STOCK BULLS KNOCKED DOWN WITH A BIG BEAR PUNCH -- A VOLATILE BASING PERIODS COULD BE IN THE CARDS -- SETTING SPY VOLUME AND PRICE TARGETS FOR A SELLING CLIMAX -- IS GOLD POISED TO JOIN THE SAFE-HAVEN TRADE? -- GLD HITS SUPPORT FROM DECEMBER LOW
STOCK MARKET BULLS KNOCKED DOWN WITH A BIG BEAR PUNCH... Link for todays video. The decline in stocks accelerated this week with the major index ETFs and some key sector SPDRs breaking clear support levels. This could be the beginning of the end, or it could simply be the middle of a free fall. Stocks are in falling knife mode as the decline accelerates. Such accelerations often end with a selling climax or washout. Taking a cue from August 2011, chart 1 shows the S&P 500 ETF (SPY) breaking support with a sharp decline on August 4th. After breaching 120 and falling 10% from its July high, the ETF continued even lower with a decline below 112 the next two days (another 6.5%). Overall, SPY declined around 20% from its May high to its October low. Notice that volume surged as this selling climax took hold and it took the ETF another two months to recuperate. The selloff in late July and early August 2011 was triggered by events similar to what we are seeing now. Europe was engulfed in a sovereign debt crisis with fears of contagion to Spain and Italy. US economic statistics were hit with a rise in unemployment and decline in economic growth. The more things change, the more they stay the same.

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Chart 1
Chart 2 shows SPY during the flash-crash of May 2010. While high frequency trading certainly exasperated the decline on May 6th and 7th, the market quickly recovered and I do not think high frequency trading can be blamed for the decline into early July. Overall, SPY declined around 16% from the April high to the July low. Excluding the bounce after the flash-crash, there are two distinct down legs (May and late June). After a smaller selling climax in early July, SPY bottomed with a surge back above 100 and then formed a higher low in August.

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Chart 2
A VOLATILE BASING PERIODS COULD BE IN THE CARDS... Now lets look at these two declines together for some common traits. First, the market was hit by a hard bear punch with sharp declines in May 2010 and August 2011. Just like a prizefighter that has been knocked to the canvas, the bulls need time to stand and stabilize before the bigger uptrend has a chance to continue unabated. Chart 3 shows that it took around 3 months for SPY to base in 2010 and 2 months in 2011. In each case, a volatile trading range formed as SPY oscillated around 104 from June to August 2010 and around 114 from August to September 2011. Trading during these periods was treacherous to say the least. News and rumors whipsawed the market violently in August and September. We could see the same thing now in the lead up to the Greek elections and the next round of economic numbers. In the next few weeks, perhaps will see the European Central Bank (ECB) guaranteeing deposits in Greece, Spain and Italy to prevent bank runs and/or Germany giving in and sending money south.

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Chart 3
The first sign of a trend reversal occurred when SPY moved from a lower low to a higher high with one big surge. Notice how SPY hit a lower low in July 2010 and then a higher high in early August. Similarly, SPY broke its summer lows in early October 2011, but then surged above resistance with a powerful October rally. Those missing this rally were given a second chance with pullbacks that formed higher lows. SPY formed a higher low in late August 2010 and a higher low in late November 2011. Also note that these higher lows retraced ..... wait for it ..... 61.80% of the prior surge.
SETTING VOLUME AND PRICE TARGETS FOR A SELLING CLIMAX... It certainly looks like the stock market is in the middle of a bear punch, just like May 2010 and August 2011. How far might this bear punch extend and how much volume is needed for a selling climax? Chart 4 shows the entire bull run for SPY (March 2009 to now). Notice that there are three up legs and two corrections. Hmmm.... 3 + 2 = 5. Despite this wave structure, I am not taking the bait and regressing into Elliott wave. Sorry. I am more interested in potential support zones that could lead to a basing period. Notice that the prior two advances found support near the 61.80% retracement zones. A similar retracement would extend to the low 120s for SPY (closing basis).

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Chart 4
Volume increased this past week, but did not reach levels consistent with a selling climax. The blue line marks 300 million shares, which seems to mark a high threshold for SPY volume. The blue arrows shows when SPY volume exceeded 300 million shares and the 5-day Rate-of-Change exceeded 5%. Thus far, the 5-day Rate-of-Change remains above 5% and volume has yet to exceed 300 million shares. This means we may not have seen the selling climax just yet. Chart 5 shows daily bars for more detail.

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Chart 5
IS GOLD POISED TO JOIN THE SAFE-HAVEN TRADE?... Even though it is just two days, gold is starting to perk up and could be poised to join the safe-haven rally in the Dollar and treasuries. It is a relatively rare event, but spring 2010 was the last time all three moved higher. Chart 6 shows these three in the main window. The Dollar bottomed first in November 2009, Gold bottomed in early February 2010 and Treasuries shot higher from late March to August (black arrows). All three were moving higher in April 2010, just before the stock market peaked and embarked on a correction.

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Chart 6
Flash forward to 2011. The 20+ Year T-Bond ETF (TLT) bottomed in mid March and the US Dollar Fund (UUP) bottomed in the latter part of April. Both have been moving sharply higher the last few weeks. The Gold SPDR (GLD) is still moving lower, but got a bid on Thursday and early Friday. Strength in all three would signal a serious flight to safety and this would be bearish for stocks. Gold probably looks like a relative safe haven for Euro holders.
GLD HITS SUPPORT FROM DECEMBER LOW... Chart 7 shows the Gold SPDR (GLD) hitting a support zone in the 150 area with this weeks low. A weekly close near or above the 153 area would forge an intra-week reversal similar to a hammer. This occurred in December 2011 and led to a nice bounce in January-February 2012. In addition to the December low, support in the 150 area stems from the 61.80% retracement and a small consolidation in May-June 2011. Even though the trend since August remains down, GLD is showing signs of firmness at an interesting juncture. Chart 8 shows the Spot Gold ($GOLD) for reference. Chart 9 shows GLD with a morning doji star forming near the December low.

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Chart 7

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Chart 8
