GLD and the $CRB

Gold is a hedge against inflation. Gold is a hard asset. In chemistry, gold has the symbol Au and is number 79 on the periodic table of the elements just under silver and copper. But what makes gold valuable is demand, and when prices are rising paper money is worth less and gold becomes worth more. Therefore, the price of gold is directly related to inflation (and demand).

GLD is an ETF that trades at approximately 1/10 the price of gold. It is easy to trade on the stock market and to use to watch the price of gold. Because gold is also a speculative commodity its price can jump more than is due to current situations.

The $CRB index is a commodity price index. It was first calculated by Commodity Research Bureau, Inc. in 1957. The index was originally comprised of 28 commodities which were traded on exchanges in the U.S. and Canada. It has had several revisions since then and is now I believe composed of 17 commodity prices. Since prices tend to go up together it reflects on inflation. For background and history see see here.

Compare the two charts below and you will notice some similarity. While gold has moved more to the downside comparatively that could be due to the speculative nature of gold. In any case it would appear that inflation, which hit a high last month, is on the decline. Both charts are 6 month daily charts with Simple Moving Averages. Click on charts to enlarge.

GLD

$CRB

Markekt Summary

The table below shows the performance for the following: Nasdaq, Dow Jones Industrial Average(1/10), CBOE Oil Index, Russell 2000 Index, S&P 500 Index, International iShares MSCI EAFE Index, and GLD(1/10 price of gold). Click on table to enlarge.
As can be seen the Year To Date(YTD) and 12 Month(12M) performance of oil and gold have done the best on this list. While gold has shown a recent decline over the last month oil has continued to do well. Keep your eyes on the ball and follow the leaders.

Raise your stop

Raising your stop is always fun. It means you have limited a potential loss to a smaller amount, moved to break even, or locked in a profit. In any case it is a good thing. Just to show the illustration from the prior post we have moved to the “Next Stop” by raising our initial stop to below the most recent low or to a break even point. If we had got in on the close of April 14, 2008 in the S&P500 where I made a post on “The Sweet Spot”, we would have taken a position at 1328.32. Our initial stop would have been below the low of March 28 which was 1312.98. We have now raised our stop to 1324. While we are not yet at break even we are close and have reduced our risk considerable. In fact, we could move to break even now at 1328.32 and have no risk of loss at all. Here is our new stop shown below.

Stop Loss Placement

Once we see a market reversal and we take a position we need to protect our investment from loss. I will be discussing stop loss placement in a series in the coming days to illustrate the different kinds of stop loss methods available. Keep in mind the trend is your friend until the end when it bends. Personally I need something that is easy to follow and a set of written rules to be my guide. I am developing software for this purpose which I will make available.

Coincidentally, I am in a group of friends that gets together about once a month to have a desert and discuss a movie that we decide to see individually and meet later to talk about. This next Saturday we will get together at one friends house to discuss the movie Stop Loss and have a desert called ‘Death by Chocolate.’ I will keep you posted.

The chart below shows a series of higher highs and higher lows, which is the definition of an uptrend. It is coming from an extended period of time in which we have had a downtrend. I believe the market bottomed the week of March 17, at least for the short term. This is the 20 day 4 hour chart. I have marked the preceeding two lows. When price goes above the most recent high to form a new high the stop placement will move from the prior low to the most recent low. This is one method of where to place a stop. Click on chart to enlarge.

THE SWEET SPOT

According to wikipedia: A sweet spot is a place, often numerical as opposed to physical, where a combination of factors suggest a particularly suitable solution. The term has its origin in sports where the sweet spot is the best place to grip a bat, rachet, or club.

I have made reference to a sweet spot in the market and want to show what it looks like. In time the markets will prove it whether it is sweet or no.

I have two charts today. The half day and the daily NDX 100 Index. The NDX 100 is the largest 100 companies in the Nasdaq stock exchange. The first chart, a 20 day 4 hour chart, clearly shows the fast band of moving averages have crossed above the slow band and we have a series of higher highs and higher lows - the classic definition of an uptrend. Click on chart to enlarge.
The second chart, a 3 month daily chart, shows a long downtrend that looks like it is coming to a close. At least it has made some kind of bottom formation and the fast band of moving averages has crossed above the slow band for the first time in 3 months. There is a lot of support here where all the moving averages converge. Will price hold here? Only time will tell but clearly this is where the sweet spot would be if this proves to be a reversal in the market from a downtrend to an uptrend.

S&P 500 – 1332

We have seen this number before. In the recent past it was a number that the market was coming up to but could not pass. It was resistance. Then on March 19 we broke through for the first time, then again on March 24. The last time was April 1 with a decided move up and now we have come back to this level again. My feeling is that this time it is support. That means we should see a bottom here and next week we take off to the upside. However, there is always some uncertainty about the future .

I am posting 3 charts here: a half day chart, a daily chart, and a weekly chart. I am leaving the trend lines on that were previously drawn.

Here we see the short term 20 days 4 hr chart still showing us a series of higher highs and higher lows – the classic definition of an uptrend.
A little longer perspective with a 3 months daily chart shows a resistance area between 1380 and 1395 with 3 failures to break up into this area. Also we see a large red candle on the right which seems to have broken the trend line to the downside.
Finally our 9 months Weekly chart shows how we came up to the downtrend line and reversed but are still within the recent uptrend line and have pulled back to approximately a 62% retracement of last week.
We remain within the confines of a triangular tug of war between the bulls and the bears. If we break below 1310 we are likely headed lower and if we break above 1380 we are likely going higher. What the future holds we will just have to wait and see.

Weekly Recap

Elliott wave analysis looks at the market as moving in a series back and forth motions called waves which can be numbered. The general pattern is a series of 5 waves which can be counted as 3 steps in one direction and 2 steps back. At the end of the 5th wave two possibilities are present: an ABC correction or a new wave count. An ABC correction is a pause, or consolidation, after which a new wave count in the same direction as the prior movement resumes. However, when a new wave count occurs after the 5th wave without the ABC correction then this can be in the opposite direction to the prior movement. I noted the beginning of the 5th wave in a prior post here.

The markets are at a resistance line that can be drawn from the beginning of the wave count to the downside connecting the top of the 2nd wave. This line can be projected down to the present. This is an area of resistance and also a decision point. It will take a breakout above this line on the weekly charts to develope the momentum for a new trend to the upside. Below are weekly charts of the Dow, Nasdaq, S&P500, Russell200, EFA (which reflects international markets), and GLD. Click on the chart to enlarge.

Dow

Dow chart above with Elliott waves drawn in black

Nasdaq

S&P500

Russell2000

EFA

GLD

I also am including these markets performance in table form along with the oil index.

Another look at the indices

The markets are at a turning point on the weekly trend as I suggested yesterday. Most of the indices have similar looking patterns and often move together. The recent rally in the market starting from the low back in the week of March 17 has come to the downtrend line on the weekly chart. This is a decision point in the market.

I want to show in the series of charts below how a 20 day 4 hour chart, essentially a half a day, compares with a 1 month Daily chart. The signals come sooner than they do on the daily chart using the same moving averages. For a recap of using bands of moving averages see here. I will be displaying the following charts: the Dow, the Nasdaq, the S&P500, the Russell2000, and GLD for the gold bugs. Click on the chart to enlarge.
The Dow


The Nasdaq


The S&P500


The Russell2000


The GLD

Market Review

March ended the month with the S&P500 closing at 1322.70 slightly below the 1330 mark which has been a pivot point area. On the 20 day 4 hour chart the fast band had crossed above the slow band back on March 24 and later price had come back to rest on the slow band to close the month on March 31st. A breakout above this area is what I would call a sweet spot in the market, which I have marked here and which occurred on April 1. It is worth noting that on the Point and Figure chart the pattern is a Ascending Triple Top Breakout also occurring on April 1. Click on chart to enlarge.

A longer perspective shows a 6 month daily chart with price above the slow band and the fast band beginning to cross over.

Finally, a longer 9 month weekly perspective with some trend lines drawn shows that we are at a crossroads. The recent uptrend is not firmly established as of yet compared with the more established downtrend. It will take conviction to break through this down sloping trendline. We will just have to wait and see.