As investors debate the validity of the stress test to gauge the financial health of European banks, the market has definitely signaled clues on the charts that we are nowhere out of the woods yet with the sovereign debt issue. Since the European crisis began at the end of April, the news out of Europe has rattled the markets on high volume selloffs, break of trends and moving averages. It is interesting that now, with the stress test showing positive, investors are hesitant to jump back in. This is indicating that there are still other major concerns and that many of us don’t have faith in the stress test or published government reports.
One lesson I’ve learned as a trader is that if you don’t know what the trend is, don’t make a guess. Even a four year old child who looks at a price chart on gold can spot the uptrend. However, in the case of the major market indices -- where you have a declining 50-day moving average below the 200-day moving average, and when you are seeing poor price volume action -- it is best to be cautious. There can be impressive rallies before a bear market begins. The Dow Jones Industrial Average is overbought and has crossed the 200-day moving average on light volume. This has come after major bouts of selling from institutions including the infamous “flash crash in May.”
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The way I measure how excited a market is is through volume. A break above key support or resistance on low volume indicates that the move was not convincing and should send warning signs as a “fakeout.” This market is indicating that the moves higher are basically due to a lack of sellers, and any further news items which may be negative will bring the bears back out.
Housing is an area which is seeing very little demand right now. This is the industry which initiated the financial crisis we are in and it should be showing signs of strength in an economic recovery. Much of the rise in housing was the result of government intervention in the form of tax breaks offered to buyers. The rise in Treasury prices and the weakness in housing indicates that many people are not borrowing.
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Although housing appears to have a double bottom, I am a bit suspect of the lack of volume. It would be premature of me to call a buy signal on housing, especially since it has not tested the 50-day moving average as resistance after the bearish death cross of the 50-day crossing the 200-day. Housing needs to turn positive before any real rally can begin. Right now housing stocks are still bearish and a convincing break above the indices would change my mind, but the probabilities of that occurring with these overbought conditions and lack of volume are low.
There was a report this week about executives of bailed out banks who were paid $1.6 billion dollars of taxpayers money. As investors realize the staggering debt and the stagnant economy we are facing because of high taxes and increasing government intervention into the private sector, there will be major move away from cash and towards gold and silver. At that point gold and silver could move significantly higher. I believe that time may be closer than many sources would have you believe.
To summarize, some indexes have broken the moving averages to the upside but on low volume, as I have shown in the first chart. To me, this indicates that smart money is staying on the sidelines until the trends are more observable. Right now, my bias is that this rally is a fake-out and I will not become bullish again until I see a break above 10,600 on the Dow as well as a bullish golden crossover of the 50-day crossing the 200-day moving average to the upside. Volume is a crucial part of this equation. If there is some major accumulation coming coupled with the 50-day moving average sloping higher, then I will reconsider my position. However, at the moment I am still bearish on the markets and am bullish on silver and gold.
Disclosure: Author is long gold/silver mining stocks