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VIDEOPanic Selling Slams the Market, But Will Gold Hold?
Anyone who's been watching gold closely knows it's doing its own thing now: Some days it moves with the dollar, other days it doesn't.
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Did you close out any long positions yesterday? Well if not, then you're one of a few!
Yesterday the market gapped down 1.5% at the opening bell which set a very negative tone for the session. Volume was screaming as protective stops triggered and traders closed out positions before prices fell much further. This gap seemed to have caught several traders off guard, but some of you knew something big was brewing and kept positions very small.
Just before the close on Tuesday I had a buy signal for the S&P 500 which was generated from the extreme readings on the market internals. After watching the market chop around and get squeezed into the apex of the rising wedge the past three weeks, I knew something big was about to happen. I didn't want to get everyone involved because I felt a large gap was about to happen and the odds were 50/50. Instead, I passed on the technical buy signal and waited to see what would happen yesterday.
Below are a few charts showing one of my extreme-reading indicators I use; it helps me identify possible short-term bottoms.
S&P 500 -- Exchange Traded Fund (SPY)
This daily chart of the SPY ETF clearly shows when we see panic selling in the NYSE. (I consider 15-plus sell orders to each buy order to be panic selling.) This is shown using the purple indicator at the bottom of the chart. Yesterday there was an average of 37 sell orders to every buy order, which tells me the majority of traders are closing out all their long positions.
In an uptrend, this indicator works very well and can help time a bottom within one to four days. As you can see on the chart below, we just had a huge sell-off and everyone seemed to be exiting their positions. This panic selling tends to carry over for a couple sessions until the majority of traders around the globe are finished selling.
The problem with this indicator is that in a down trend, we tend to get these panic-selling spikes regularly, which means this time it may not work out because of the trendline break yesterday (which I think has officially changed the trend from up to down). Because of this possible down trend starting, I feel it's best to wait and see if it’s a dead-cat bounce or if there are real buyers behind it; then I'll take action to go long or short the market.
Market Internals -- Put/Call Ratio & NYSE Advance/Decline Line -- 60 Min Charts
Here are two charts that are currently at extreme levels. This typically means a bounce should occur the following day or gap higher. If you didn't know there was a strong trendline breakdown yesterday, you most likely would have taken a small long position into the close.
The put/call ratio when above 1.00 means more people are buying put options, meaning they're leveraging themselves to make money if the market drops. As a contrarian indicator, if everyone is buying leverage to the down side, then they should have sold their long positions already. That would mean most of the selling has already taken place in the market, thus it should have some upward bias in the near term.On the other side, you can see the NYSE A/D line which shows how many stocks on the NYSE are advancing and how many have moved lower. When this indicator is below -1750, then we know the market is oversold on a short-term basis and there should be some upward bias in the near future.
Now Lets Take a Look at Gold
Gold was left on the side of the road yesterday as traders and investors focused on the equities market. I was actually a little surprised that it didn’t make a big move yesterday because the US dollar rocketed higher for the entire session. Anyone who's been watching gold closely already knows that gold is doing its own thing now; some days it moves with the dollar, other days it does not. It's become much more random than it used to be.
Gold looks to be forming two patterns -- first one is a bull flag. If a breakout to the upside occurs, that would send gold to the $1,230-40 level.
The second pattern is a mini head-and-shoulders pattern, which would send gold down to the $1,180 area if the neckline is violated. It's a very tough call for gold.
(In pre-market trading, SPDR Gold Shares (GLD) is trading +1.22 to 118.56.)
Mid-Week Technical Traders Update
In short, it’s going to take a day or two before we get a feel for the S&P 500 as we wait to see if it bounces with volume behind it. I personally would like a bounce so I can short it. It's unfortunate how the market broke down yesterday. We were so close to getting a really good setup in either direction but the FOMC meeting shook things up and caused the large gap, which in turn made a large group of traders miss that beautiful drop. It’s frustrating when you wait for something only to have a piece of news mess things up. That’s just part of trading, though.
As for gold, I feel it’s a 50/50 trade and could go either way, so I'm not going to take a position right now. I’m just going to wait for the market to tip its hand a little more before I jump.
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