Market Overview by Fernando Gonzalez


Overthe coming week, the legion of earnings announcements will hit themarket and will continue over the next few weeks. Being in theseasonally most volatile period of the year and hand in hand with somevery interesting technical developments recently, we look to thisperiod to bring in precious volatility and exciting price action. 

The big event over the last several days in the financial markets is afresh, multi-year breakout in Gold to new, All Time High. In our June 28thNewsletter as well as some recent discussions in the Evolution TradingStudio, we pointed out some Bullish price behavior and that the Goldmarket was beginning to ?heat-up.? It is gratifying to see the pricefollow through on our expectations, and the time has come to assess thebreakout.  Although to analyze the short-term action is tempting, weshall take a look at a far more important structure in the Monthlies,let?s begin:

The Monthly chart of GOLD (yellow) overlayed to the SPY (blue) goesback more than 1 decade. It is interesting note that Gold?s multi yearbreakouts over the last decade correspond with the Stock Market?s mostimportant turning points. While Gold?s correlation to Stock Market oversmaller time periods is inconsistent and nebulous at best, the largertime horizons beginning with our chart above illustrate a plausiblecorrelation within this cycle. The multi year high breakout points in Gold are labeled with the bright numbers, while the correspondingturning points in the Stock Market (as represented by the SPY here) aremarked with the transparent numbers.  The most recent breakout in Gold(4) signals an important turning point in Equities, whichinterestingly, sits right in the middle of this decade?s range.

Ourcurrent momentum target on Gold sits at approximately $1100, while ourlonger term target sits much higher, based upon range expansion(discussed later) at approximately $1500 between Spring 2010 to Spring2011. While these figures may seem large to some, let?s note that within the context of these time frames, they are not entirelyfar fetched. Gold, after all, is a currency that has been exchanged forthousands of years. A 1500, 2000 or 3000 figure in that market is notmuch different from a move on AAPL from 6 to 60, to 120 and beyond,much like a hill is structurally no different than a mountain. As muchas Gold?s multi year breakouts tend to coincide (and in fact LEAD)important turning points in Equities, the rising prices also signal some unparalleled inflationary scenario ahead?

Speaking of AAPL, let?s now take a close look at the technical price behaviors that surround the Equities beginning with the Dow:

Thechart above is a Weekly Chart of the DOW represented by the DIA, goingback approximately 2.5 years. Readers following this newsletter willrecognize this chart from the previous issue. The only difference nowis that we note a flat correction ahead of the move to the gap from Oct 08 (white lines). At the top of this gap sits exactly a 50%retracement to the all time high in the Dow. We believe this area is most likely to serve as a formidable resistance point. In the larger timeframe, it is simply a commonsensical warning of downside risks over theintermediate term time horizon, at the least, as this market now entersthe epicenter of the violent downward momentum experienced by theequities in 2008 (50% retracement point, in blue). I suppose betweenour Gold chart earlier and the DOW chart above, the technical plotshere are ?haunting? enough to fit for a nice Halloween frame at your local brokerage house, except that the picture does not pretend to bescary. To my eyes, they are, and I wonder about the future. Perhapsthere is a larger force that we do not see that will save the market from a continuation of 2008 ? I am ready to be proven wrong.

SHORT-TERM MOMENTUM NOTATIONS: Our prior two charts illustrate very large time frames, while our next two will address short term momentum.

Our15min chart of the S&P 500 above (via SPY) suggests someinteresting price action that is not very common. On Oct 6th last week, wehad opposing extreme breadth readings (via NYSE TICK) in a single day.It is very rare that the market will hit both sides of the TICKextremes on the same day and we did see that rarity last Tuesday.Although it was somewhat bizarre, we now have the luxury of seeing howthis resolved in hindsight: the market?s ability to resolve higher onconflicting readings in extremity of breadth shows that there is stillenough ?fuel? in the market to move higher, at least over the veryshort-term. This makes sense, based upon the path to the short termupside our next chart illustrates.

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