What the Decline in Gold Means for Stocks
Many a bull market has started from short covering. They have to start somewhere.
The liquidation continued on Wednesday, breaking the important mid-point of the year with authority.
That being said, when the primary level of equilibrium buckled the mid-point of the year near 1223, the S&P was quickly magnetized to the secondary mid-point and a 50% retrace of the last rally of 108 points to 1212 was satisfied.
Whether the selling is hedge funds going out of business for year-end or quadruple witch option expiration basket programs are unwinding (as noted yesterday), it was serious liquidation with stocks waterlogged across the board.
The only hope the bulls have is that the S&P made a stand at this 50% pivot on a closing basis.
The other hopeful sign is that the Three Amigos -- IBM (IBM), Google (GOOG), and Apple (AAPL) -- were all down, which only happens on big liquidation days and often times represents at least a short-term climatic low with the next day seeing the beginning of a squeeze.
With expiration drawing to a close, it is possible this will play out. If yesterday's lows hold and if the market is up after the first hour -- especially after the first two hours following the close in Europe. However, further downside follow through in these key names could mean a blood bath.
The other major mid-point pivot to consider is the point of equilibrium of the huge rally off the October 4th low.
The mid-point of this range from 1075 to our October 28th turning point of the year at 1293 comes in at around 1183/1184.
A weekly chart of the S&P shows that the lower rail of a rising channel comes in near the 1200 strike. The current decline could be a second higher low following the late November low at 1158. Note how that late November low was a textbook test of the close of the weekly low bar of the year. Also note how a larger channel that ties to the Summer 2010 low and the Summer 2011 low still suggests the potential for a tag of 1330ish. A drive up toward this level will carve out a potentially bearish 3rd drive to a higher high at/near the key 1332 mark of 2X the beast, the 666 March 2009 low. Is it possible the market can rally above 1300 in the first quarter of 2012 on the three-year anniversary of the March 2009 low just as it rallied up to a fake-out high on the third anniversary of the May 2008 pre-crash pivot high? Is it possible the market will rally up 144 Fibonacci months into the anniversary of the Bubble Top in 2000, leaving market participants wrong-footed just at the wrong time prior to another summer smash in keeping with the message of the decennial cycle of years ending in 2 -- just like 2002, 1932, 1962, and 1982?
The market becomes very dangerous below the 1200 (120 SPY) strike which implies a test of this 1183/1184 level. If this happens near year-end/quarter-end, we could see wholesale liquidation before market participants lose all their gains for the year.
The Three Day Waterfall in gold is a good example of how quickly bulls can jump ship no matter how entrenched their macro view (of gold in this case) once faced with the prospect of losing all their gains for the year.
Another hopeful sign for at least a rally attempt is that GLD satisfied a test of a 50% retrace of its 2011 range.
The low for the year in GLD is the January low (as is often the case for many markets that make a high or low at the beginning of a year or quarter) at 127.80.
The high for the year in GLD was 270 degrees in time later at 185.85, giving a mid-point of 156.80.
Click to enlarge
Yesterday, GLD tagged 152.05. While it is worrisome that GLD closed below the equilibrium for the year, the market is not a fine Swiss watch. Regaining 156.80 quickly may be at least short-term constructive. In addition, note the Three Day Waterfall that closely mirrors the three day plunge last September. Long time readers have heard me say many times that markets often play out in threes.
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