Jun 30, 2011

Silent gold correction

Gold is considered safe haven and long term chart proves it. Latest movements indicate slowing of price growth, but is that start of deeper correction?
Macro view of the picture still supports the precious metal. Debt problems around the world suggests vulnerable currencies. Capital markets reflect rising system risk and only store of wealth seems to be obvious. The big gold rally could be stopped if money become expensive i.e. FED starts tightening, but this is not expected at least until the year end. Still gold looks like good pick.
Closer look at the chart shows triangular technical pattern. This is corrective move usually confirmation of the trend. Considering again declining dollar short term target of $1551 is reasonable.
Gold In Consolidation

Chart source: dukascopy.com, Chart analysis: investink.net


Jun 23, 2011

June Market Breadth

Recent market moves have left stocks in oversold area. However markets are still under pressure – European debt, slow growth prospective. Desperate and oversold moments have always been excellent profit opportunity, if you know the right entry point, of course.
One reliable way to estimate market top-downs is using market breadth indicator percentage of stocks above 50 day moving average. This indicator is showing short term momentum of the stocks.
As seen on the chart only 24.7% (green line) of the stocks in broad S&P500 (black line) trade above their 50 day moving average. This measure is close to previous big correction seen in June – July 2010 and middle of March drop. Reading between standard deviation -1 and -2 is in oversold area and indicate buy signal.
% of S&P 500 Stocks Above 50-Day Moving Average
Chart source: stockcharts.com, Chart analysis: investink.net
Another good measure for the market sentiment is Put/Call ratio. Current levels for this indicator are extreme. The ratio is between +2 standard deviation and is close to June 2010 peak showing bullish signal.
Put/Call Ratio
Chart source: stockcharts.com, Chart analysis: investink.net
Put /call is also useful in detecting market tops. The red ovals indicate such points before correction. January, April 2010 and April 2011 tops pushed Put/Call ratio to below 0.85 around the –1 standard deviation.
This technique is useful in timing over or under sold markets, but if there are major fundamental news or events as happened in the beginning of 2011 where extreme low put/call ratio did not stop markets from rising. Rapid recovery expectations were so strong that this indicator simply did not work at that time. Although not so precise you can use both indicators to have perception for the market mood and what direction most likely to expect.


Jun 22, 2011

S&P Technical Outlook

Recent rally raised questions is it sustainable. It is obvious that markets were oversold at June 16th bottom. Considering that and recent developments about European debt crisis and US interest outlook capital markets are still nervous and react sharply on every signal.
Using Elliot Wave Theory we can determine in which wave of the cycle we are. Close investigation of S&P500 index chart shows finished positive 5 wave upward cycle. Now we have finished A-wave - the first of the three corrective waves and forming positive B-wave. Each cycle is formed from 5 wave bull market and 3  waves bear. Current upward move is limited to the level of 50 MA around 1320 level, some 2% up. Of course brake above this resistance is possible if economy shows better than expected macro indicators. This would mean that we are again in bullish mode and economy is back on track.
S&P 500 Expected to Rebound
Chart source: stockcharts.com, Chart analysis: investink.net
Fail to brake 1320 level will form positive B-wave and start final negative C for the corrective cycle. In other words pattern formed is also known as “Head and shoulders”. It is reversal formation and further drop would be expected. The downside is limited to November 2010 top support lever around 1230 level. Last scenario is expected to break 200 moving average, considered to be long term trend line, which could mean entering extremely oversold area. Move least likely to occur.

Jun 20, 2011

Gold Near Peak?

Gold is showing signs of slowing its price growth in recent weeks. Does it have room for future gains or it’s time for healthy correction?
The method used in the analysis is Fibonacci retracement applied for the previous correction in order to determine key support, resistance levels and turning points. Gold has proved to be technically predictive but one should consider fundamental factors as well.
Measuring the corrective wave with Fibonacci retracement gives 1x and 2x projections of the important 61.8% level also known as the golden ratio in the nature. Those 161.8% and 261.8% levels determine possible resistance levels of the future move.
Gold Price Projection Using Fibonacci Ratio
Chart source: Saxotrader, Chart analysis: investink.net
In 2008 gold started correction before the markets feel the destructive effect of Lehman collapse. The peak that year was 261.8% positive move from the bottom of the 2006 negative correction, seen on the chart. 161.8% level appeared to be resistance but significant correction did not occur at that time.
Gold close to Important resistance Level
Chart source: Saxotrader, Chart analysis: investink.net
2008 correction determine recent move. Now we are close to 261.8% line that suggest strong resistance. If the pattern is correct we should now be close to the peak of recent gold cycle. This is the case only if fundamental factors support such a move. Current economic environment is not the same as that in 2008. At the end of QE2 and cheap money, gold is poised to correct with rising dollar. This would not happen if economic situation force central bankers to continue with quantitive easing – in case that economic recovery is still more fragile than expected. Slowing US and world growth would prevent gold from decline because the markets would calculate eventual QE3 or additional stimulus in other form. Pumping liquidity means pressure for the dollar, cheap dollar means expensive gold. All this is connected with safe heaven perception of the precious metal. So correction would be limited to the downside if not horizontal as it appeared to be at 2010 end.

Jun 16, 2011

Is Market Turn Point Close?

S&P500 has recently dropped more than 8% from its peak on growing concerns over the strength of the recovery. After riding the optimistic wave investment crowd fell in the trap of its own expectations.
Now the broad index, S&P500, reached 200 moving average. This is strong technical support which is expected to sop the decline. At least for a while. Index oscillators are showing extremely negative values indicating oversold pattern. The slow stochastic lines are crossing below 20, a case not seen since last September.
S&P 500 Touched Important Support Level (200-Day Moving Average)
Chart source: stockcharts.com, Chart analysis: investink.net
At this point it is worth playing long but be cautious. Rally is expected to occur but only supported by good fundamentals. The upward move is limited by 50 moving average at 1323, some 4% gain. Fail to mark new index top above previous (1376) would form negative short term trend and additionally push the prices down.

Jun 10, 2011

EUR vs. USD – Short Term Outlook


The Euro index movement almost coincides with actual forex move of the pair. Recent peak of the index was clean expectation based trading of the ECB decision of possible rate hike in the Euro zone. At the moment it has the higher interest among developed world – 1.25% compared with close to zero rates in US and Japan. After the Thursday announcement the index dropped in contradict with logic that widening interest differential should support the euro. The fact that market are in correction and investors are more risk averse is pushing them to support the greenback.


Chart source: stockcharts.com, Chart analysis: investink.net

Technically the trend is positive for the euro but divergence between last two index peaks and moving average histogram is clear signal for trend reversal. The support is determined by cross point between parallel channel support line and 200 moving average around 137.50 level of the index. This could be translated to roughly 1.38 usd per euro.

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