The S&P 500 broke out of a bearish rising wedge pattern last week after failing to hold the 200 day moving average four different times. My bearish views were confirmed last week with a high volume breakdown after the Federal Reserve gave a sour report on the state of the economy. Trading became highly volatile before the announcement. In previously published articles, I warned that the Fed would ease and do everything within their power to flood the markets with cash, which has been bullish for gold and mining stocks. The several gap downs on the S&P are hard to short as the market may rally to try to fill those gaps. Although I have downside targets, I would look for a countertrend days to enter if going short.
Yesterday’s break of the 50 day moving average was a key move as the probability of the 50 day moving average to cross the 200 day moving average to the upside is diminished. Many were concerned that the bearish death cross would be a whipsaw, meaning markets would revert higher. However, the bearish death cross is becoming more confirmed and pronounced as the 200 day begins sloping over.
Stocks' key technical break yesterday of the 50 day moving average on high volume shows there is little support as the risk appetite wanes. The rally in treasuries are showing signs of a double deflationary dip, similar to the 2008 bear market as investors fear that the economy is on shaky grounds.
I believe that the chances of S&P moving into new lows are very high. Yesterday’s break of the 50 day moving average is confirming both the bearish head and shoulders pattern and death cross.
The S&P market action is demonstrating that the two day rally above the 50 day was not strong enough to maintain support. Now the 50 day will once act again as resistance. Volume did come in higher signaling major distribution. However, when a market transitions from a bull to a bear, each subsequent failure at the 200 day drives out the bulls who still believe that the decline is a buying opportunity. After the third or fourth failure usually a full blown bear market begins.
Despite the Fed’s promise to amp up the struggling recovery by flooding the markets with cash and the latest jobs bill from Congress benefiting government and union employees, their major constituents, investors are losing confidence in Washington’s attempt to prevent another bear market. I expect a breakdown into new lows over the next few weeks.
Despite all the weakness in the equities market, many mining stocks I am following closely are breaking out as gold is on its way to test new high territory.
Fronteer Gold (FRG) which I have highlighted to my subscribers came out with their best drill results yet at their Long Canyon Project. This project is being viewed as one of the great new high grade gold discoveries in Nevada. These results in Nevada will be part of a new resource estimate on this project which should be a driving force for this company over the next few months.
Disclosure: I and/or my family own shared in Fronteer Gold