Tuesday, July 10, 2012

Gold is trying to tell us something

Well, my thesis that, in the absence of any big news stocks would drift lower this week, is coming to fruition.  After a slightly down day yesterday, we started out today with a mild rally which quickly turned south.  The selling accelerated this afternoon after engine maker Cummins (CMI) gave some terrible future guidance on its business prospects for the rest of the year.  Cummins, which had started the day up over a dollar ended the day down almost 9%.  All the major averages swooned as a result.  Here's a daily chart of the Wilshire 5000, the broadest US stock index:

(click on chart for larger image)

The Wilshire closed right on a short term Fibonacci retracement level.  The blue uptrend line has not been violated so we have to say that the uptrend that began in the first week of June is still intact.  We have three higher highs and three higher lows.

All the major indexes are reflecting the same price action characteristics and no major trend lines have been broken as of yet.

However, Gold is sending us some serious signals and they are not bullish:

This is a weekly chart of the Gold ETF (GLD) which I watch on a daily basis.  The metal has been trapped in a descending channel since the beginning of the year.  About a month ago it looked like it might break out to the upside and those of you who read me regularly might remember I commented at the time that the chart was constructive.  The last two weeks have been disappointing as GLD has attempted each week to break out to the upside (notice the long wicks at the end of the candlesticks) and has failed.  The Relative Strength Indicator is ominously closing in on the 40 level (blue arrow in upper panel) and if it penetrates that level that will signal further weakening of the yellow metal.

What's Gold telling us?  The same thing the US Dollar is and what I've been warning my readers about since 2010: deflation is alive and well underneath the mountains of liquidity central banks have pumped into the global economy and is more and more rearing its ugly head as the European and Chinese situations become more untenable and the global slowdown washes over to our shores.

I'm looking for a possible short term bounce tomorrow on the heels of the FED's June meeting minutes being released at 2 PM EST.  If there is anything in those minutes that will provide "hopium" to stocks it will  spark a rally. But I expect disappointing earnings will fuel another correction or worse going into August.