In May of 2010, immediately following the flash crash many investors started to become bearish (nervous) regarding their position in gold and equities. Once the general public became aware that the stock market could fall 10% in a matter of minutes, investors became very cautious. Suddenly protecting their capital and current positions was at the forefront of their investment process.
A couple days later the market recovered most of its value, but it became clear that investors were going to sell their long positions if the market showed signs of weakness. It was this fear which pulled the market back down to the May lows and beyond over the next couple months which caused investors to panic and sell the majority of their positions. It is this strong wave of panic selling that triggers gold and stock prices to form intermediate bottoms. Emotional retail traders always seem to buy near the top and sell at the bottom which leads to further pain.
Now, fast forward to today …
This past August we saw another selloff similar to the “Flash Crash” in May of 2010 (I warned followers that gold was on the edge of topping and that stocks would take some time for form a base and bottom – Read: this). Over the past couple of months, gold, silver, and stocks have been trying to bottom but have yet to do so.
Just a couple weeks ago we saw gold, silver, and equities make new multi-month lows. This has created a very negative outlook among investors which I highlighted in red on the chart below. Since the panic selling low was formed just recently we have seen money pile back into gold and stocks (more so stocks).
This strong bounce or rally which ever you would like to call it may be the beginning stages of a major bull leg higher which could last several months. Before that could happen, I am anticipating a market pullback which is highlighted with red arrows on the chart below.
Chart of SP500, Gold and Dollar Index Looking Back 18 Months
Reasons for gold and stocks to pullback:
- Stocks are overbought and generally retracements of 50% or 61% are common following large rallies.
- The dollar index looks ready to bounce which typically means lower gold and stock prices.
- Gold continues to hold a bearish chart pattern pointing to lower prices still.
Weekly Trend Trading Ideas
A few weeks ago I warned my followers that stocks and gold are forming a bottom and that we should be on the lookout for further confirmation signs. I also mentioned that I was not trying to pick a bottom, but rather that I was looking to go long once the odds were more in my favor.
This is a potentially very large opportunity unfolding and there will be several different ways to play this. However, right now I continue to wait for more confirming indicators and for more time to pass before getting my own money involved.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.