Technical Picture - $USDX Strength Weighs on Precious Metals and Commodities

Markets gapped up on strength overseas, but sellers quickly took control and the opening gap was faded. Not satisfied to simply fill the gap, the bears persisted, and helped along by a stronger $USD, sent prices all the way down to yesterday's gap support for tech and almost a full PD gap fill for the S&P. Small caps were hit even harder still. The only bright spot was the DOW, which managed to end the day on the plus side. Prices started to stabilize and bounce midday, and got a further boost from the FOMC minutes. However, late day price action became much more volatile and after hours, the bears are hard at work.

On the SPX chart above we note that open interest CPC is still too bullish and needs to correct. Today's stick not likely a hammer, more likely a hanging man, but that needs to be confirmed.

Note that the VIX, which has gone virtually ignored for months, is forming a bottoming pattern which looks like a mini inverse H&S.

Yesterday, the dollar held support and today it bounced, holding most of its gains into the close.

Dollar strength meant pressure on commodities and precious metals. Crude carved out a bearish evening star reversal pattern over the last three sessions.

Distribution in gold and silver. Look for more downside if the $USD strengthens. On the SLV chart we see multiple waves of RSI divergence to higher prices. This time I think we will see a deeper correction.

I still have a core swing short position in SLW which I was very tempted to cover at $36.00, but I believe it's going lower, so I'm holding on.

Coal technicals are still strong, but we have a bearish island reversal waiting to happen. Watch the futures in pre-market.

Semis are holding up well, but a correction would be healthy here given the steepness of the trendline.
MOO has already corrected, so I'm expecting a retest of the base. World food shortages are still problematic, and I expect Ags to be one of the leading sectors in 2011.

Commodity Rotation Cycle - In a commodity bull market, precious metals are the first to rally, followed by other metals, agriculture is third and oil is usually the last rally in the cycle. That said, it stands to reason, that precious metals will be the first to correct. Just a thought from a non-expert.

Breakout Comparison - ARO vs CRM

To help determine the probability of BO follow through, focus on these two key areas: 1) daily chart setup, and 2) intra-day price action around the opening range or BO.

Here are key comparisons between ARO and CRM on 6/3/2010:
From the daily charts below, both had notable daily patterns with BOs on 6/3. ARO had pulled back to form a symmetric triangle, but it was below key price pivots and below its declining 50 day MA. The CRM setup was much better technically. CRM formed a B&B above its upsloping 50 day MA. In general, a flat-top B&B in a strong uptrend is more powerful than a symmetric triangle below recent price highs. From a daily comparison, CRM carries the higher probability of follow through.


On the 15min charts below, I marked several features: 1) range/volatility of the 15min OR bars, 2) proximity of the first pullback to the 15min 5EMA, and 3) proximity of the BO level to the 5EMA. While both gapped up on the open and both had upper wicks on the OR bar, ARO was much more volatile and moved "too far too fast". CRM moved up and had an orderly pullback to the 5EMA while ARO remainded well above the 5EMA. The BO level in ARO was well extended and above "loose" price action. The BO level in CRM was much closer to the 5EMA and associated with "tight" price action. From an intraday perspective, CRM gets the nod. The result was that CRM trended up all day while ARO spent the remainder of the day consolidating the volatile OR action.

VIX "h" Pattern Update - Daily & Weekly

Even though the broad market had a narrow range consolidation day, the VIX volatility index declined today. Generally speaking, a decline in the VIX has bullish implications for the stock market. Below is an updated daily chart of the VIX showing the h-pattern that I mentioned previously and a horizontal support line at the base of the "h". Notice the VIX closed just below that horizontal support line today.

Markets are fractal in nature which means that similar patterns occur on multiple timeframes and often simultaneously on multiple timeframes. Here is a weekly chart of the VIX showing another (higher timeframe) h-pattern and the horizontal support line. Notice the horizontal support line on the weekly is being violated.

Tough Week - Chop and GOLD

Summary of last week's action: Following the gap-down trend-day down on Monday, Tuesday was an offsetting trend-day up with strong volume in the financials. After that bang-bang volatility, the market went into chop mode for the rest of the week. The 30min S&P chart below highlights the choppiness Wed-Fri. A close in the vicinity of the open usually has chop in between.


I had several scratches and stop outs that alerted me to the chop mode. I had decent long trade in GOLD on Friday. It hit my gap + volume scanner and was very strong relative strength-wise compared to most other gold stocks. Gold (in general) was moving up due to weakness in the US dollar. I will elaborate more in a Technical Picture post.