VIX Daily Chart
The VIX has dipped below a support/resistance line. The significance being if it breaks it to the upside, a touch to the 50 day moving average is likely. The VIX alone doesn't reveal inherent bearishness or bullishness. So let's look at AAPL, one of the market leaders.
AAPL Daily Chart
AAPL has hit a resistance line and arguably broken the trend, depending on how you draw it. Look at the divergence of the 50 day MA (blue line) from the 200 day MA (red line). The farther apart those are, the more you have to accept that they should come closer together, which means a flat or declining stock price.
Finally, the most telling indicator is the MACD divergence. Price reached the resistance line twice, but on the second contact, MACD was lower. This is considered a fairly reliable indicator when it is seen and is bearish. AAPL being one of the market leaders, if that fails to lead the market higher, it would go to reason a market can't go up without a leader. When the leaders begin to falter and the VIX is looking due for a pop, it's time to get short equities. In the short-term of course.
Let's look at the S&P 500 now.
S&P500 Daily
The S&P500 is showing 2 bearish indicators. A head and shoulders pattern and divergence on MACD. It has broken below the 50 day moving average for the first time in a while too. I think it could easily decline to touch it's 100 day moving average over the next month or two.
These three facts summarize my bearish view on the market. Fundamentally speaking, the job losses number released on Thursday was not good. I heard something very interesting about that data as well. Apparently it was going to be released on Wednesday but it was mysteriously moved back a day. The reason being those who released it knew it was ugly and wanted to lessen its impact on the market. By releasing it Thursday, they figured most people would already be on vacation and not paying attention to those numbers. They could sweep their dirty report under the rug, and not have a market reaction until Monday. By then it would be old news, in theory, and the market would be less reactionary. Yet while volume was light on Thursday, the decline was not. After that ugly report, a head and shoulders patter in the market, divergence on the MACD, I see no reason that the big money will be bullish this week. The market has every indicator it has reached a short-term top and needs a pullback, indicators both fundamentally and technically.
Personal InsightHere is my personal insight into the economy, a unique little tidbit that perhaps sheds light on larger trends.
The first is in the construction industry. Here in Michigan it is utterly awful, except for government spending, especially for schools. Schools in our state were given stimulus money to spend, which they used to repair their decaying facilities. The problem is they had restrictions on what fiscal year they could spend that money on. Their fiscal years ended June 30, and they may not spend that money after that date. They were in a big hurry to get jobs done before that date and now that it has past, they are no longer employing the restoration company my dad works for.
This is anecdotal, perhaps, but it instills little confidence about the economy since school construction spending from the stimulus package will drop off a cliff for the month of July.
Now let's look at the other charts to explain my view for treasuries, the Dollar, and commodities.
Dollar Index Weekly Chart
To me it looks like a head and shoulders without the right shoulder. Look at the histogram on the MACD. The bars are declining steadily, which means the gap between two lines is lessening. This is one of the earliest indicators that a trend is reversing. Since this is a weekly chart, this trend if it does reverse could become a multi-week rally in the dollar.
Well if you're new to trading, I'll outline what that means. It means commodities like oil and gold will fall, and bonds will rise. If a rising dollar means all these things, it would make sense to look at those things for confirmation.
TLT Daily Chart
This is an ETF used to trade 20+ year treasuries. It's a great representation of what's happening with long term treasuries.
Notice that the downtrend line was violated recently. This is generally bullish. If you look closely at the chart, TLT formed a reverse head and shoulders pattern which should be bullish. TLT has formed a bullish trend line and as long as that holds with the contact it made on Wednesday, I don't see a reason to be anything but bullish on bonds for the short term. Now we've already determined that equities are a bearish situation. If bonds seem bullish, this creates a mutually reaffirming situation between equities and bonds. If stocks are being sold, that money must go somewhere, and that somewhere is often bonds.
Now if the dollar is rising, why is it rising? It rises because foreign money is flowing into our currency to buy things such as our national debt, which is US treasuries.
Well commodities fall when the dollar is strong. Each dollar is worth more, which means it buys more oil and gold for each buck you spend. So we should see weakness in the commodities, let's look...
Silver Daily Chart
No weakness can be readily detected here in the technical indicators. It is currently resting at a bullish trend line, which means now is a decisive moment for the future price of silver. It'll either rise up off that trend line or break through it, devaluing the commodity. I think the later is most likely considering everything, in which case I found a similar situation on the MACD play out in August 08. Look at the two purple circles. The first one saw a stalling decline which then accelerated. I believe an accelerated decline on the histogram is likely this time around. If you're planning a trade around silver, an easy way to do it is to wait until the trend line breaks and then make the bearish play. I look at it like this... the trend is too obvious and this is the fifth contact with the trend line it has made. Buying here is the obvious play if you're only looking at silver only, but often it makes sense to do the opposite of what is obvious, especially when other data conflicts with the obvious move. Fading The Trend is what my blog is all about, because that's where the biggest moves happen.
Anyway, moving onto gold...
Gold Weekly Chart
It's hard to see on this picture, but there's bearish divergence on the MACD. Now I have heard that Gold is making a reverse head and shoulders pattern. It is obvious to see but I think it's very fishy. A reverse head and shoulders after significant price appreciation? Aren't reverse head and shoulders supposed to happen after major declines and signify a longer-term reversal to the upside?
Look at the very right shoulder. Notice how it declined instead of busting through resistance. Wasn't it supposed to shoot up? When obvious technical patterns fail, they fail monumentally because many investors buy on the technical pattern and then sell when it doesn't materialize. Furthermore, the most obvious technical patterns are the most likely to fail or turn out slightly different, from my personal experience.
Maybe we see another little bounce in silver and gold, but I have a hunch they'll both break through resistance because of a rising dollar and bad economic news. People buy silver and gold based on the inflation theory. We have to get past this recession before there will be any inflation, and Thursday's news means we are far from being out of the woods.
