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S&P 500 Internals, U.S Dollar & Gold Price Analysis

September 30th, 2010 · Chris Vermeulen · 21 Comments

After a fierce equities rally last Friday, which I figured would happen, just not that strong; I have to wonder if there is some event or major decision in the works we don’t know about?

Friday’s rally could be something simpler like window dressing by the funds. This is when the funds buy up all the top performing stocks for month end reporting. They do this so that their investors think they are on the ball and know what they are doing. Window dressing will end Monday and from there we could see some profit taking (selling) start. But for all we know Obama could be extending the tax cuts for everyone or cutting payroll taxes etc…

It would only take one of these events to trigger a sharp up move in the market and that could be what Friday’s move was anticipating. That being said volume has remained light and during low volume session the market has a tendency to move higher. Sell offs in the market require strong volume to pull the market down, so until volume picks up there could still be higher prices just around the corner.

Let’s take a look at some charts…

SPY – SP500 60 Minute Intraday Chart

Last week we saw the market reverse to the down side with a strong end of say sell off. That set the tone for some follow through selling and for any bounces to be sold into. That being said, the market always has a way of surprising traders and it did just that on Friday gapping above Thursday’s reversal high causing shorts to cover and the typical end of week light volume drift to help hold prices up.

ESsept26 - S&P 500 Internals, U.S Dollar & Gold Price Analysis

NYSE Market Internals – 15 Minute Chart

I like to follow some market internals to help understand if investors are becoming fearful or greedy. It also helps me gauge if the market is over bought or oversold on any given day.

These three charts below show some interesting data.
Top Chart – This indicator shows me if the majority of shares traded are bought or sold. When the red line spikes up and trades above 5 then I know the majority of traders are buying over covering their shorts. I call this panic buying because traders are buying in fear that the market will continue higher and they will miss the train. When everyone is buying you know a pullback is most likely to occur.

Middle Chart – This is the NYSE advance/decline line. When this indicator is below -1500 then the market is over sold and bottom pickers/value buyers will step in and nibble at stocks. But when this indicator is trading over 1500 then you know the market is overbought and there should be some profit taking starting any time soon.

Bottom Chart – This is the put/call ratio and this tells us how many people are buying calls vs put options. When this indicator is below 0.80 level more traders are bullish and buying leverage. My theory is if they are buying leverage for higher prices, then they have already bought all their stocks and now want to add some leverage for more profits. When I see the majority of traders bullish then I an sure to tighten my stops (if long) as top my be forming.

Putting the charts together – When each of these charts are trading in the red zone know I must be cautious for any long positions because the market just may be starting to top. Or a short term correction may occur.

InternalsSept262 - S&P 500 Internals, U.S Dollar & Gold Price Analysis

UUP – US Dollar Daily Chart

The US dollar has been under some serious pressure with all the talk about quantitative easing (printing money). Obviously the more the Fed’s print the less value the dollar will have. The chart below shows a green gap window which I think once it is filled should put the dollar in a oversold condition for a short term swing trade bounce before heading back down. A bounce in the dollar will put pressure on equities, gold and oil.

UUPsept26 - S&P 500 Internals, U.S Dollar & Gold Price Analysis

GLD – Gold Daily Chart

Gold continues to grind its way up. This move is looking very long in the teeth and pullback will most likely be sharp.

GLDsept26 - S&P 500 Internals, U.S Dollar & Gold Price Analysis

Weekend Trading Conclusion:

In short, equities and gold continue to grind their way higher while the US dollar continues its grind lower. When I say the market is grinding I am implying the market is over extended and a reversal any day should occur.

Financial stocks like Goldman (GS) which typically leads the market has been strongly underperforming over the past week. Insiders were selling GS very strongly which is strange and makes me wonder what’s up there? With the financial stocks underperforming it sure looks like a market reversal is just around the corner.

If Friday’s rally was simply window dressing by the funds then it should end on Monday and with any luck we will see a sharp reversal to the down side early this week.

You can get my ETF and Commodity Trading Signals if you become a subscriber of my newsletter. These free reports will continue to come on a weekly basis; however, instead of covering 3-5 investments at a time, I’ll be covering only 1. Newsletter subscribers will be getting more analysis that’s actionable. I’ve also decided to add video analysis as it allows me toe get more into across to you quicker and is more educational, and I’ll be covering more of the market to include currencies, bonds and sectors. Before everyone’s emails were answered personally, but now my focus is on building a strong group of traders and they will receive direct personal responses regarding trade ideas and analysis going forward.

Let the volatility and volume return!

The above article was written by Chris Vermeulen.  To read more gold and oil related articles please visit:

21 responses so far ↓

  • 1 Greg Atkinson // Sep 30, 2010 at 6:10 pm

    I wonder how much higher gold will go before a serious pullback? Of course watching the gold price in USD is a bit misleading as the US dollar is falling rather than gold itself becoming more valuable. Still the gold bulls do seem to be out in force.

  • 2 Firebug // Sep 30, 2010 at 9:38 pm

    Hi Greg,

    Gold pulling back should be a matter of time. There is just too much pro gold talks out there…

    However, Gold may still go higher in years ahead though. I believe in Martin Armstrong’s view that gold is a hedge against bad governments and their policies which there are plenty about…

  • 3 Greg Atkinson // Oct 2, 2010 at 12:28 pm

    Hi Firebug, gold for me is in the speculative area at the moment. It could rise much further that is for sure, but I suspect that at some point the smart players will cash in when they feel it is reaching a peak and many small investors will get trampled when the price falls back.

    At the end of the day, large amounts of gold are simply going into vaults because humans seem to gain some comfort from that. It isn’t being “consumed”.

    I know the gold bugs like to talk about how people in the developing world will keep buying old, but the fact is that as people become more affluent they find other things to spend their money on besides gold like real estate, cars, iPods etc.

    If you look at the gold supply/demand statistics it is pretty clear that investment demand (i.e gold going into vaults) is pushing the price higher..but for how much longer?

  • 4 Firebug // Oct 3, 2010 at 1:35 pm

    We know investment demand of Gold comes and goes, so at some point Gold will pop. It is certainly a play worth playing for now though.

    What is your current view on Aussie interest rate? It appears to coming up again soon.

  • 5 Biker // Oct 4, 2010 at 1:49 pm

    I’m going to bet against the odds… and say rates will stay the same. Seventy percent of economists say they’ll rise, so I’m clearly with the minority here.

    Some factors:

    * Closeness to US parity must negatively affect both exports and tourism.

    * Housing values are down in nearly all states.

    * Construction is down in nearly all states.

    * Gold fever signals a lack of confidence.

    If Stevens & Co raise rates tomorrow, it will further reduce construction. Rents and home values will gradually rise; not simply because rates go up, but due to supply/demand factors.

    With our money in offsets, we’re relatively unaffected by rates, but won’t commit to any new home construction projects if rates rise. My guess is that most investors will take the same position…. .

  • 6 Firebug // Oct 4, 2010 at 9:01 pm

    Thanks Biker, let’s hope the RBA is sensible

  • 7 Ned S // Oct 4, 2010 at 11:07 pm

    I’ll be surprised if the RBA moves tomorrow. They aren’t as heartbroken by a little bit of inflation as they try to make out I’d say. And Biker is right about our housing being a bit challenged. Plus in a world where a cheap currency seems to be seen as a good thing, yes, they mightn’t be at all sad to see ours drop a bit either.

  • 8 Greg Atkinson // Oct 5, 2010 at 8:13 am

    Well I hope the RBA sits on its hands because I reckon rates are too high already. Yes our currency is strong against the U.S dollar, but it isn’t so strong against the nations we import from i.e China and Japan for example.

    Remember higher interest rates affect business owners as well, so it isn’t just home owners when rate rise.

  • 9 Biker // Oct 5, 2010 at 12:35 pm

    No change in rates. A win for common sense… . 🙂

  • 10 Ned S // Oct 5, 2010 at 9:42 pm

    “No change in rates. A win for common sense” – Only real way it could go unless the price of a bunch of staples was to go up a lot in the quarter. ‘Highish’ inflation just isn’t one of the RBA’s great worries at this time I reckon! 😉

  • 11 Biker // Oct 5, 2010 at 10:59 pm

    The current slow pace of the economy ruled against it, too.
    WA, said to be the boom state, hasn’t really experienced anything I’d term worthy of that descriptor; although full rentals may constitute a comforting form of prosperity.

    The RBA might find itself in difficulties if our perceptions of 2011 – 2012 prove true. To what extent should the other states suffer punitive interest rate hikes as a result of one or two states going balli$tic???!~

    Hardly seems fair, does it?

  • 12 Ned S // Oct 5, 2010 at 11:13 pm

    As we’ve realistically had to suggest to some others on more than one occasion, what’s ‘fair’ has only marginal relevance to making one’s way in life Biker.

  • 13 Greg Atkinson // Oct 6, 2010 at 9:03 am

    Well imports are down, exports are down and yet the RBA and Government still seem bullish on the economy, that’s interesting isn’t it? One thing we know for sure is that commodities prices move in cycles, we are now in a sweet spot…but how much longer will the good times roll on?

  • 14 Biker // Oct 6, 2010 at 10:58 am

    Well, there are signs that things are just starting to pick up in WA. Mine dew, our gas projects are well behind schedule, which may mean the real boom here commences 2012.

    Not sure what the aborted RIO/BHP merger means. Didn’t think it would proceed, though… .

  • 15 Greg Atkinson // Oct 6, 2010 at 11:58 am

    Oh maybe there will not be a boom? Gloomy forecast for LNG projects

    We must not forget supply and demand. Australia is not the only place where LNG projects are roaring ahead, there could be some pain ahead for the gas sector when all this new LNG becomes available.

  • 16 Biker // Oct 6, 2010 at 12:47 pm

    Well, it’s not _all_ Jumpin’ Jack Flash, Greg!~ 😀

    For a long time we thought only our northwest was resource-rich.
    In recent years we’ve discovered that the Darling Range, adjacent Perth, then right down to Esperance, is rich in almost every mineral imaginable.

    A major fall in gold price would mean chaos for the goldfields to the east of us, but while Asian demand stokes our economy, I can’t see much to derail us*.

    Perhaps conversion of all WA trucks, taxis and buses to LNG wouldn’t be such a bad thing… . One of the downsides of the anticipated export boom was a major jump in domestic LNG prices.
    Less reliance on overseas petroleum has to be a plus… .

    * Think I’ve warned previously that I’m an unashamed optimist! 😉

  • 17 Plornt // Oct 7, 2010 at 7:41 am

    Hey every1 😉

    What is everyones thoughts re: current levels? The path of least resistance seems to be up and there appears to be record short interest atm (NYSE Nasdaq). I’ve dropped my Net Long Investment exposure from 100% to 65% and tightened my VAR levels.
    Gold looks like its in blowoff mode, I am not holding anymore.
    My emotions are telling me to SELL SELL SELL, so I think its time to hold what I have left and passively observe.

    Walmart and WPL look like they should breakout over the next couple of months. MSFT looks good too. This is an observation of a possibility and is not advice.

    All posts by this poster is not financial advice or a reccomendation to do something. Can change my mind quickly on any decision I make, given markets always change. Have positions in instruments discussed unless otherwise indicated.
    Be sure to seek and take personal professional advice from someone familiar with your circumstances and needs.

  • 18 Vince L // Oct 8, 2010 at 8:40 am

    It’s a bit hard to make an accurate call with so many central banks weakening their currency in one way or another. Looks very messy out there.

  • 19 Greg Atkinson // Oct 11, 2010 at 12:04 pm

    I reckon the U.S dollar will struggle as long as Obama keeps spending and he can’t really stop spending until the economy picks up. Maybe the U.S is entering it’s own lost decade?

  • 20 Biker // Oct 11, 2010 at 12:35 pm

    Perhaps, but the DOW’s current strength must surely be buoyed by QE commitments?!~ 😀

  • 21 Plornt // Oct 12, 2010 at 12:50 pm

    QE committments will likely underwhelm imo, its priced in here.
    DX support is comming into play soon and may bounce, risk off may occur.
    AM fully hedged and am flat from today.
    Earnings expectations look too optimistic and bullish sentiment is extreme.
    May just go sideways here, not sure. If 2yr presidential cycle correlation plays out then theres alot of downside risk from these levels.

    All posts by this poster is not financial advice or a reccomendation to do something. Can change my mind quickly on any decision I make, given markets always change. Have positions in instruments discussed unless otherwise indicated.
    Be sure to seek and take personal professional advice from someone familiar with your circumstances and needs.

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