GOLD SLIPS BELOW $500 -- NASDAQ IS LOSING LEADERSHIP -- MORE NYSE LOWS THAN HIGHS
HEADED TOWARD LOWER BAND... The price of gold fell $7.85 today to close below $500 for the first time in a month. Chart 1 shows the recent chart action for the Gold Trust Shares (GLD). It closed at $49 today which is the equivalent of $490 for bullion. The chart includes three possible downside targets for the GLD. The first is $485 which represents a 62% retracement of the November/December advance . The second is the 50-day moving average which sits at $482. The third is the lower Bollinger band which sits at $483. That puts a range of support for GLD in the $482-485 region. Since I've made a point of comparing gold to Japan lately, it seems only fair to point out that Japanese stocks have done much better than gold this week. Chart 2 shows Japan iShares (EWJ) closing at a new recovery high today.
Chart 1
Chart 2
NASDAQ LOSING LEADERSHIP ... One of the more disturbing aspects of the latest market selling is that it's being led lower by the Nasdaq market. That's never a good thing. That's because Nasdaq leadership is necessary for any market rally to continue. The Nasdaq/S&P 500 ratio line is plotted along the top of the Nasdaq Composite in Chart 2. The ratio peaked in early August along with the rest of the market. In that case, Nasdaq weakness hurt the market. The ratio turned back up in mid-October which coincided with the latest market bottom. From mid-October to early December, Nasdaq leadership helped pace a fourth quarter rally. The Nasdaq/S&P ratio has now fallen to the lowest level in nearly two months. That will hurt the market if it continues. The daily bars show the Nasdaq testing its early August peak (2220). If that doesn't hold, the Nasdaq could slide back to its 50-day average. The downturn in the ADX line correctly signaled the start of the recent pullback (see black arrow). Unfortunately, the red (-DI) line has crossed over the green (+DI) line for the first time since October which is a negative sign. What the Nasdaq does from here will have a strong bearing on what the rest of the market does. And, as I suggested last Friday, the pullback in the rest of the market was already on weak technical footing.
Chart 3
MORE NEW LOWS THAN HIGHS... Last Friday I wrote about the negative divergence between the S&P 500 and two popular measures of market breadth. One was the NYSE advance-decline line which had failed to confirm the market's recent move to new highs for the first time in more than three years. The second (and more serious) divergence was seen in the NYSE New High-New Low line ($NYHL). It's gotten even worse. The top line in Chart 3 is the NYHL line which has fallen beneath the zero line. That means there are more NYSE stocks hitting 52-week lows than highs. That's highly unusual in a market that has just hit a new multi-year high. If you compare the NYHL to the S&P 500 over the last year, you'll see that the former often dips below the zero line during market corrections -- as it did in the spring of this year and again in October. During the summer runup in the S&P, the difference between the number of stocks hitting new highs and lows neared 500. During this last runup, the number didn't reach 200. That's a sign of a weakening market. To make matters worse, the NYHL line has turned negative. It's hard to call this a healthy bull market when there are more stocks falling than rising. The market may have one last shot at a rally during the week between Christmas and New Years (the Santa Claus rally). After that, seasonal trends start to turn negative. Since the yearend rally started a little earlier than usual, it may also end earlier. I wouldn't wait for Santa Claus to start trimming some stock holdings.
Chart 4
