Sunday, 10 February 2013

S&P 500 watch that big picture wedge, and the short term trend channel

On Friday I wrote that "It would surprise many, myself included, if the S&P does not now continue upwards to test its 2007 high at 1570ish". At the time it was a half completed sentence, true in itself. The other half of the sentence is simply that markets are full of surprises, so beware making assumptions. Time then for a fresh look at the S&P 500.

First chart is the S&P 500 weekly going back to the 2007 high. Recent action looks like a wedge. Wedges are reversal patterns. The pattern may morph in to something else, so how would we know that the wedge is operative? Either the market turns down hard now from its test of the upper line, or it completes a brief throw-over.

Next the daily chart, zooming in on the wedge. Whether or not we see a throw-over, a break lower from the short term trend channel would be a bearish indicator.

Did the Gold and Silver bull markets end in 2011?

Did the Gold and Silver bull markets end in 2011? Nobody knows, and I am not saying the answer is yes, merely putting my own long term bullishness for the precious metals to the test. The fact that a Gold bull is questioning his faith could be viewed as a contrarian buy signal. Ha!

Why am I asking the question? The US Fed has unleashed a flood of liquidity in recent years. Logically Gold and Silver and commods more broadly should have long since responded by hitting all time highs. Clearly this has not happened. When something so seemingly obvious and logical is not happening, you need to question your assumptions and your logic.

First chart is the Silver monthly. The move in 2011 was to my eyes a classic blow off top, and its peak was very close to the all time high from over three decades ago. The fact that Silver's run also halted at trend channel resistance was icing on the cake. So in 2011 I would not have been surprised if Silver's bull run was finished, but I was not certain as I believed Gold's bull market had further to go, and if that was the case Silver could rise further too.

Does the silver action since the 2011 high look like the makings of a descending triangle? If so, a break below the 2011 and 2012 lows would be very bearish.

Next chart is the Gold monthly. The trend channel differs to the one I have shown many times previously (most recently one month ago). This channel suggests Gold completed a throw-over in 2011, marking the end of the previous trend, which would imply that Gold will move considerably lower in coming years. Somewhat ironically one of the motivations for my looking closely again at the monthly chart was Bullion Baron's observation that one of the candles that defined the previous channel was "rogue". Ironic because they don't come any more bullish on Gold than the Baron, and yet his observation has me questioning my bullish stance.

To my eyes the thing that is missing from the above chart to signal the end of Gold's bull market is a final blow off top. But remember what I said about assumptions. They can be wrong. Anyway that lack of blow off top has been one of the reasons why I believe(d) Gold and possibly also Silver would rise further, despite Silver itself having shown a clear blow off.

Next zooming in to the weekly chart for Gold, with the same channel I have shown in previous posts. Now that I can see a throw-over on the monthly in 2011, I am inclined to take the throw-over of this different channel on the weekly more seriously. See, my assumptions have changed. Though at this time frame I see Gold as range bound, until support around 1520-30 is broken. Below that would be bearish, doubly so because of throw-overs and completed up trend at two time frames.

While I'm rabbiting on, what is more dangerous for a trader than incorrect assumptions? Hope is one thing.  Many hope there will be a blow-off in Gold, I'm sure I'm not the only one. Don't let hope blind you.

Back to the charts. What do the above charts tell us? They don't predict the future, no chart can, but they provide a road map of possibilities, and levels against which risk can be measured. Above 1800 for Gold and we may yet see that blow-off top, below 1530ish and there's fair odds we'll see the opposite. For Silver, the 2011 and 2012 lows around 26 are key, below that would be strongly bearish, above 50 would be screamingly bullish.

I'll end the post with the daily charts. Silver is showing near term weakness and Gold is hinting at it. I haven't answered my question, the market will do that for us in due course.