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Why the S&P 500 and Gold Rallied in the Face of Negative News

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And shockingly, for most retail traders, last week produced a very strong return for US equity indexes as well as risk assets in general.

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The amount of negative news that we have seen recently has been mind-blowing. Europe is going into recession, Greece and several other countries are on the verge of bankruptcy, the Middle East is a powder keg, and the US is facing a fiscal cliff. Shockingly, for most retail traders, last week produced a very strong return for US equity indexes as well as risk assets in general.

Retail investors oftentimes consistently lose money because they focus on the financial media and all of the negative news that is out there. Trust me, as a longer-term trader and investor, there is never an absence of negative news or potentially poor economic possibilities. This is not to say that markets cannot decline, investors just need to understand that markets are cyclical in nature and do not ever move in a straight line.

Based on what I was reading from most of the financial blogosphere recently, you would think that the entire world was about to end. A few blogs were calling for an all out collapse late last week or a possible crash this past Monday, November 19. As is typically the case, the market prognosticators were wrong with the calls for a crash or an absolute collapse in financial markets.

Unlike those blogs, my readers were getting information indicating that we were expecting higher prices. I try to cover a variety of underlying assets from the S&P 500 Index (INDEXSP:.INX) and oil futures, to gold and Treasury futures. My focus is purely on analysis of various underlying assets across multiple time frames. I cover intraday time frames as well as daily and weekly swing time frames throughout the week.

To put into perspective what I was seeing in the marketplace on Monday November 19, I sent my readers the following chart during intraday trading that day.



As can be seen above, the target we were expecting was at the top of the recent channel. As shown directly on the chart above was my comments that if the 1,410 level on the S&P 500 Index could be taken out to the upside, the bulls would have an opportunity to move prices higher into the end of the year. The daily chart of the S&P 500 Index after the close on Friday, November 23.



As can be seen above, the S&P 500 Index moved right into the expected target price range and closed literally at the very top end of the range shown above. If prices move considerably higher, the bulls will have broken the descending channel and higher prices will likely await.

This week's price action is going to have a dramatic impact on the price direction of the broader market indexes. One important aspect that I would point out to readers is that the large move higher shown above came on exceptionally light volume due to the holiday week. In light of that, a strong reversal cannot be ruled out. Caution is warranted regardless of a trader's or investor's directional bias.

One of the most important charts to monitor over the past few weeks has been the US Dollar Index futures. Typically a stronger dollar has been bearish for equities and risk assets in general. However, on Friday we saw a very strong sell-off in the US Dollar Index futures as shown below.



As can be seen above, the US Dollar Index futures closed on Friday right at a key support level having given back much of the recent gains. If the dollar continues to move lower, it should put a floor under stock indexes and push risk assets higher overall.

Two major moves higher occurred in light of this weakening dollar on Friday in both gold and silver futures. The precious metals had a very strong move higher after the US presidential election and have been consolidating now for a few weeks. Prices in both gold and silver had strong moves higher on Friday which were accompanied by very strong volume. The daily chart of gold futures is shown below.



Gold futures had a huge move higher recently supported by strong volume. Based on this action, I believe that we will see the $1,800 / ounce resistance level tested in the near term. Seasonally speaking, this time of the year is bullish for gold and silver and should the strong seasonality correspond with a weak US dollar much higher prices likely await in the precious metals sector.

I was expecting very strong action in both gold and silver when they broke higher after nearly testing their 200-period moving averages. At the time, I said that as long as the breakout from the consolidation zone from the July-August time frame held as support, higher prices were likely, and that is just what we have seen.

Overall, I believe that the quarters ahead should be strong for both gold and silver. Time will tell whether oil futures and the broader equity markets will also move higher. I continue to believe that monitoring the Dollar Index futures closely is an important part of assessing the directional bias to expect in the months ahead.

Take care, and happy trading!

Editor's Note: JW Jones offers more content at OptionsTradingSignals.com.

For more on options trading, take a 14 day FREE trial to OptionSmith. Get access to veteran options trader Steve Smith's portfolio along with emailed alerts and strategy with every trade he makes. Learn more.
No positions in stocks mentioned.
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