The S&P fell to 1268 on Friday which marks the 7th negative close in the last 8 weeks. Volume on the major indices was substantial as the it reached a 3 month high on the SPX and a 11 month high on the Nasdaq. The SPX is 7.5% off of the peak in May and the high volume selling that took place yesterday despite the market being down so much already supports my forecast for next week which is that we rally off of the lows into the holiday weekend. Always remember that there is always an upside bias going into a holiday as there is light volume and the Fed likes to use to holiday as an opportunity to encourage spending. With the market as oversold as it is and the light volume that we’ll likely see next week, I think it’s safe to speculate that the market floats off of the lows but I’m personally not expecting anything robust.
The volume on the SPX was at a 3 month high on a huge down day in an already huge downtrend. Despite the massive move down and the high volume behind it, a contrarian should look at this type of activity as a bullish indicator. I’ve spoken about this before, but we’re going back to the same methods that I used to call the top in silver just days before it peaked. Whenever you have everyone on one side of the trade after a trend has already largely played out, it’s usually a good indicator of an upcoming reversal.
Those who sold after the FOMC announcement and after news of Greece’s deal with the IMF, were extremely late to the party. The news that came out in those instances that induced a selloff, did not contain information that told us anything we did not know already, and it was all priced in to the market before the news hit the wire. Just go back to the analysis I did on Thursday and look at how the market reacted when QE II was announced. The ones who bought QE II on the announcement and not beforehand, lost tremendously in the weeks following.
The volume after the 33 point selloff on the composite was an 11 month high and beat the volume on the March 16th capitulation during the Earthquake and Tsunami crisis in Japan. The Nasdaq also held the 2650 and the 200 MA support. If it closes below 2640 it’s going to be in trouble again but I think a rally the 2700 this week is the more likely scenario given the other reasons I have listed for the S&P.
Another important point about this chart is that the volume and the price action signals capitulation, but the composite did not make a new low, which means that during all of the selling, there was some buying going on (most likely institutional) at the bottom that gave support to the market.
One more chart that seems to support a rally next week is the XLF. The financials usually lead the market and over the last week to two weeks, they have begun to make a series of higher lows and the XLF still hasn’t confirmed below $14.70 which tells us that this is a critical support level. If the XLF moves back up to $15.20, it will likely carry the market higher as the financials make up a large part of the index weighting and typically trade up or down with the market.
SLV fell again Friday and closed down over 4% on the week. This weekly chart tells more than the daily and another close below $33.36 next Friday will confirm the bear flag and SLV will go to $32.50, if not before then. Once again, it will be a buy after a pierce of $30.
GLD has been slammed over the past two days and my top call on Wednesday is so far so good. The trendline and the 50 MA coincide with each other and while it has confirmed below the trendline, it has not technically confirmed below the 50, but one more close lower on Monday will most certainly confirm it. It has decent support at $146 and I expect it to retest that trendline and the 50 MA, but failure to make confirmation above either of them means that this thing is going lower.
Now, some might ask how I come to this conclusion that gold is going lower but the market is going to rally because the market and gold typically rally together on a strong Euro. Well, the reason the market is going to rally and gold is headed lower is because the market is oversold while gold has held up over the last 2 months. Gold has held up better than silver, oil, and other commodities that got crushed in April because gold is a hedge against the European debt crisis which has been front and center for the last several weeks. However, now that Greece has accepted a package from the IMF and all of the bad news is out there, it appears that the headlines coming out of the EU may quiet down if only briefly which bodes well for equities, but is negative for gold because gold does well when there is fear in general but particularly well when policy makers use currencies as a tool to combat sovereign credit issues.
So, how did I know that gold was going to top out and go lower weeks in advance? Do I know members of the IMF and Greek Parliament who told me that they would reach a deal beforehand? Of course not. I touched on this earlier but if you buy after the news comes out, you are unbelievably late to the party. I knew gold was topping because of its historical market cycles and because contrary to popular belief, the charts lead the news. The price pattern, the volume, the alloted time, and a little wisdom is how to beat the news, and the market. And with that, I’ll wrap up this commentary and I’ll see you next week.