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Are the Elections the Key to the Short-Term Stock and Gold Price Swings?

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The general stock market is mixed for the short term and the final support line for stocks has not yet been reached.

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We summarized our previous essay from October 31, 2012 by stating that the correction in metals may not be over yet. It looked like it's over in case of the mining stocks, at least in terms of price.

This has been quite a week. Not only has Hurricane Sandy shown us how vulnerable we are to the large and indifferent forces of nature, but we also saw how markets can plunge even though the fundamental situation did not deteriorate. In the short run markets, don't act on fundamentals – they move based on investors' emotions and short-term price swings will always be present. Just as we can't eliminate weather's unpredictability, we can't control what will happen on the market in the short run, even though we are convinced of the existence of the gold bull market.

There are some things that we can do about it, though – in both cases, we can prepare to some extent. In the case of the stock market and the precious metals market, we can use charts and technical analysis to estimate what may be waiting just around the corner. In the following essay, we will do just that. We will focus on stocks, crude oil, and gold markets.

Let's start with the S&P 500 Index (INDEXSP:.INX). (Charts courtesy of http://stockcharts.com.)


Click to enlarge

We did see a pullback in stock prices (SPX) this week, but the rising red support line has not yet been reached. Therefore, it seems that further weakness could be seen before stocks form their bottom. A day or so of declines followed by a strong rally just before Election Day seems to be a likely scenario. There's also the possibility of a rally without an additional move lower.

Let us now move on to crude oil, as this commodity is quite useful in analyzing the precious metals market and also seems susceptible to the influence of the election.



This week, we have seen a further deterioration in WTI crude oil prices. At this time, it seems that the medium-term trend for crude oil prices is down. If the neck level in the head-and-shoulders pattern is broken, then the downside target level would be close to $60. This is considerably lower (about 30%) than today's crude oil price and would not necessary bring gold and silver down as significantly. Such a case was seen in mid-2011. All-in-all, however, the short-term implications here are bearish for the precious metals.
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No positions in stocks mentioned.
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