Thursday, May 20, 2010

Melt Down or Bounce?

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In the short-term, we're all just guessing. I think we're getting ready to have a significant bounce. I am bearish on the stock market, but we've moved a long way fast and fear has risen substantially. I vote a bounce that may even start tomorrow. Here's a 20 year chart of the Volatility Index ($VIX) with my thoughts:

To be honest, it wouldn't surprise me at some point during this secular stock bear market to see the $VIX make a new all-time high higher than at the height of the Great Fall Panic of 2008 (you know, the panic the apparatchiks and gangsta bankstaz couldn't stop despite the ban on short selling and guaranteeing the entire banking system and mortgage market with our money?). But it's a little early in the game to be setting new highs in the $VIX when we aren't even in a confirmed return to bear market territory yet!

Next up, the McClellan Oscillator ($NYMO), a short to intermediate term breadth indicator. This daily chart goes back to mid-1998 (as far back as my data goes):

Next up, the Chicago Board of Exchange (CBOE) total put to call ratio ($CPC) over the past 42 months:

How about the percentage of NYSE stocks above their 50 day moving average ($NYA50R) - 8 year daily chart follows (as far back as my data goes):

Now, I am not saying that I am going to go out and buy the stock market here. Far from it. I am talking about a bounce. It could last a week or several weeks. How would I know? However, during that bounce, I think the U.S. Dollar will drop because the Euro will get a relief/short-squeeze rally. A lot of ignorant paperbugs have seen the recent correlation of Gold going up with the U.S. Dollar and they think that when the U.S. Dollar Index drops, Gold is going to drop too. HAHAHAHAHAHAHAAAAAAAAAAAAAHH!

Gold reacted to the crisis in confidence like it always does. Now it is free to react to U.S. Dollar weakness. A correction in the U.S. Dollar is due even if you think the U.S. Dollar Index is headed higher. I also believe the copper to Gold ratio is starting to firm and copper is headed higher in overnight trading while Gold is down to flat. Here's a 15 minute intraday chart over the last 30 days action in the copper:Gold ratio using the JJC ETF as a proxy for copper and GLD ETF for Gold (i.e. JJC:GLD ratio chart):

This ratio should be continuing to plunge if we are headed for Armageddon right here and right now. Obviously, I am getting into very short term analysis here. I am not bullish on the copper to Gold ratio or the stock market, but we don't move in straight lines very often in trading markets. What I am talking about here is not investing, it is speculating/trading. I will be buying more paper Gold (the double Gold bullish UGL ETF) tomorrow if we go below today's lows in the Gold price. I am already loaded up, but saved some dry powder to buy more if we go any lower in the Gold price.

The point of all this analysis is simple: when the bounce comes, I think the Gold patch will benefit. Don't forget which shiny, precious market is still in a solid, uncontested bull market. Silver may outperform Gold on the bounce, but I'm sticking with Gold here in my trading account. The bounce I am anticipating is a 2-4 week bounce in Gold that should result in new highs for the U.S. Gold price. Gold stocks will be pulled along for the ride if I am guessing right here (but I am guessing the miners don't have enough strength to lead the move).

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