STOCK MARKET SELLOFF DEEPENS -- GOLD DROP HURTS GOLD STOCKS -- DROP IN DOLLAR AND BOND YIELDS SUGGESTS PESSIMISM
GOLD BACKS OFF FROM FEBRUARY HIGH... On Thursday morning, gold broke briefly through its February high at $390 to hit the highest level in seven years. Unfortunately, it couldn't hold the gain. By day's end, gold had gone from a $5.00 advance to a $2.00 loss. That type of action usually marks a short-term top. Gold lost another $4.00 today. That also makes for a downside weekly reversal. The fact that it took place at an obvious resistance level is also a negative factor. Although the long-term gold chart still looks bullish, this week's action probably market a short-term top. That explains Friday's 4% loss in gold stocks. Chart 2 shows the XAU Index falling to the lowest level in almost a month on Friday. Given the size of the recent advance, a setback isn't too surprising. The horizontal lines on the XAU chart are Fibonacci retracement levels, which often act as support levels. A fall back to the late August low at 85, for example, would represent a 50% retracement of the advance that started in mid-July. I wouldn't be suprised to the XAU test that level. My longer-term outlook on gold stocks, however, remains bullish.
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S&P 500 BREAKS SUPPORT LEVELS... The market benchmark broke support at its mid-September low and closed beneath its 50-day moving average. The S&P 500 also fell back below psychological support at 1000. The next possible support level is at the late-August low at 985. However, we have to consider the possibility that the S&P is headed all the way back to retest its summer lows near 960. That would be a 7% correction from its September high at 1040. It would also retrace a third of the advance from the March low, which can be more easily seen in the weekly bars in Chart 4. That's still within the confines of the cyclical uptrend that started last October and again in March. The green horizontal line in Chart 4 is drawn along the summer lows near 960. A glance to the left shows that the 960 level is not too far away from the highs formed last August and November at 965 and 954 respectively. That also defines a potential support zone beneath the market. The weekly RSI and stochastic lines are turning down from overbought territory. The market can shrug off negative readings on daily charts. It's harder to ignore negative signals on weekly charts.
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DOLLAR FALL AND BOND RISE HINT AT WEAKNESS... We recently showed a strong correlation between the trend of the dollar and the yield on the 10-year T-note yield. The jump in yields and the rally in the dollar started together during June. Rising interest suggest economic strength and boost the dollar. Since the start of September, however, bond yields and the dollar have been falling. That suggests second thoughts about the strength of the economy. The plunge in the dollar has been talked about all week. The drop in bond yields shows that money flowed back into bonds this week. When bonds do better than stocks, that's usually a sign that investors are becoming more defensive.
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