Jan 26, 2012

Gold In Bullish Mode Again

Gold’s triangle consolidation started in the beginning of July 2011 has come to an end after yesterday’s sharp rally and subsequent brake above important resistance level - $1640. This move is really important as price steps into new pattern which appears to be bullish for the precious metal. 

The unsuccessful brake under 200-day moving average confirmed upside trend for the gold
The actual reason for such a sharp one day appreciation was extended low interest rate environment announced by FED. This move suggests that for the next two years we have cheap money which is bullish for gold. Dollar started depreciating already and probably the precious metal is back in the investor’s portfolio as a store of value. The dollar and gold tend to move opposite, although not in 100% of the cases, but this correlation have been seen last two weeks.

Technically next target for the yellow metal is $1950. This level is determined by the triangle’s length ($300) added to current price. However this scenario is extremely bullish and previous historical heights around $1850 is strong resistance.   

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Jan 24, 2012

Markets Overbought In Short Term

Beginning of the year was impressive for stocks. S&P500 climbed 4.1% year to date and 19.10% since 4th of Oct 2011 bottom as markets exit the most severe market correction since Jul 2010. Still overall sentiment is positive but breadth indicators start showing some overbought signals.

First chart shows correlation between percentage of S&P500 companies above 50-day moving average and S&P500 index. The percentage of S&P500 companies above 50-day moving average indicates short term stock sentiment. Readings above 77% (+1 standard deviation) point overbought market. Currently 85% of the 500 companies in the S&P index trade above their 50-day MA. That is extreme ratio that market could stand for a while, as it did between Oct and Dec 2011, before we see some correction.

The second chart plots S&P500 index relative to 200-day moving average. This indicator measures long term market sentiment. As shown on the chart the index is 5% (1.05) above 200 MA. This level is close to its mean (1.03) suggesting that there is still room to grow.

VIX indicator or fear gauge (third chart) crossed under 20 for the first time since end of July signaling markets volatility is slowing and according to some analysts it is clear buy signal. However historical review of the correlation between the VIX and S&P500 suggests that extreme low VIX levels appear to be sell signals.

It is not clear whether the time for correction has come as short term indicators showing overbought signs while long term sentiment is still positive. Earnings season is still on the move and positive surprises could lift stocks additionally.

Breadth indicators show mixed signals


Jan 19, 2012

EURUSD at bottom?

Last few sessions showed positive signs for already beaten euro. The news coming from Europe are supportive for that move. German business climate is improving and even recent downgrades did not overshadow last French and Spanish debt auctions. Successful debt markets provide demand for euros and support for the exchange rate.

Still the trend for the single currency is negative. Considering current ECB policy for keeping interest rates low and thus helping stressed euro countries easy refinance that would keep appreciating of the euro limited. Another point to consider is expectations for mild recession in the Eurozone. If, however, slowing is not so mild as considered to be another easing would be needed and pair could test 1.20’s. Recent macro developments worldwide suggest that trading around 1.30 for the next couple of months is most likely.

From technical point of view last few months formed so called divergence between the price and the indicators (MACD histogram). Usually after this pattern trend reversal follows. Actually last sharp appreciation gives us reason to think this has already started.  

EURUSD Divergence Support Trend Reversal
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