What's The Gold Doing?

The gold market has been muted for the most part in this latest round of stock market weakness driven by pending banking crisis developing in Greece and Spain....until today. Interestingly, the historical inverse correlation that emerged in 2011 between gold assets and the broad US stock market has not really shown itself so far in this latest correction of what is emerging as a deflationary flight to safety episode.

Lets have a closer top-down structural look at the gold complex.



From the line chart below we find the overlays of GoldCorp (GG--NYSE 'Blue'), Gold Futures ('Black') and S&P500 mini futures ('Green') since Feb 2011 at the level of the day time frame.

We can see that from above the GG (blue) and GC futures (black) lines rally as the ES futures (S&P500 Green) collapse during the August 2011 market shock in response to macro-euro risk. This implies the early perception of gold assets as safety in times of political fiscal mismanagement and uncertainty. Following last August market correction we see declining gold assets with subsequent reflation in the broad stock market S&P500 into March 2012 in line with coordinated global central bank swap line liquidity intervention establishing a perception of stability. And since the correction in March 2012, which began as an early risk off pullback from an overbought stock market evolving into systemic risk-off flight to safety in the recent 2 weeks has seen gold remain very neutral in its corrective pattern....until today. Could this be another push higher in gold assets implying caution to stock investors from the long side.


We can observe the long term downtrend in GG via the day chart view below with a momentum Long buy signal generated May 17, 2012.

Using the day chart above as a reference providing context we can drill in deeper to the intraday  activity of GG and observe the short term momentum buy signal May 17 indicated by the 'green' arrow below and the LE - 34.61 (Long Entry) reference.

We can see on May 17, GG traded up and through the 3 day regression pivot overlay, with expanding ATR and volume to indicate a short term change in bias to the upside with a closing on that day > weekly channel low support level (blue horizontal line). This implies urgent buying in GG from larger funds and important structural change back above the weekly channel low and through the short term regression to imply change in bias.  On May 29, we saw GG pull back into lower weekly support (blue horizontal line) and rebound on excess buying the following day. I stay long through this pull back. Today we can see GG breaking above important monthly resistance (brown horizontal line).


We can also use the macro weekly chart below to examine longer term trend channels and regression along with Fib retracements to 2009 lows. We can see from below that the long-term macro-weekly channel low has been formed coinciding with a 50% retracement of the entire 2009-2012 up move.

Lastly, we can observe the Gold futures coming back into monthly support at 1523 for the 3rd time and stabilzing prior to todays rally.

We can look closer at the gold futures by examining the important Long signal generated LE-1566 May 30 coming off the important weekly low at 1532 coinciding with the monthly low at 1526. This LE is the system generated long entry signal as the gold moved back above the 3 day regression, implying short term change in bias which positioned me ahead of today's big price moved.

Minksy Moment?

Into June 1st; the EU banking crisis contagion is deepening. And retail investors are concerned about safety of assets and less so about return on assets  -- as IBD reported yesterday that 5.86B in net US stock fund outflows in April following 9.79B outflow in March and 11 of the past 12 months have experienced net outflows from retail investors. Where is all the money flowing? IBD reports retail inflow to bond funds of 24.61B in April and hybrid funds (stocks and bonds). This is evident as per the trend in US 30yr Treasury Bond chart below that reveals the velocity of flow into the 'safety' theme on the back of global macro risk.

The US 30 Yr Bond is breaking out big time. We saw earlier this week that it was finding support on the previous months highs (brown line channel) and has now moved aggressively higher this week.

This inverse move to stocks was part of our thought process coming into the trading week. And we can see below that the DOW Industrials mini future (YM) is failing below its previous monthly lower boundary level or pivot and is threatening to make 'new' lows for the year as per the chart below. See the 'orange' line reflecting these potentially new lower prices.

When we see the Bonds rallying as aggressively as they are and risk assets deflating as they are, we need to pay attention to this as traders and investors as markets are speaking that things are not healthy in the system.

Lets just look at a few other visuals of risk assets below

Above, we can see the Aussie Dollar, which has collapsed back from 1.07 (to USD) into .95 and the strong-hold monthly lower channel boundary in line with the current price. The Aussie Dollar is an important gauge into commodity-based sentiment and macro-asian economic state, which is also weakening on the back of today's China PMI data release.

Below, we can see the Oil market intensifying to the downside.

This will present to be a very good buying opportunity in risk assets, but we have to be cautious from the long side until we see evidence of market confidence re-emerging. We will have to use different techniques to gauge this starting on a micro-structural level.

Macro View Into Stocks

We took a look at the micro-sector based view, which revealed that stocks are starting to turn to the upside, but cautioned that majority of the sector-based transitions in bias were on weak demand. We're not in the clear quite yet. The market feels like its trying to develop and stabilize at current levels, but we're not seeing any initiative buying coming off the short covering rally last Monday (May 21st).


Below, the Nasdaq 100 (NQ) mini future is stabilizing between monthly structural lows at 2575 and weekly structural lows at 2468. Any meaningful activity from the long side will have to take this market above the monthly lows at 2575 and get accepted. More importantly, from a Major monthly structural perspective, the market must close above the 2575 monthly low by the end of the week. Otherwise, going into June, we will have the first lower monthly closing since August 2011, which is more significant in light of the prolonged Jan-April up-trending condition. Monthly boundaries are very important from the perspective of longer term bias and sentiment and coming off an 8 week correction that has taken the NQ down > 300 pts, any monthly lower closing that violates the monthly trend in place could be perceived as weak and would imply continued correction into the summer. If the NQ closes back in the monthly channel (> 2575 by the end of the week) then we can expect a sideways condition to develop as was the case in 2011 with a possible retest of the April highs going into August.

We can also observe from above that the NQ mini future approached the 2011 highs at 2440 indicated by the black horizontal line across the chart. Any market that approaches old significant highs should find buyers and support. The NQ came back into 2468 lows last Monday (May 21st) from which we had a short covering rally that turned the short term trend back up. This short covering rally coincided with a 38% Fib correction of the August 2011 lows - April 2012 highs, which fits in with the thought process that a technical rebound could be due to develop. A weak scenario would see the NQ mini fail to close > 2575 monthly low support and proceed to get rejected above the 2011 highs below 2440. This scenario cannot be taken off the table just yet, given the macro-euro erosion that has come back to the forefront.

In the image below, I show the short term trend of the NQ on the 15min intraday chart with 3 day regression overlays and LE-2536.5 implied short term buy signal coming off short covering rally. So far, the market has not gained any acceptance > 2550 nor < 2500 level. The short term bias remains long with risk and the market trades above 3 day regression implying a short term trending nature may be developing.

The same logic applies to the the DJIA (YM-mini futures) as the market trades < monthly support at 12678. A June 1 closing < this level would imply weakness and sustained correction into summer. We can also see that the Dow mini is finding support at the trend line connecting 2011 highs projected into this year. Short term support should be found at these levels. This market has been accepted below 2011 highs, implying need for continued development of price at lower levels. Any weekly closing < 12318 would signify deeper correction.

We can also use the deflationary 'flight to safety' rally in the US 30yr and the USD as indications that reflation in risk is off the table short term. But, can make the argument that USD is short term overbought market that may need to take a break, which may coincide with relief rally in the stocks.

US 30yr bond market looks to be getting support at monthly upper boundary, just as stock appear to be losing support at monthly lower boundary - this inverse correlation is the implied risk in a long stocks position at this time. We would need to see the Bonds break down below monthly upper support, coinciding with a breakout in the stocks with a move back above monthly support.

Sector Screen Update

We can take a bottom-up structural sector based approach to examine whether there is 'micro' evidence of support for the major US stock indices within the current stage of market correction that has been ongoing for 2 months (since early April). We'll also have a look at the day charts of the major US averages to see if we can refute any of the thought processes we arrive at. 

When examining the condition of the stock market, we need to observe the intersection of a series of component parts; likened to observing independent pieces of a puzzle. Though, unlike a puzzle, where we can start with the end in mind and work backwards to assemble the pieces - in markets, we can't know the end with certainty (however that may relate to our investment time frame), but we critically examine the pieces, develop a working hypothesis (or image) while staying flexible enough to adapt if we have overlooked or misinterpreted aspects of our input (changing image). 

From above, we can observe a screen shot of US sector ETF's and corresponding signal types that reflect the nature of the buying or selling and the respective directional bias of each individual product. The list also takes into consideration a variety of US sector ETF products from the same group so as to observe the signal across different holdings within each ETF as issuer's do vary from to product in the ETF universe. The ETF screen shot is but one approach of gaining directional insight into the major averages.

The 2 signal types above are seen from 'IntraS' and 'CloseS' columns and offer up information on short term directional bias. Whether the bias is long vs short (green vs red colour overlay), as directional 'swing' traders or 'trend' traders and even as investors, we are looking for clues in the auction process that indicate whether urgent buying or selling is initiating a trend signal.  This urgency is revealed by the signal type 'Intra' vs 'Close' and tells us whether a directional change is momentum based (IntraS).

The sector based approach is one way that helps determine the 'state' of the major index. So, if I'm looking to take a position in the S&P500 index futures (ES), then knowing the nature and type of short term activity systematically within the context of larger structural inputs at the level of Sector group and sub-group  can greatly improve our odds of winning in the ES futures (S&P 500) as it is a composition of its sector and sub-sector parts.

I like to see urgent buying (as revealed by IntraS column above) by funds at the Sector level coming off a prolonged 8 week correction if we are to see some evidence of stabilization or rebound in the major averages. We can see a lot of bullish changes (green) in the past 3-4 trading days, evidenced above by both closing and intraday signal types.  The majority of sector products have transitioned long on closing signals, implying weak underlying transition into the long side, structurally.

The Intraday momentum signals that we are interested in has come from Healthcare, Biotech, Internet Index, Industrials, Materials, Gold, Silver, Oil Equipment and Services sectors. We are not seeing momentum breadth into real economy sector based ETF's (Home Builders, Financials, REIT's, Retail). 

  

Market Correction

Yesterday was a heavy liquidation day across the board as volumes picked up and ATR's expanded -- an indication of short term directional change. Yesterday I pointed out the importance of price acceptance/rejection above 2011 highs in the major indices. To follow on that thought process, we can view the futures this morning and have a look at the structural precipice of the Dow (YM #F) - sitting at a precarious  level of monthly structural support as per the brown horizontal channel line at 12678. Yesterday, the Dow futures broke down and closed the day below the 2011 May and July highs, which as stated implies rejection of new 52 week highs and a need for continued price development, given the extent and duration of this rally. Today, we can see the market is attempting to challenge this important level again as per action in line with the black line reflecting 2011 highs. More importantly, if Dow mini's close below the monthly structural support at 12678 on a weekly basis, this market correction will be much deeper.

We looked at the $TRAN (Cash Transports) yesterday and discussed the non-confirmation new 52 week high in the index. We can see the ominous action in the Transports below as they come back into monthly support at 5000. If this market breaks 5000, the corrective action will be much deeper.

We can also bring in some perspective from the macro-weekly overlay line chart below looking at the Dow (Blue Line) and Transports (Black line) correlation since 2006/7. From above we looked at TRAN non-confirming the new highs but below TRAN are trading near all time highs (Black Line) vs DOW (Blue Line) which is clearly lagging. The recent erosion in TRAN looks to be closing the weekly DOW/TRAN spread and explains the recent directional weakness in the TRAN index relative to DOW on the day chart. This chart would imply DOW outperformance going forward as a result of its lagging behavior. We could also trade the Dow from the long side on any short term long momentum signal, hedged against the TRAN until this weekly spread comes back in line.

Lastly, we can take a look at what will be a key piece in determining the timing of any potential reversal in this market: AAPL. Yesterday's action in AAPL did not demonstrate significant weakness. We can see from the 'Red Arrow' below and 'SE - 628.56' that a short term momentum sell signal was generated. Looking closer, we can see that AAPL continues to trade decisively above its 3 day pivot regression (defined by the pink visual overlay structure), implying that the short term bias has remains up. We would need to see a significant liquidation event to imply the end of this trend. Structurally, AAPL trades within its weekly channel as per the blue horizontal overlay lines. This channel signifies that the intermediate trend is up. For longer term investors any daily closing violation below the lower weekly boundary at 600 would imply reducing long position or taking profits as a much deeper correction would develop. We would have to remain agile at these levels, as per yesterdays 'tell' based on our 'SE' (Short Entry) at the 3 day time frame level or short bias would suggest that trend is showing 'cracks'. In that line of thought, any 2-day closing violation below the regression would signify potential further downside corrective action. We will have to monitor this market as it could be a potential leading indicator into the depth of corrective action.

US Index Tour

Where are we in Macro-Context with respect to what has been a relentless push since Jan?

If we look at the Dow Industrial e-mini future below we can see that the index has been in corrective mode since April 2 - the first trading day of April. The first trading day of the month is always significant from a directional pivot standpoint and usually etches a monthly extreme; it seems that the April high on the mini at 13229 is proving to be an inflection point thus far. The structural view of the DJIA mini future is currently developing in a supportive area: we can see the confluence of several key supportive time frame boundary lows -- the 'blue' channel low (reference 12813) marks a supportive multi-week low for the index, which has acted to contain the price to date. Just below the 'blue' channel, we can find the 'brown' channel enveloping price which defines the important macro-monthly pivot low (12678 level). Lastly, we can visualize the 'black' horizontal line running across the screen linking the April/May and July 2011 'closing' highs (12768) and now supporting the current distribution of April 2012. We can see how larger time frames (Weekly and Monthly) contain this market from the day chart perspective, along with the 2011 highs. Most importantly, we have to watch for any weekly closing violation < 12678 (monthly pivot channel low -- brown channel low), which would imply further downside corrective action. This would imply a 'price-rejection' above the 2011 highs, suggesting the market is not 'ready' and sustainable above these levels quite yet and would need more time to develop below these highs. Typically, markets will move into new 52 week high territory as part of the nature of a self-reinforcing momentum bias that finds fewer and fewer interested buyers before establishing a balanced or accepted zone of price action. The macro conditions all remain supportive, however, but we need to keep an eye on 2011 highs.

We see similar activity developing in the S&P e-mini future below: levels to watch are again defined by the 2011 highs as per the black horizontal line that is currently supportive to price. As well, we need to watch for any downside momentum weekly closing activity below the current monthly pivot channel low at 1335 level. A weekly closing below this level would violate the structural macro-trend since January and would imply again that the S&P's are not ready to be accepted above the 2011 highs and need more time to develop.

Small caps have been under-performing as per the IWM (Russel 2000 ETF). The 2012 trend has not taken this market above 2011 highs. The Russel 2000 is still in a major-monthly macro down trend, despite the support in the major indices. This is an important divergence from the Dow and S&P - which reflect general perception and capital inflow from foreign investors. This inconsistency in breadth or concentration of capital to Dow, S&P 500 and NDX 100 speaks about the general perception of this move since January as a move to private sector quality balance sheets defined by cash flow and income through dividend as a proxy for  real-economy support and less so for the more 'speculative' real-economy growth theme defined by small caps, along with the inflationary theme as per the materials which we'll look at shortly. The 83.22 level in the IWM reflects monthly and weekly pivot resistance. We can see that the IWM attempted to move outside this level in late March, but was rejected and continues to move sideways, coming into monthly and weekly support (79.47, 78.52 levels). Any breakdown below the weekly channel low at 78.52 would imply continued weakness. 

The Transports have not confirmed the DJIA break above the 2011 highs. The Transports have struggled to move higher since early March and continue to consolidate within the monthly and weekly channel overlays as a range-bound trade. This market should find support at the 5000 level in line with monthly pivot lows (brown channel). 

Lastly, well look at the XLB -- the basic materials sector ETF proxy. We find strong correlation to the Transports above; lower macro-monthly structural highs below 2011 highs -- no attempt to push directionally above monthly and weekly pivot channel highs (38, 37.63 -- blue and brown channel boundaries). Capital inflows have been defined by our proxy of foreign buyers -- the Industrials -- with a supportive 'real-economy' perception as per the S&P 500 -- and our proxy for 'domestic' capital flows -- the Nasdaq. Again, the long term broad based inflationary theme as per the risk-on support for materials and mining, small caps and transports is muted by comparison to capital concentration in Major US Market Indices, which suggest early shift of capital and perception to quality private sector balance sheets for preservation against market shocks and government balance sheets.

Sector Screen Update

From yesterday, we have key breadth inflows across the board: Financials, Healthcare and Biotech, Technology, Materials, Mining and the Energy space.

Within Financials, Commercial and Regional banks received stronger flows than the Broker Dealers (IAI) which remain in short term bearish mode. Momentum buying was also apparent in the Oil Equipment and Service sectors versus the 'Integrated' names. We are looking at sector rotational quality, referenced by 'IntraS' vs 'CloseS' columns - referring to the signal type within the specific product (IntraS is an intraday momentum signal, 'CloseS' reflects an end of day change in direction). Whereby, the momentum trigger implies stronger product demand.  As well, the short term signal, as described, must be evaluated within the context of the intermediate and longer term product/market trend. When all trading time periods are fully synchronized directionally, we can use the trade signal type as our timing mechanism. So, the types of signals we find within sector spaces relays micro perspective and/or mood relating to the sector. And collectively, we can develop a broad macro-based insight into the overall state of the US stock market by analyzing signal quality specific to each sector.

Similar momentum signals we generated within the Ag (MOO), Mining and Materials (XME, XHB), and Energy Equipment and Service issuers (OIH, XES) space.

By far, the leading market sector is in Healthcare and Biotech space (XBI, FBT, XLV, etc). These products have been in bullish mode for the longest duration as per the numerical value found in the column associated with the signal type (4.00, etc), and driven by momentum signals initiating short term trend in line with longer term trends.