A triple alert for stocks

As the selloff in gold has resumed, investors need to be on alert for signs of a pullback in equities as well.

By MoneyShow.com Apr 15, 2013 12:02PM

Stock index Image Source Getty ImagesBy Tom Aspray, MoneyShow.com

U.S. stocks had another good week last week, but early Monday there has been some selling overseas as weaker than expected data on China's growth pushed the Hang Seng and Nikkei 225 almost 1.5% lower. European markets were also lower with most of the major averages down around 0.60% in early trading.

The volatility last week, however, was concentrated in gold and crude oil, with gold having its largest one-day decline in many years. As the gold futures and the Spyder Gold Trust (GLD) cracked important support, it triggered a series of stops that exacerbated the decline. The stock market bulls are hoping that those who sold their gold will buy stocks.

The decline in crude oil was also pretty dramatic as it dropped almost $3 per barrel on the heaviest volume since January. This should be a positive for consumers as the decline in gas prices is likely to continue. However, lower demand for crude oil is normally not a positive for the economy, and this is consistent with my Week Ahead view that stocks may have gotten ahead of the economy.

Bonds are the third market that may have turned last week as the yields on both the 10-year T-notes and 30-year bonds have turned lower. Yields have been rising since last summer, and if they have now turned lower, it may be a sign that the bond pros are skeptical that stocks can move much higher.

The technical outlook for the S&P 500 ($INX) and the Dow Jones Industrial Average ($INDU) is still positive, but there are two key market sectors that I focused on in Buy, Sell or Hold that will need to be watched closely this week. Take a look at these charts to see the alerts that have me concerned.

Chart Analysis: The weekly chart of the Spyder Gold Trust (GLD) shows the decisive break of support, line b, in the $148 area.

Click to Enlarge

  • The quarterly S2 support at $143.08 is not far below Friday's close.
  • The next important level of support is in the $140 area, which is the major 38.2% Fibonacci support from the 2008 lows.
  • Four weeks ago, the on-balance volume (OBV) closed above its WMA and tested its downtrend, line d.
  • Gold was just a bit lower the next week and the OBV also reversed.
  • The selling last week was heavy as the OBV broke its support that goes back late 2011.
  • In order for the OBV to turn positive, it now needs to move above its previous peak, which is unlikely to happen very soon.
  • Last week's bounce failed just below the monthly pivot at $154.10.

The daily chart of the crude oil contract for June 2013 shows that the daily uptrend, line f, was briefly broken on Friday.

  • There is next support in the $90 area with more important at $87-$88.
  • The quarterly S2 pivot level is at $86.39.
  • The volume was heavy Friday as the uptrend in the OBV, line g, is now being tested.
  • The weekly OBV (not shown) has been acting stronger than prices and is still above the 2011 and 2012 highs.
  • There is first resistance at $92 with much stronger in the $95 area.

Click to Enlarge

The yield on the 30-year T-bond had been rising since the July low of 2.46% and hit a high of 3.84% in early March.

  • The uptrend, line b, was broken on April 4 as yields dropped to a low of 2.842% the following day.
  • The daily chart of the MACD-His has been forming lower highs since December, line c.
  • It has been below the zero line since the middle of March.
  • Of course, to use the MACD-His correctly, one must look also at a long-term time frame.
  • The weekly MACD-His (not shown) formed a negative divergence in early February and dropped below the zero line two weeks ago.

The daily chart of the Spyder Trust (SPY) continues to look positive with the new highs last week.

  • There is monthly pivot resistance now at $161 with the weekly starc+ band at $162.35.
  • The upper boundary of the trading channel, line d, is at $163.20.
  • The 20-day EMA is at $156.37 with the trend line support, line e, at $154.58.
  • The majority of stops are likely under $153.77 and the rising 200-day MA is $144.72.
  • The NYSE Advance/Decline line made new highs last week with first support at its WMA and the uptrend, line f.
  • There is longer-term support for the A/D line at line g.
  • The McClellan oscillator, a short-term A/D indicator, has broken its pattern of lower highs, line h, which is a positive sign.

What it Means: The heavy liquidation in both gold and crude oil may be the result of a hedge fund blowing up, and if so the news will leak out soon. Still, anytime I see extreme moves in two of the key markets, I tend to watch all of the markets more closely. As I have noted before, crude oil often leads the stock market.

The turn in yields for both the 30-year bond and the 10-year T-note is more likely a reflection of a change in sentiment and some may remember that bond traders moved out of stock and into bonds in the spring of 2012.

How to Profit: No new recommendation.

Apr 15, 2013 1:57PM
Ho hum, it's the middle of the month and a few short-sighted souls forgot the recent past and apparently have no ability to see past tomorrow.  These people remind me of welfare recipients who blow through their gubmint checks and live large the first half of the month, and then suffer through on Ramen and bummed smokes for the last couple of weeks, until their next check comes in the mail.

Relax, Bernanke will come through with another $85 billion on May 1, and we'll all be living ghetto rich again, at least for a couple of more weeks.

Apr 15, 2013 1:11PM
I'm sure Barry and Crazy Joe have a plan!
Apr 15, 2013 12:35PM
Hate to say told you so, but.... There is nothing but bad news waiting out there.
Apr 15, 2013 1:21PM
Everyone knows that if interest normalize, companies with bad business models will fail far quicker while those with good business models will do far better. Focus on Gold is pointless until the Uncle Ben Gravy train falters.
Apr 15, 2013 1:49PM
While the 'greeks' and 'italians' and ' cyppriots'  in the WH keep spending.
Apr 15, 2013 1:52PM
Gee, what surprise!  European economy in the dumper, China slowing down, the US with high unemployment, declining wages, etc. . And this is a surprise?  This has been coming for a long time.  These corporations can only play so many accounting games and layoff so many employees before it really comes down to sales and profit, which a lot of them are not doing well at. 
Apr 15, 2013 1:50PM
hmmm.... The real worry is copper.  Copper's price has steadfastly predicted every  recession/depression this country has ever had.  Copper has never been wrong.  right now it is signalling a deep depression.   Copper is still heavily used in industry.  I sure hope this is the first time in history it is wrong...  

But I would not go out and do any hiring if I were you...
Apr 15, 2013 1:24PM
Sell your gold, silver, platinum and any other commodity you have and put the cash in your bank. If your really lucky you might get almost 1/2 of 1%. Of course while inflation moves along at a rate  far exceeding your rate of  return remember to compliment yourself on your smart decision!
Apr 15, 2013 1:59PM
*pop* short, short, short, short.  The goldbugs were right, gold is making me a ton of money! haha
Apr 15, 2013 1:59PM
Many of the top pro's, have predicted a major sell off in the market for the past 4 months; just last week some top market advisors sent out a alert to their customers, that a major correction has just started, the dollar is heading into a inflation tail wind; the Fed has pumped so much into the markets, there must be a correction.
Apr 15, 2013 2:38PM
So in typical Wall Street fashion, Stocks must drop because Commodities have dropped! Seems like we have to spread the loss to one and all! I guess Wall Street doesn't want to be accused of showing partiality.  And what is a bigger laugh is that China is bringing this all on! Typical Wall Street Bullcrap!!!!!!!!!!!!!!!!!!!!!!
Apr 15, 2013 1:59PM
Wouldn't lower energy costs benefit producers and consumers with more free cash to spend on hiring and purchasing? That would be a generating cycle for profits in the near future, loosening up the tight purse strings that have been holding back spending. What am I missing?
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