Bullish vs Bearish Indicators – Who Has the Upper Hand?

Recent articles highlighted various individual indicators. Some were bullish, but the majority was bearish. This article reviews previously discussed signals and boils them down to one outlook.

In recent weeks we’ve examined various indicators, studies, gauges and seasonality. Some bullish, some bearish. But what is the balance? Does the weight of evidence suggest higher or lower prices?

Listed below is a summary of articles designed to help form an educated and balanced opinion. Articles are categorized as bullish or bearish based on their implications. >> click here to view all the links to prior articles.

Bearish:

April 23: Dow 16,000! Headline Indicator Sways Into Bearish Territory
Barron’s Big Money Poll delivered the most notable sentiment extreme in 2013. Professional investors’ record bullish outlook is bearish for stocks.

April 17: Did ‘Sell in May and Go Away’ Arrive Early?
Based on consistent seasonality, the March 31, Profit Radar Report suspected a mid-April and May double top. The mid-April high is in and the ‘double top’ appears to be in the making.

April 16: From Gold Glitter to Jitter: An Explanation for Gold’s Historic Decline
Falling precious metals prices often foreshadow weakness for stocks.

April 10: Bearish Buying Climaxes are Adding Up for Stocks and Even the S&P 500
Buying climaxes are a sign of distribution, which is bearish for stocks. Discussed in detail was a buying climax in particular for the S&P 500. The most likely outcome was a delayed (1-2 weeks) decline, which is what occurred.

April 4: Yield Spread Between Junk Bonds and Treasury Bonds Hits Alarming Level
The ‘risk on’ trade has reached a level that’s caused trouble in the past.

April 1: AAPL, GOOG, AMZN and MSFT – Tech Sector Giants Turn Laggards
The lagging behavior and lack of leadership by ‘Big Tech’ suggested that the rally is starting to run out of steam.

Bullish/Neutral:

April 17, Profit Radar Report: “There are open chart gaps at 2,850 for the Nasdaq-100 (and 1,588 for the S&P 500). In recent years all chart gaps have acted as magnet and the Nasdaq-100 (and S&P 500) should come back to close those gaps. We’ll close our short positions at 2,740 – 2700 (and around S&P 1,540).”

April 19: Weekly ETF SPY: Russell 2000 ETF – IWM
The Russell 2000 and S&P 500 bounced off major support. That’s bullish … as long as support holds.

April 17: Despite Extreme VIX Movements, Option Traders are ‘Lukewarm’
Option trader sentiment has established a solid track record as contrarian indicator. Contrary to the deeply complacent readings of the VIX, other option-based indicators (like the SKEW index) aren’t even close to bullish extremes.

April 11: Retail Investors Turn Record Bearish as S&P 500 Climbs to All-time High
The most volatile of sentiment gauges fell to a bearish extreme. Viewed in isolation that’s bullish for stocks, but only viewed in isolation.

The April 17 VIX/SKEW article summarized the overall situation as follows:
“To an extent, option-trader sentiment is in conflict with other bearish sentiment extremes discussed recently. When sentiment indicators conflict, technical analysis and support/resistance levels become even more valuable.”

Technicals highlighted key resistance at 1,593 and key support at 1,538. As per the Profit Radar Report, we went short the S&P 500 once the S&P 500 dropped back below 1,590 (April 12) and covered our short positions at 1,540 and 1,562 (April 18 and April 22).

Based on the weight of evidence, there will be a short windon with a low-risk opportunity to go short.

How to go short with minimal risk is revealed in the Profit Radar Report.

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From Gold Glitter to Jitter: An Explanation for Gold’s Historic Decline

Safe haven what? Gold’s reputation as a safe haven got dinged nearly as much as investors’ gold holdings. After the biggest gold decline in 33 years, Wall Street is struggling to come up with explanations. Here’s one explanation for gold’s free-fall.

Wall Street is grappling for reasons to explain gold’s biggest decline since 1980. Here are some alleged reasons:

  • Federal Reserve may consider withdrawing QE sooner than expected
  • Investors selling gold to pay for taxes (April 15 tax dead line)
  • Easy come, easy go: Gold ETFs like the SPDR Gold Shares (GLD) made buying gold easier than ever. Now gold ETFs accelerate falling prices
  • Computer and high frequency trading
  • Panic selling, margin calls
  • Falling demand from China and India

The fundamental factors mentioned above ultimately affect supply and demand. The forces of supply and demand drive the price of gold. The price of gold is reflected on a chart.

By default a chart reveals more pertinent information than any piece of fundamental analysis. What did the gold chart say before the meltdown?

An Ironic Safety Net

Ironically, I’ve been looking for an opportunity to buy gold, but the gold chart refused to trigger a solid buy signal.

On February 21, gold prices fell as low as 1,554 and the Profit Radar Report doubted that this low was for real: “Longer lasting bottoms generally see a more visible bullish RSI divergence. I would like to see a lower low in a week or two to firm up the idea of a larger bottom.”

Gold prices rallied modestly thereafter, but formed a bearish triangle (purple lines on chart below) and the Profit Radar Report warned that: “A move/close below 1,596 may drive prices below 1,554.”

In hindsight we know that a target below 1,554 was a gross under estimation, but still it kept us out of gold.

The March 31, Profit Radar Report laid out all the key factors affecting gold:

Here’s the rub on gold: We should eventually (April/May) see a good buy signal. Ideally, gold will drop below 1,554 first. Well-defined and much publicized support is around 1,520. The media has been talking so much about support around 1,520 that we have to expect some sort of fake out move.

This could be a bottom above support or stop-running with a temporary drop below support (the risk is that a drop below support could trigger a quick avalanche of selling).

Either way, added volatility may make it tough to manage positions effectively with stop-loss orders. The bottom line is that we’ll be looking for a low-risk opportunity to go long eventually.

A move below 1,522 followed by a close back above would be a buy signal. A move below 1,554 with a positive RSI divergence could be a tentative buy signal.

Prices hit an air pocket and gold’s meltdown will enter the history books as the biggest decline since 1980. But what caused the free fall?

It may have been caused by any of the bullet points above. We’ll never know, but we do know that the chart continuously warned of lower prices.

The move below 1,596 suggested lower prices and the drop below 1,520 and 1,480 pointed to an acceleration of the sell off. This is a terrible situation for gold investors.

But anyone who stayed away from gold (or even went short at 1,596) will be able to pick up gold at deeply discounted prices, eventually.

My technicals suggest that gold hasn’t bottomed yet. There may be a bounce, but it will take a new low against support with a bullish price/RSI divergence or a move back above resistance to trigger a buy signal.

The Profit Radar Report provides continuous gold analysis along with key support/resistance levels and buy/sell triggers.