Traders Edge Blog

A Taste of Things to Come?

It’s been good eatin for the bulls so far this year…at least when it comes to the U.S. markets. The S&P 500 managed to trade to an intraday high of 1,687 this very week after closing out 2012 at 1,426 – an 18 percent rise in less than six months.

No doubt the bulls would like to keep feasting at that table…or should we call it a trough? I’m not about to guess whether the weakness of the past couple days is anything more than a breather – merely letting the belt out a bit before more feasting takes place – or the start of a new diet.

What is worth thinking about is the fact the market here and those overseas turned pretty sharply in reaction to Bernanke’s congressional testimony regarding the slowing of the Fed’s purchasing program. It’s clear the market soured on such language.

Might it be mere hiccups or some indigestion? Who knows…? To me the real question is whether the market action portends what we should expect when the Fed turns down, and eventually off, the spigot. A question for another day, given the Fed doesn’t appear ready to do so as of yet.

That said, it’s no secret everybody out there is cautionary in terms of how far this rally can extend before we see some retracement of note…perhaps even a correction. The certainty is it will happen at some point – may be now for all we know. Whatever the case, at a minimum it makes sense to take a look at the map to get a sense of possible near-term stopping points we should be aware of.

Low-and-behold, the high set this week stopped right at the upper border (resistance) of the recovery channel established off the March 09 lows. Just above that is the psychological level of 1,700, followed by a long-term trendline that has been significant as both support and resistance dating from the 09 low and in each year thereafter in terms of reversal spots and a key trend-break confirmation point. That line is now sitting around 1,720ish. Significant levels likely to spell the end of this rally?

Time will tell…


Physical Demand? Not So Much…

We talked recently of the fact that Gold had fallen too-far-too-fast and was due at a minimum for a brief dead-cat bounce or perhaps even a prolonged, full-fledged snap-back rally. Fair to say the mid-April to early-May upward move was in fact a pretty decent snap-back rally. Certainly scared lots of peeps into believing they’d miss out on a great buying opportunity if they didn’t get in right away.

Low and behold, Gold came off its mid-April meltdown low of roughly 1,325 in quick fashion to challenge key resistance at 1,500. Yep, the bulls were excited and mocking the GS call that many say prompted the original meltdown. It was “buy time” on a big-time dip that was actually a gift.

Oh yeah, there was also all of the chatter about physical demand being at what some estimated to be a 30-year high. With such pent up demand, surely we were looking at a very prolonged period of upward price movement!

Not so much…

Apparently that demand was filled…in a matter of mere weeks. Moreover, there was that pesky little issue of ETFs… Yes, if memory serves, they were actually the big buyers and holders of Gold over the past number of years as it ran to record heights. So, it only makes sense that were they to collectively head for the door, the precious metal would take a header…and they did…still are…and it did!

Recapping a bit so we gain perspective in an attempt to figure out what’s really occurred and where we might be headed moving forward, it’s worth noting that the April meltdown saw the price of gold retreat to a level that represented a 50 percent retracement of the entire Gold run from the ’08 lows to the September 2011 high approaching 2K.

Yes, there was rhyme and reason for where Gold pulled a U-turn in the midst of a somewhat historical freefall.

Furthermore, that U turn recovery move, while impressive, stopped exactly where most peeps looking at the map (who weren’t long and/or caught up in the euphoria) would have expected, given that there was a key fib level at 1,490, followed by the 1,500 mark, which had been a key support level previously. We obviously can surmise that lots of those peeps watching the map were confident enough to lay down some big bets that the rally would go no further…and they’ve been duly rewarded.

K, so now what? Well, seems apparent that whatever the level of physical demand might be now, somebody from the bull camp better get to buying the metal quickly or it’s gonna round trip the entire breakdown recovery move…which would see Gold back to the 1,325 level.

Shouldn’t come as a surprise that confidence is gonna get tested big time IF that occurs…and both gravity and history won’t be on the side of the bulls in such an event. Regardless, gold bugs are gonna have to hold that level on a test. IF they do so, we should see some decent upside…for a bit. The same resistance levels as this last time around will serve as the real upside test.

Alternatively, if the level does get tested and the bulls fail to hold, then we’ll likely see an accelerated breakdown move to another key fib level near 1,150 in very short order. That’s not far above the level Credit Suisse Group just predicted this week – 1,100 over the next year and 1,000 five years from now…Ouch!

We shall see…