That Time of Year

We're at that time on the calendar where in prior years we've seen weakness show up in the U.S. equity markets.  And so the reasoning goes that because everyone is looking for it, the pattern of a slowing economy and it translating to lower stock prices will be negated.

Tops take time to form as large institutions distribute stock while the market is still rising, then continue to unload shares as the market pauses and trades sideways for awhile.

The last chunk of shares that gets sold before the decline takes hold sometimes shows up on the charts as churn days.  This happens when we see higher volume trading with the indices showing little to no price progress.

The last 2 days have shown signs of churning in the S&P 500 when the market weakened in the last 2 hours of trading on both days.

Despite the fact that the S&P 500 sits just 1% off all-time highs, some signs of weakness are showing up in the charts.  In my opinion, this is an opportunity for a very low risk short entry on the broad U.S. indices, with a stop loss just above recent highs. 

At the minimum, after such a strong advance off the November lows, this is not a time to be complacent.

Here are a few annotated charts on different time frames that show what could be a head and shoulders topping pattern potentially forming.

This first chart was posted to Twitter and StockTwits back on Wednesday.

Click on charts to enlarge:

Here's an update of that previous chart:

3 Dips & A Shakeout - Update

Back on March 20 I blogged about about a repetitive pattern that I noticed off the recent November lows.  The U.S. equity market has traded in a very neat, tight, upward channel with barely a 3% correction along the way.

As the updated chart below shows, if that pattern is to repeat even on a small scale, the SPX would fall below that parallel channel for the first time since it took hold. 

Will we finally see the elusive 5-7% correction every pundit has been calling for?  Or is this the beginning of a deeper intermediate correction like we've seen the past few years around this time of year?

As always, honor your stops.

A Contrarian View

As U.S. equities continue to march into new all-time highs,  permabears like Gluskin Sheff's David Rosenberg throw in the towel, and the consensus view is that "there's no other place to put your money but into U.S. stocks".

Any time there's so much overwhelming consensus, my inclination is to grab my wallet and take 3 steps back as I look around me for the thief who is conspiring to rob me.

As much as everyone agrees that U.S. equities are the place to be, nearly every market guru and expert chartist on the web is telling us precious metals are headed much lower.  This after gold has traded in a 19+ month, sideways consolidation after hitting 1923.70 back in early September of 2011.

 I can't recall a time in recent years when the precious metals complex, particularly gold,  has been so reviled.  To mention gold for a long trade other than for a quick scalp is to be considered ridiculous, and just plain stupid.

And now we have some investment firms and brokerage outfits like Goldman Sachs, Societe Generale,  TD Securities, etc. coming out and downgrading the sector.  Thanks for the timely heads up guys!

Earlier this morning on Twitter I posted a weekly chart of gold showing a falling wedge pattern, and highlighting the action of commercial hedgers.   Recently they have been increasing positions while gold lingers near the low of the aforementioned 19 month trading range.

Pay attention to prior times when these hedging firms were accumulating at these levels,  most recently in the May through early August period of 2012, and then further back in the latter part of 2008.   Both instances marked the beginning of an upward move in gold.

From what I see, we're possibly closer to some type of a tradeable bottom than on the verge of a precipitous decline.  As always, use stops losses to prevent huge losses to your portfolio.

Click on chart to enlarge view: