Thursday, December 15, 2011

Technical Take GLD just keeps getting worse

The down draft in the indices (DJIA 11823, S&P 1211) continued yesterday, but still closed well within their intermediate term trading ranges (10725-12919, 1101-1372).

The S&P is now two days or five points away (which ever comes first) from confirming its break of 1230. If that occurs, the next visible support is circa 1158.

Further, it is also trading below the left shoulder of a developing reverse head and shoulders formation. That doesn’t necessarily negate the pattern; but another big down day and it will. Finally, after being unable to penetrate its 200 day moving average to the upside, the S&P fell through its 50 day moving average yesterday.

Meanwhile, the DJIA still hasn’t broken 11741 (its equivalent of S&P 1230). That leaves the Averages out of sync; and as you know, I generally don’t like any trading activity as long as the condition persists. On the other hand, it did close below its 200 day moving average.

Volume was off; breadth mixed. The VIX finished up on the day, but it is still well below the upper zone of its trading range. That should be reflected in better prices for stocks--which clearly isn’t happening. I have noted that some experts are attributing this phenomena to trading/seasonal factors; however, I am not viewing the better performance of the VIX as a reason to Buy stocks.

GLD continued its water fall formation. Yesterday it pushed below its 200 day moving average as well as a secondary support level. The next stops are (1) circa 143.00 [horizontal black line], (2) 130.00 the objective set by the break to the downside out of the pennant formation and (3) 103.00 the lower boundary of GLD’s long term up trend. Regarding the latter, this means that GLD could decline by another 30%+ and still not violate its long term up trend. As you know, our Portfolios cut their position by another third at yesterday’s open. Any bounce and they will be completely out.

That above dismal dialogue notwithstanding, I continue to believe that long term, GLD will move to higher levels. However, at the moment there are multiple reasons for expecting more to the downside, i.e. technical (see above), the drive by underperforming money managers to lock in profits from one of their few successful investments in 2011 and fundamental (strong dollar, fear of deflation in Europe). As I noted yesterday, my job one is to preserve the profits in this trade. I will worry about when to buy it back once we have an idea of a bottom.

Bottom line: the S&P is a short hair away from confirming the break of the 1230 support level; although frankly, it is acting relatively well versus commodities and stocks in the rest of the world. Further, the DJIA is not validating the break. So while our own Universe of stocks continue to lose strength every day, our Portfolios will do nothing till the Averages are aligned once again.

EXCEPT for GLD. This puppy is badly broken; and though I don’t have a clue how much worse it can get, I don’t want to own it while I am finding out. A further reduction in the size of this holding is pending.

The correlation between stocks and gold (short):