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Aaron Basile
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Contrarian Investor, Commodities Speculator, Technical Trader.
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Aaron Basile
  • Uncertain Equities Movements Before Midterms, FOMC Statement 0 comments
    Oct 24, 2010 7:28 PM | about stocks: GLD, SPY, GDM, GDXJ, GDX

    There are a lot of different angles and opinions by which to go on regarding the movements in equities and the dollar as we are 10 days away from the FOMC statement and the likely results of the midterm elections. Some say the market will like a Republican sweep, because gridlock is good, some disagree. Some think that Quantitative Easing is priced into this market and we’re headed for a major downfall, others say that the amount of QE is not certain.

    Quite frankly as of right now I’m not overly concerned with what happens because at this point I am an investor, not a trader. However it is important to cover this because we are coming up to a major crossroad in the financial markets in the next week and a half, and this will be one of the more important, however subtle events in finance since the 2008 crash. The reason why I say this is because there are serious techincal and fundamental indicators at work here, and they are about to crash into each other at full speed, the way that a bear and a bull collide.

    I’m going to begin with the S&P 500. There are plenty of technical indicators that say that this rally is about to be destroyed soon and the market bears are trying their best to scare everyone into a selloff.

    I want to list a few indicators that jump out on this chart regarding the similarities between this rally and the previous one this year that was followed by a selloff, which has the bears calling BS on this current move.

    The first is that they both start at almost the same level (1045 and 1041 respectively). Another is the similar amount of gaps between the two major buy rallies this year, and more importantly, where those gaps take place in each. The two rallies also contains bull flags in almost the exact same locations and even look alike with the naked eye alone. And in addtion, the current rally has covered more ground, and on lower volume than before which is a sure sign of a false move to the upside. These are all parts to arguments that I’ve been hearing over the last few weeks over the validity of this low volume rally and honestly, these techincal indicators can be hard to argue with. It will be interesting if we do indeed form another shoulder, then head, despite the elections and the FOMC.

    The next major sector that needs to be covered is the one that has everyone talking; precious metals.

    The difference between gold and silver and the major indices has been crude and the gap has increased even more so over the last few weeks. After convincingly outperforming the market for the last 2-3 months, gold and silver have recently corrected, and corrected hard. I haven’t seen a fundamental reason for this correction, the Chinese recently cut their silver exports by 60% and there are rumors going on about large amounts of Indian buying. I do think that the argument that QE was priced in has lost some merit due to this. Gold and silver have literally lost 5% in just the last week or so. That’s quite a correction for such a short amount of time even though the techincals have been well overbought for some time… notice how the slow stochastic is already kissing the oversold level.

    The other part to this argument is that since precious metals have been leading the market in the rallies, then they must also be leading them into selloffs as well. In other words, perhaps the aforementioned shoulder, head, shoulder pattern is about to take place and gold is acting as the alarm for that. In any case, as a long term investor I think you have to take this opportunity to buy precious metals if you have the capital on hand.

    Another thing I would like to point out regarding gold is the GDXJ which has gotten slammed harder than the GLD, HUI, and GDX.

    We can take the reasoning behind this information as speculative traders who weren’t completely sold but had entered positions in junior miners have all recently been scared away by the massive shorting volume that has come in since gold began correcting. If anything, this just reinforces the fact that there isn’t any real volume in precious metals yet, despite what some might have you believe.

    What I think completes this market wrapup is the dollar index. An ugly chart with a very recent, and very large bearish divergence that took place on the slow stochastic. I believe I recall saying that the USDX could bounce up to as high as 80.00 before coming back down. I don’t think that is true any longer as the 50 Day EMA has now past that mark and has begun to slightly flatten as the dollar gains some momentum. I think when you add the dollar index into the mix you somewhat solidify the theory that gold is leading the market downward. Anyone who is smart enough to add up 2+2 should know that this rally is nothing more than a meltup due to inflation. So, as the dollar index comes out of oversold territory, gold corrects as it should, but where is the S&P, IXIC, and DJIA? Well, they are still floating around the highs and enjoying the good life. It looks like the canary has keeled over, but it appears that they just think that he’s only fallen asleep.

    One last point about the dollar index is that during the March, April, May rally, the dollar actually sustained a rally during parts of the climb in equities. This time however, it has fallen like a rock.

    I think it is clear that there are some fundamental and techincals that are about to get worked out in a big way. There are some contradictions that need to be fixed. Maybe there will be some decoupling, maybe not, but traders are finding out that QE isn’t working, and the market seems to be as split in opinion as ever. Again, as an investor in the precious metals sector, I am not worried or uncomfortable concerning the outcome of all of this in nominal amounts for my positions, but I am definitely paying very close attention to it all.

    Stocks: GLD, SPY, GDM, GDXJ, GDX
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