Gold uptrend still intact

An opening gap up and subsequent
consolidation throughout the morning hinted at a potential rally
yesterday, but the bears took control during the final hour of trading, causing
the broad market to reverse its morning gain and finish in negative territory.
The Nasdaq Composite’s
(
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the close. The other major indices followed a similar intraday pattern, causing
the S&P 500
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by 0.4% and 0.3% respectively. The small-cap Russell 2000 fell 0.6% and the S&P
Midcap 400 lost 0.5%. Each of the broad-based indices finished at their intraday
lows, pointing to more institutional selling into the close. Just as a strong
market often recovers from intraday losses and rallies into the close, a weak
market often gives back intraday gains and sells off in the final hour of
trading. The tendency for markets to follow this type of trading pattern is
quite a reliable indicator for confirming whether or not the overall bias
(bearish in this case) remains the same. Because of the weakness in the final
hour, we sold short the DIAMONDS
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new low of the day into the close.

Turnover in both exchanges declined yesterday, although it
increased during the final hour’s selloff. Total volume in the NYSE declined by
8%, while volume in the Nasdaq was 6% below the previous day’s level. That the
bearish reversal occurred on lower volume was better than having another
“distribution day,” but it is important to note that volume picked up when the
late day selloff began. At 2:00 pm EDT, when stocks were still consolidating
near their intraday highs, volume in the NYSE was on pace to be 13% lower than
the previous day. However, it increased by 5% in the final two hours, indicating
institutional distribution during that short time period. Turnover in the Nasdaq
also increased by 5% in the final two hours.

One of the few industry sectors that has not yet broken
support of its primary uptrend line is the CBOE Gold Index
(
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the market with a 2.9% gain yesterday. Although the $GOX has dropped a whopping
19% from its May 10 high, its primary uptrend line that began exactly one year
ago remains intact. The ascending blue line on the weekly chart of the $GOX
below illustrates this:

As of now, we do not advocate getting long the gold
sector because there is still too much volatility. Even though it has bounced
off its uptrend line, we want to be sure it will hold and begin to build a base
near its current level. If it does, we will consider long entries in the sector
after the $GOX index moves back above the 50%

Fibonacci retracement level from its May 10 high. We also need to see the
return of individual stock leadership within the sector. Former leaders such as
Goldcorp (GG) have taken a beating, so we need to see how well they recover from
here.

As for the actual price of spot gold, it has been holding up
much better than the mining stocks. The StreetTRACKS Gold Trust
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not yet even corrected down to its 50-day

moving average

 and is only 6.5% below its historical high. Similarly, the iShares Silver
Trust (SLV) could also stage another rally attempt back up to its all-time high
(be sure to chart the price of spot silver, not SLV, which only has a one-month
price history). There could be several reasons why gold has been so strong. Most
likely, inflation fears, a weak U.S. dollar, and now a flight to safety are all
valid reasons, but the bottom line is that the reasons for its strength
are irrelevant. All the matters is the price and volume action, so keep both the
$GOX index and GLD on your radar as one of the few sectors that could rather
easily recover back to new highs.

Going into today, stocks will need to deal with the downward
momentum created by yesterday’s selloff into the close. In the overnight futures
market, both the S&P and Nasdaq futures were trading significantly lower than
their closing prices, so we are prepared for an opening gap down today. While it
may appear that the broad market is “oversold” and due for a bounce, it is very
dangerous to try to pick a bottom without first having some sort of
confirmation. As of now, we have received no confirmation of a short-term bottom
in terms of accumulation days, bullish closes, sector leadership, breakouts, or
any other major type of bullish indicator. Therefore, we must assume the
downtrend remains firmly intact and, as such, are simply trading in the
direction of the primary trend. As discussed in yesterday’s

Wagner Daily,
selling short any price retracements up to resistance of the hourly moving
averages and selling short breaks of key support levels are two strategies that
work well in a very weak market.