December 28, 2006 – With the New Year on the horizon, in many global markets around the world, there will be choppy trading on low daily volume as many people take a break for the new year. Also, you may see abnormal peaks and dips in some stocks as institutions seize the low daily volume as an opportunity to enter or exit the market and control the prices of certain stocks.
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Let’s look at three overarching trends you should be aware of as an investor. As you know from my previous newsletter, I don’t place primary emphasis on technical charting patterns but do use them to supplement my decisions. With the price of gold, I’m not yet 100% convinced yet that this uptick we’re seeing is the beginning of the next bull leg for gold. I still need to see some type of sustained movement higher in gold stocks to indicate that perhaps a true bull leg is forming (you can find the graph in the next blog entry on the blog home page). However, since the 50 day SMA for the HUI (the unhedged gold bull index) just kissed the 200 day SMA (simple moving average), if it crosses the 200 day SMA then one must watch the behavior of gold stocks for the next week very closely.
Historically, if we compare the behavior of the HUI index to the spot price of gold itself, you’ll see that during the last strong leg in gold that began last June, that when the spot price of gold started to decline in August, we still continued to see upward momentum in the HUI index that carried into the beginning of September. Currently, we haven’t seen gold stocks break significantly higher yet from the patterns of the spot price of gold, so this is why I’m recommending close monitoring at this time.
As far as tech stocks are concerned in the U.S. market, we see the 13 day-SMA for the Nasdaq Composite Bullish Percent Index (again please refer to the graphs on the blog home page) about to cross over the 20-day SMA on the downside. If it passes through and continues to pass through the 50-day SMA as well, then I think we’ll see a decent correction in tech stocks.
Finally, in looking at the SPX (the U.S. S&P500 index), nothing goes straight up, except the SPX for the last several months (again you can find the corresponding graph on my blog). We see a classic bearish rising wedge formation here, so again, this merits caution. Though the Dow Jones Industrial Average receives all the headlines regarding the U.S. markets, as a proxy for the overall market, because the DJIA is a price-weighted index that assigns heavier weights to higher priced stocks, and because it consists of just 30 stocks, it is a terrible proxy. That’s why I look towards the SPX as a much better proxy for the U.S. markets.
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J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
