Bernanke scared the gold market

Ben Bernanke:

"The unemployment rate [...] has moved down appreciably since September, reaching 8.3 percent in January."

"The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected"

"Looking beyond this year, FOMC participants expect the unemployment rate to continue to edge down only slowly toward levels consistent with the Committee's statutory mandate. In light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however, it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery."


Gold futures (sensitive to monetary policy expectations):

Gold futures April 2012 daily chart

Ok, so Ben Bernanke has been praising the labor market a little and gold traders have taken him seriously.

This might mean less monetary stimulus than expected in the future -I would say it is bearish over the short term for the stock market, but bullish over the longer term.

A correction is close

The SPX has already reached its 2011 high and the weekly leg up that started in November is already about 21% long.

Also, the market is close to overbought on the short term, judging by the 3 day moving average of TRIN.

Thus, I think the market will correct after a surge above 1380. This will not be an intermediate term top but rather a pause before a move above 1400. The ES 1330 -1340 area should contain this correction.

Will I short? Yes, small size, only if the market surges above 1380 or higher. The long uptrend up to here will probably not be stopped by a dull market.

Ugly number, good news

The chart below shows the average monthly pace of change in real capital goods new orders. The latest report has just been released and the number is ugly.

However, given what happened during past expansions, we are very close to an inflection point followed by an acceleration of this indicator. Thus, good news most probably lie ahead, a fact that is certainly not bearish for the stock market.

A negative development would only be a drop to about -2.5, which has been associated with recessions. For now, the economy is still expanding.

Out at 1363.5

The market has shown weakness in the last 30 minutes before lunch, this is the third day of upside in a row and  the SPX is very close to its 2011 highs.

Long at 1360.25

This is a short term trade for a move to/above 1370.

The Economy Still Has Room to Accelerate

Recent data suggests the economy is in a point from where activity may accelerate further. This, associated with the fact that there is no sign of a bigger top in the markets, makes any bigger correction a good opportunity to buy (I guess, given the recent run up, that we might see a 40-50 points fall soon).

Here are some economic indicators.

While the growth in Employment has stabilized at a quite normal level

and the deflation scenario is more and more improbable,

(the sticky CPI is a version of the core CPI published by the Atlanta Fed)

the pace of change in Real Durable Goods Orders has turned up from a low level

along with the CPI pace of change

and the ISM New Orders vs Inventories ratio,

all suggesting intensifying activity in the future.

Meanwhile, the pace of change in Real Retail Sales has fallen a bit,

but it can turn upwards from these levels given the overall context. Looking at its behavior during  past periods of expansion, there is nothing to worry about regarding this indicator at the moment.

Looking to buy at 1353

That represents a ~ 8 points pull-back on the 3 hour ES chart into daily support. Since there is no sign of an intermediary term top and the market is acting strong after a 23 points daily correction, I am looking for a move to 1370.

Daily Globex ES chart

Out at 1345

The break-out has clearly failed.  Given yesterday's action, the market will probably oscillate today and even reach above yesterday's close, but the drop on a not too weak retail sales report sends a message of caution.

Long at 1349.5

I am entering before the retail sales report because I expect a strong number.

ACH on Feb14: Correction over?

3 hour ES chart

The market has already corrected almost 20 points on the daily chart and the short term (chart above) looks bullish with a cup & handle forming (blue) and a break out of a triangle(red). So here are my hypotheses:

H1 - the correction is over and the market has started rising again;
H2 - a bigger correction has just started and a top is forming around these levels.


Evidence:


E1 - the 5 d ema of the put/call ratio is suggesting the market is/was oversold;
E2- the NYHL (52 Week New Highs - Lows) has already retraced to levels that market higher lows in past uptrends;
E3 - the short term market action is bullish with a break out of a triangle taking place;
E4 - the market has risen a lot on the weekly chart and it could at least consolidate for a longer time.


Matrix:

	E1	E2	E3	E4	Total negations
H1	+	+	+	-0.5	-0.5
H2	-0.5	-0.5	-1	+	-2

Conclusion:


H1 wins. It is important to note that mainly the shorter term action is tilting the balance towards this hypothesis. Thus, a trade on the long side will not be justified if the short term weakens (for example, the break-out attempt fails).

Chinese PMI - Make or Brake

The Chinese PMI has turned upwards recently but another slowdown from these levels cannot be excluded. Thus, the February report (released at the end of the month) will be decisive.My guess is that the index will break upwards into faster expansion territory.

Sold at 1341.5

I missed the best exit as I was expecting a move above 1350 so I had to sell on weakness. I do not like this kind of execution but sometimes it is better than waiting too much.

I sold the rest of my long I had accumulated since the beginning of January. I last updated on this trade here

ACH on Feb08: Take the money and run?

Weekly chart of the March ES contract

The March ES contract is up against the 2011 highs, the weekly IT upleg is up ~ 18% and the rise on the daily chart since the last correction is already greater than 50 points. What to do? Take profits here and wait for a correction of at least 20 points to reenter, or just hold longs because the market will only consolidate in a range of about 10 points?


Hypotheses:


H1 - The market will correct at least 20 points from somewhere around these levels;
H2 - The market will consolidate in a ~10 point range before moving higher.



Evidence:


E1 - NYHL (52 week NYSE New Highs - Lows) has spiked to +400 a few days ago and has been weak since then - a typical behavior before daily pullbacks;
E2 - The weekly bull leg is already 18% long and against strong resistance, similar to November 2010;
E3 - The market action resembles acceleration on the daily chart before a bigger correction, similar to Jan 14-20, 2011 or May 1-7, 2009;
E4 - The Fed has just become more accomodative and the latest employment report is consistent with economic strength so the market may just surge higher.



Matrix:

	E1	E2	E3	E4	Total negations
H1	+	+	+	-0.5	-0.5
H2	-0.5	-0.5	-0.5	+	-1.5

Conclusion:


H1 wins. I will go with the scenario of a correction of at least 20 points from here. I will add to this analysis as more evidence will become available during the next days. Until then, I am waiting for an opportunity to take profits on the remainder of my long position.

ACH on Feb06: Up from 1330?

The market has dropped 12 points near the ES 1330 daily support after strength into the end of last week and a good NFP report. Will this drop get longer, say 20 points, or will the market start rising back to 1340?


Hypotheses:


H1 - The market continues its drop, clearly breaking below 1330;
H2 - The 1330 ES daily support holds and the market starts rising again, reaching 1340.



Evidence: 


E1 - Short term TRIN stayed more than 1 day below 1.0 recently, before corrections on the daily chart (see chart below);
E2 - The first pull-back into daily support will be bought by those that liked the strong NFP number;
E3 - The market action may, by and large, resemble what happened after the Jan03, 2011 or Mar23, 2009 moves;
E4 - Uncertainty about the situation in Greece resurfaced;
E5 - Strong up moves are usually followed by smaller rallies during the next days.





Matrix:

	E1	E2	E3	E4	E5	Total negations
H1	-0.5	-0.5	-0.5	+	-1	-2.5
H2	+	+	+	-0.5	+	-0.5

Conclusion:

H2 is the winner. The market has good chances of reaching 1340 before decisively falling below 1330, although a dip to 1327 cannot be ruled out. Thus, we should see strength today, a close near the 1330 level greatly increasing the odds of a bigger correction.

Chart:

Sold at 1337.5

Sold the add I got at 1309 and part of my previous long position. The ES has strong weekly resistance above 1340 and I expect some correction to start even today. Many times, when the NFP report is too good and the gap up is too large, the market falls for the rest of the day.