to bring additional selling as long positions go underwater that were placed on above $1780. That tends to amplify selling pressure that would not otherwise occur.

If you note the enormous spikes in volume on the price chart I have included below, you can see the EMOTION being reflected in the market. This sort of emotional intensity is very difficult to sustain for any extended period of time so I for one am welcoming what I hope will be a bit of relative "calmness" if we can get it. After daily moves from $60 to $80, a day in which gold moves "ONLY" $20 will be a pleasant relief. So much depends however on what happens next in the bizarro-land of the equity markets so for now we wait and see like the rest of the investing/trading world what the computer algorithms will do next.

From a technical chart standpoint, the market has indicated that it needs a break and that the easy money on the upside is over for a while. Today's BEARISH OUTSIDE DOWN REVERSAL is signalling additional selling should be following. The fact that the market looks like it is not willing to move below $1,740 makes the reversal not as serious as it could have been. Still, the signal is bearish and will have to be noted due to the nature of todays trading which is highly technical.

Now we have to see at what levels we get some two-sided trading to take place. All depends on just how hungry the bulls are to move back into the market. Initial downside support comes in just below $1720 and then down near $1700. That is followed by more formidable chart support near and just below $1,680. There are a lot of potential gold buyers sitting on the sideline who did not want to chase this market higher out of fears of getting caught flatfooted who are eager to get in. They are going to be doing the same thing as the rest of us; namely watching for a level that they feel they can get in more safely.

If the Bulls are now to have a shot at $1,800, they will have to take price past $1,780 and hold it there first.

I did note that open interest, after falling for the last few days, shot up yesterday on the big volume surge higher. It was a large enough increase that I cannot attribute it all to just spreads being put on so it appears that some of the very strong bearish hands were doing a large amount of selling yesterday. The weak-handed shorts were run out in large numbers recently so this new group of sellers is more formidable. It is going to take a very sharp selloff in equities to threaten them in the least.

If you notice, the Swiss Franc is really getting hammered today, down near 4.5% at one point today. That is an excellent gauge of risk aversion so as it moves lower, gold is moving lower alongside of it. These two markets have recently been moving pretty much in tandem. If Swissie reverses higher, so too will gold.

One last note, as usual, the HUI once again failed to better the 580 level. Until it can take that out convincingly, the shares are not going to go anywhere. Once that level gives way preferably on a weekly basis, the shorts in the shares will be in serious trouble. Until then, they can brazenly sell no matter how much further they push them into severe undervaluation territory.

CME GROUP hikes margins for gold

Effective as of the close of trading, margin requirements for gold are being raised from $6,075 to $7,425 for new positions and from $4,500 to $5,500 for "current maintenance" margins. WE had expected this to actually come a bit sooner than it did on account of the extreme volatility and extent of the intraday price moves that have recently been taking place in gold. This is a normal occurence in bull markets which begin to see large moves in price and is designed to protect the integrity of the clearing houses and of the brokerage firms, which can set their own margins for their customers.

Apparently the announced hike has not impacted gold the least as it continues to trade above $1,800 at this hour and as of yet shows no sign of weakening.

Gold Open Interest readings indicate a panic among some of the Bears

Please see the following chart along with the notations I have placed in it for some insight into the distress currently being felt by the gold bears at the Comex. This is one of the reasons that the price of gold has been moving up so sharply - forced short covering is occuring as panic sets in on the part of the bears. Only the strongest shorts are going to be able to sustain their positions in this type of squeeze. We'll have to see how far this wave of short covering can take things before all or most of the weak-handed shorts have been run out of this market. Things could get a bit dicey for the longs after that.