Think gold can’t go higher? Think again…

The major indices consolidated in a
narrow, sideways range just above the previous
day’s highs throughout Monday morning, but selling in the afternoon caused the
broad market to fall into the red. A moderate rebound in the final hour enabled
the Dow Jones Industrial Average to close 0.2% higher, but the S&P 500 finished
the session unchanged. Like the Dow
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also gained 0.2%. However, the index was showing a gain of nearly 0.8% at its
morning high. Small and mid-cap stocks showed relative strength to the major
indices. The S&P 400 Midcap Index
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advanced 0.8%.

Total market volume in the NYSE declined by 2% on Monday,
while volume in the Nasdaq came in 4% lighter than the previous day’s level.
Although the Nasdaq has closed higher for the past three sessions, it is
negative that volume has declined in each of those three “up” days. Yesterday’s
turnover in the NYSE was also the lowest of the past nine sessions. This tells
us that the recovery attempt of the past several days is more the result of a
technical bounce as opposed to heavy institutional buying interest. Furthermore,
don’t forget that last week saw three straight “distribution days” in which the
major indices closed lower and on higher volume. As such, it is not surprising
that the bounce of the past several days has been on lighter volume. This
combination of higher volume on the down days and lower volume on the up days is
obviously bearish and indicates a high level of caution is warranted on the long
side of the broad market.

Last week, we discussed the importance of the August lows as
key support levels on the S&P, Dow, and Nasdaq. On September 22, both the S&P
500 and Dow Jones reversed just above their lows of the prior month. The Nasdaq
also rallied that day after probing just below support of its August low. While
the rally of the past few days was positive for the broad market, the
combination of light volume, combined with a lot of technical overhead
resistance, means the reversal attempt may be short-lived. The S&P 500, for
example, now has resistance of both its 20 and 50-day moving averages, as well
as resistance of its September downtrend line. This red descending line on the
daily chart below illustrates resistance of this primary downtrend line. We have
also circled the significant resistance of the 20 and 50-day MAs:

Because of the overhead supply and light volume on the bounce
attempt, we expect a test of the September 22 low of 1,205 within the next few
days. If the S&P falls below that level, odds are good it will also break below
the August low of 1,201, as well as the 200-day moving average at 1,199. Such an
occurrence would correspondingly trigger a break of the weekly uptrend line from
the August 2004 low. The Dow Jones has a similarly ominous daily chart and is
also already below its 200-day MA:

The Philly Semiconductor Index
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the Nasdaq, has completely failed its breakout attempt from earlier this month.
It now has resistance of its September downtrend line, as well as its 20 and
50-day moving averages. Unless the $SOX can recover, it’s likely the Nasdaq will
remain weak. The Biotech Index
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Nasdaq throughout the September weakness, but it too appears to be failing the
bullish consolidation that occurred throughout most of the month. The index
itself has bounced off support of its 50-day MA the past three days, but it is
back below the prior highs from July and August, which is illustrated as the red
dotted horizontal line on the chart of $BTK below:

If it’s any indication of whether or not the Biotechs will
hold up,
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first time since April. A break below its August low around $187 will present a
good short setup, as it will trap the bulls who bought the breakout and
subsequent consolidation earlier in the month:

Needless to say, we remain biased to the short side of the
broad market because the major indices have a lot of overhead supply. The one
exception is Gold
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holding near its all-time highs and should consolidate and go higher. Our short
position in IYR (iShares REIT) is conversely holding near the lows and nearing
our profit target on the downside.

Open ETF positions: