Is Gold showing signs of exhaustion?
After beginning the day with an opening gap higher, stocks drifted lower throughout the morning session, but an equally soft afternoon rally enabled the broad market to finish near unchanged levels. The S&P 500 gained 0.1% and the Nasdaq Composite advanced 0.2%, but the Dow Jones Industrials slipped 0.1% lower. Both the small-cap Russell 2000 and mid-cap S&P 400 indices eked out gains of less than 0.1%.
It was an uneventful session overall, as most traders preferred to stay on the sidelines ahead of today’s FOMC meeting and decision on interest rates. Virtually everyone on Wall Street is already expecting an increase to 4.25% in the Fed Funds rate, but the big question is whether or not the Federal Reserve Board will hint at an end to the recent string of interest rate increases. The decision on interest rates and corresponding commentary will be delivered this afternoon at 2:15 pm EST.
Turnover in both exchanges was nearly on par with the previous day’s levels. Total volume in the NYSE increased by 1%, while volume in the Nasdaq was 0.3% lighter than the previous day. Volume in both exchanges came in just below 50-day average levels. The nearly unchanged broad market closing prices combined with flat volume changes made for a quiet session overall. Market internals were slightly positive, as advancing volume marginally exceeded declining volume in both the NYSE and Nasdaq. Expect turnover to remain light ahead of the FOMC meeting today.
Most industries turned in a mixed performance yesterday, with no specific sectors showing major relative strength or weakness to the broad market. The Semiconductor Index, which we analyzed yesterday, gained 0.6% and continues to show bullish consolidation on its weekly chart. The Biotech Index, which we also discussed yesterday, gapped open above that 682 resistance level, but immediately reversed and “filled the gap.” The index eventually closed 0.3% lower and remains in its three-week sideways range.
As many subscribers know, we have been bullish on both the Gold Trust ETF
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A $10 per ounce overnight spike in the price of Spot Gold
caused yesterday’s regular trading session to begin with a 2.6% opening gap up
in the GOX index and a 1.3% opening gap up in GLD. However, because the large gap in GLD occurred after it had already been rallying parabolically for several weeks, we were rather suspicious about its ability to maintain its opening gap. When you consider that GLD had closed higher for seven consecutive sessions, that made us even more doubtful that the gap would remain intact. Sure enough, traders sold into the strength of the gap and, by day’s end, GLD
had gained only 0.3% and finished near its intraday low. It also showed this
type of price action on its highest volume day of the entire multi-week uptrend,
which is bearish.
The GOX index similarly changed from a 2.6% opening gain to a 0.1% closing loss. When this type of intraday price action occurs after a stock or ETF has already been trending sharply for an extended period of time, it is known as an “exhaustion gap” and often marks a short-term top. For that reason, we took profits on all our open positions in the gold and silver mining stocks yesterday. Unless you intend to hold through at least a short-term correction, you may want to do the same. Looking at the chart of GLD below, notice yesterday’s bearish reversal candle, as well as the huge volume spike to nearly four times its average daily volume. That large volume spike, combined with a reversal candle after a parabolic move, signal a likely short-term correction:
Because the Feds are meeting on interest rates today, we intend to remain on the sidelines and passively watch the afternoon reaction. Trading in the morning is likely to be lethargic, while trading will become erratic and volatile after the 2:15 pm Fed announcement. After the market has had a chance to digest the Fed’s comments, we will consider entering new positions in the latter half of this week. Remember to trade what you see, not what you think!
Open ETF positions:
Short half position of
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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .