Monday, July 17, 2006

Gold Produces Outside Down Day

The stock market started the week out by doing basically nothing with the Dow up 8 little points.  The broader market didn’t match up as the decliners out numbered the advancers on the NYSE.  The NDX, NASDAQ 100, did trade higher for some reason and we need to keep our eyes on that index for signs of a short term low in the stock market.  As of this evening we are not willing to get out of our position but we don’t want to get cutesy either.  We need to focus on the lower, much lower, lows that will be had in September or October.  Sometimes we like to try to time things a little too much but we don’t want to miss a good trading opportunity.  

The big move of the day came in the gold market as gold issued a major sell signal today with the outside down reversal day.  An outside down day is most important when it happens to end a move in one direction or the other.  We describe the nature of an outside day as one that trades higher than yesterday’s high and lower than yesterday’s low.  In this case, the outside down day, trading starts out very optimistically higher besting Friday’s high and then trades down the rest of the day to close below Friday’s low.  

Gold traded as high as $667 on Friday and in Sunday night trading went just over $675 and then collapsed to $640 in late afternoon trading on Monday.  As we write this, gold has recovered a bit to about $652 but the peak has probably been seen here for a while.  The pattern in the metal is not pretty as this latest peak is well off the nearly $725 high set right at the time the stock market was peaking in early May.  This failure to reach back to the peak is in lock step with the HUI and is very bearish near term.  

Tech talk:  For those of you who want to watch Fibonacci in action, this may be your best opportunity.  The $725 high set in May is followed by a strong drop into the June lows near $550, this is wave one.  Then, we see gold rallying to Monday’s (Sunday night’s) high of $675, wave two.  A good guess at the Wave three is a 1.618 multiple of the wave one move and measured from the Wave two high, like this:  Wave one is $175 from $725 down to $550.  Multiply $175 by 1.618 to get about $280 and this $280 is the drop expected in this next move from the wave two top of $675 or $395.  Doesn’t seem possible, does it?  Well, even if we are only talking about a move down equal to the wave one drop of $175, we are still looking at $500.  

Tuesday brings the Producer Price Index (PPI) and consensus is up 0.3% with “core” PPI up only 0.2%.  Normally, the PPI is not as big a market mover as the CPI but we are willing to watch this number on Tuesday.  The CPI will be out on Wednesday and expectations are for a 0.2% rise in both the base and the “core”.  We are really waiting for the housing starts number due out on Wednesday.

If you haven’t checked out the Elliott wave free week, you have one more day to get some valuable analysis for the price of signing up for it.  We recommend reading the July Financial Forecast and the Short Term Update (STU) on the subscriber’s page.  Tonight’s Short Term Update shares a tidbit that we found interesting:  “…the September S&P futures contract has closed down the week of July 14 to July 21 for the past 10 straight years…”  This comes from the Supertrader’s Almanac ( by Frank Taucher.  We don’t really follow these types of things but do find it interesting.  

Dow Industrials:  10,747.36  +8.01
RYVNX:   24.79
RYAIX:  25.68
TLT:  85.17
BEGBX:  13.26

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