Wednesday, April 28, 2010

Gold, VIX, Dollar, & Bonds

Yesterday was a strange day in the market. We saw what appears to be a flight to quality - the selloff in equities led to significant gains in bonds. What's even stranger is that Gold rose the face of a rising dollar. Normally, a rising dollar is bad for commodities and precious metals such as Gold. GLD the ETF proxy for Gold gained from 112 to 114 despite the Dollar Spot Index Futures' massive gains from 81.3 to 82.7. This indicates an influx of money towards gold and gold funds. Also, notice in the chart below TLT the ETF proxy for longer term bonds broke above a descending trendline. This is a bullish indication for bonds indicating lower rates are here to stay for at least the short term. This is largely due in part to banks assisting the Fed in treasury purchases after the end of the treasury purchase program. This is largely needed to fuel the little bit of what's being called a housing recovery. Longer-term, the scenario for interest rates still looks bearish as the risk on higher longer term interest rates looms. Here are the charts for GLD, TLT, and /DX aka Dollar Index Futures.

Volatility came back to the market on Tuesday as the VIX:Volatility Index also jumped above a bearish descending trendline. My initial reaction was that naturally news of a country going insolvent and needing a bailout would cause a bit of a panic - which would explain the flight to quality we saw into gold and bonds and ultimately the US Dollar amid a weakening Euro. However, Greece, Spain, & Portugal are relatively small issues for the US Markets, unless we're expected to be involved. The 60B that Greece is asking for is nothing compared to what was handed out to US Banks last year. My suspicions on this were confirmed as today the market rebounded slightly back into the green. Although we're not out of the woods yet, this recent pullback could have just been the signs of the market taking a breather. Note GS was green yesterday and today despite the selloff and all the negative press they have been getting. Below is the charts for VIX and S&P 500. Note on the SPX chart, there are similarities on the candles preceding declines, though none have managed to change the prevailing bullish trend. I've underlined the next major support and potential target of 1055 should the market fall under its current trendline support (middle of channel). The SPX would need to hold in the 1160-1170 area which coincides with the 50 Daily Moving Average (blue line) to keep the trend in tact.

I was stopped out of my SPX long position at 5 points of profit. Although I do believe until we hit the levels indicated above, I still believe the primary trend is in tact. Therefore, I reentered my position at 1180. As a matter of fact, I used the opportunity on yesterday's decline to add to my CIM and GLD positions as well. I entered GLD at 112.


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