Trail your stops… Gold is set to hit its 8-year high

The major indices followed-up Tuesday’s bearish
reversal with another session of losses, but this time on slightly
lower volume. Small-cap stocks weighed heavily on the Nasdaq yesterday, as both
the Russell 2000 and Nasdaq Composite
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Industrial Average
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lost 0.4%, and the S&P 500 Index
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in Energy, Pharmaceutical, and Gold Mining sectors helped to minimize the losses
in the S&P 500. Tech sectors including the Internet and Semiconductor stocks, as
well as Retail and Biotech, each acted as an anchor on the Nasdaq.

Wednesday’s losses caused some technical damage to the charts of the major
indices, which we discuss below, but it was positive that volume declined
slightly in both exchanges. Total volume in the NYSE declined by 1%, while
volume in the Nasdaq was 4% lighter than the previous day’s level. This
prevented the formation of another broad-based “distribution day” like the
previous session. Nevertheless, market internals were firmly bearish in the
Nasdaq. Declining volume exceeded advancing volume by a margin of 2.25 to 1.
Similarly, declining issues were double the number of advancing issues in the
Nasdaq. NYSE internals were also bearish, but not by a wide margin.

Looking at individual sector performance, the obvious highlight of
yesterday’s action was in the Gold Index
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Spot gold also rallied $4 to finish the regular session just below $450 per
ounce. The 0.9% gain in spot gold resulted in the same percentage move in the
Gold Trust ETF
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PowerRating)), which we bought on September 7 and added to on
September 9. Both $GOX, which consists of gold mining companies, and GLD, which
mirrors the price of spot gold, marked their highest closing prices since last
December. The spot gold commodity is now less than 4% off of its 52-week high,
which corresponds to an eight-year high as well. GLD only began trading last
November, so it is less than 2% below its all-time high. Looking at a daily
chart of spot gold throughout the past year, you will see that it has been in an
intermediate-term downtrend, but a look at the long-term monthly chart shows
that the weakness has merely been a correction within the context of a four-year
uptrend. The monthly chart of the spot gold commodity below illustrates how it
resumed its long-term uptrend after coming into support of its uptrend line (the
ascending blue line) this past June:

Notice on the chart above how the 200-month moving average (the orange line)
acted as resistance that caused gold to begin its correction last December. Gold
subsequently tried to break out above that 200-MA on numerous occasions in the
months that followed, but failed every time. However, it is now poised to close
the month of September above that 200-month MA and gold has also broken out
above resistance from its downtrend line off the December high. As such, a lot
of momentum has been building during gold’s ten-month correction. We now
anticipate a resumption of the 4-year primary uptrend and a breakout to new
highs in both spot gold and GLD. We intend to simply trail a stop on our GLD
position in order to maximize profits and protect the gains.

Wednesday’s broad market losses caused the major indices to close at key
levels of support for both the S&P and Dow, while the Nasdaq already broke below
an important level. Most notably of the three indices, the Nasdaq Composite
closed firmly below its 50-day moving average, which it was trading above for
only two weeks. Considering that the index also failed to rally above its 61.8%
Fibonacci retracement from the August losses, the break below the 50-day MA is
significant because it indicates that a “lower high” may be forming on the daily
chart. A subsequent break below the August low of 2,112 would form the
corresponding “lower low” that would indicate a primary trend reversal. The
possible “lower high” of September 12 is circled on the chart below:

The S&P 500 Index is still above its 50-day MA, but only by less than two
points. The index also closed below support of its prior downtrend line from the
August high. Going into today, watch yesterday’s low as a key area of support.
If the S&P closes below that, it too will have fallen back down below its 50-day
moving average. The S&P, however, is showing more relative strength than the
Nasdaq at the moment. The daily chart below illustrates the break below support
of the prior downtrend line (blue descending line) and the close proximity of
the 50-day MA:

Just as the S&P 500 closed right at its 50-day MA, the Dow closed only three
points above support of its 200-day moving average. Take a look:

As many traders know, the 200-day MA is very important as well because it
usually determines long-term sentiment and bias of an index. All eyes will be on
the performance of both the S&P and Dow today, as a close below yesterday’s lows
will result in significant technical damage to the charts. Be very careful if
you are still heavily long, but don’t get get too aggressive on the short side
yet either. Markets can be very erratic and whippy near key support or
resistance levels. Continue to focus on shorting individual sectors with
relative weakness or buying those with relative strength to the broad market
instead. Above all, always trade what you see, not what you think!

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