Stock #Market Recap 08/22/11 {Video}

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There are many names being assigned to what is happening with gold bullion right now. There is an argument that gold is blowing off in a parabolic manner, not unlike the Nasdaq in 2000. There are also gold bugs bulls who insist that gold is merely short-term overbought, but still headed much, much higher.

A few thoughts from my vantage point:

1. No one knows for sure if gold is actually blowing off at the end of a multi-year bull run and making a MAJOR top.
2. If gold is going truly parabolic here, then it can go MUCH MUCH HIGHER before the bubble bursts, which means that there is significant risk to shorting gold here without a sound exit strategy to the trade.
3. A look at a zoomed out weekly chart below of GLD tells me that the angle of ascent has clearly changed and is now essentially up in a straight line.
4. Putting on a long swing trade here in gold is not a high probability idea, and offers a terrible risk/reward profile, with the risk of a quick and fierce reversal too high.
5. In light of these points, swing traders should probably take a hands off approach to gold for now. Again, if you choose to short it, have a clear stop-loss price in mind as a further move higher is a distinct possibility.

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Last Wednesday, I posted the following S&P 500 daily chart as a scenario that I thought would frustrate the majority of traders, as the market has a propensity to do.

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As we know, the market did indeed roll back over late last week, albeit staying above those 1101 lows from August 9th. Accordingly, the number of traders calling to sell every rally as we are now in a bear market has increased dramatically. The rollover on Thursday was swift, and even bears stalking shorts were likely forced to chase, unless they had anticipated it in the face of a huge risk of being squeezed much higher. Note also that longs who had aggressively bought two weeks ago were also frustrated by this scenario, given the violent declines late last week, with many stocks and quite a few sectors making new lows.

The main thing that equities need here is a few days of quiet action, including gold coming down and volatility abating. Unless this is a 1937-esque collapse, I expect the 1260 area to be challenged in the coming weeks, as it was essentially the site of breakdown.

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If the bulls are going to make a higher low (1123 on the S&P 500 held in well today) and put together a tradable rally, I expect to see more charts like the ones below. Note they were toying with breakouts from resistance trendlines on Friday, and then followed-through higher today. Merely a few charts will not suffice, though. You are looking for a proliferation of names to set up and break higher in this manner.

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At this point all of your other indicators and market “tells” may as well be out to lunch, for the only one that seems to matter is the inverse relationship between gold (fear trade) and equities. Note the relationship below on 3-minute charts.

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[youtube:http://www.youtube.com/watch?v=bzhQoLtJA80 550 412]

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It is tough to get involved with a tape that jumps around at random as much as this market has. Thus far today, we hit the highs right at the opening bell, and have been fading since. Gold is still ripping higher, and that has been a key part of the “fear trade” over the past few weeks. The bulls were really looking for gold to roll over here, and that just has not happened yet, despite how stretched it is to the upside.

That said, the silver miners that I discussed in a video over the weekend are breaking higher as a group in impressive manner. They have had time to form bases, and if these breakouts hold I will likely look to get involved with that group.