Are Happy Days Here Again? | Stock Market Investing

Thursday, May 1, 2008 | Home | Andy Mayo

Today may have been the pivotal rally in changing our trend from bearish to bullish.  The Nasdaq 100 closed above its 200-day moving average and the S&P 500 Index closed above 1400, though still shy of its long-term moving average.  A strong showing Friday will help clarify whether we're seeing an actual change in trend or just a rally within a Bear Market.

A striking factor in this week's action has been the decline in "hard assets" versus "financial assets" such as stocks.

It's always worth waiting to see if a Head and Shoulders pattern works out -- as it did this week for the gold bullion exchange-traded fund GLD.  I first pointed out the formation last Thursday and then noted on Monday how the price had bounced off the "neckline" at about 87.50.  Then came the breakdown, and GLD closed today at 83.99, down more than 15% from the high-price "head" of the formation.

Look for a reversal, if there is to be one, in the range between 76 to 81.

Gold is supposed to be a protection against inflation and, despite what is happening to consumer prices, inflation expectations seem to have fallen over the past few weeks.  Or is it simply the exhaustion of speculators?   

For example, the exhange-traded fund TIP, Treasury Inflation Protected Securities, broke through an important area of support in April.  TIP shares had run up rougly 13% from the beginning of September to mid-March.  Since then they've fallen roughly 5%. 

Another inflation-indicator is the exchange-traded fund DBA, a multi-sector agricultural futures fund.  It is possibly tracing out a head and shoulders pattern, but in any event is down significantly from it's peak in mid-February.

All of these declines may not indicate anything fundamental.  Rather, they may simply show how overbought these funds were by speculators betting on ever-higher commodity prices.  Even oil prices are down this week, though only by roughly 3%, hardly a trend-changer.  Copper also seems poised for a break in the coming days, and the odds would seem to indicate a break downward in price rather than up.

What to do now?  I'm not giving investment advice.  If you bought gold long ago you still have a hefty profit and waiting for a serious break at 76, that might indicate a true change in trend, would be a reasonable course of action.  If you bought gold recently and have a loss, a good rule of thumb is to sell in order to avoid any loss greater than 8%; but this rule is critical only if you are close to using that asset for income. 

If your income stream is secure and you believe gold is a good long-term holding, then waiting to see if it recovers in the range of 76 - 81 is also a reasonable course of action.  But you must maintain that belief against the discomfort of looking at greater losses before the reversal finally occurs.

To me, patience in the face of pain is the single most important attribute for winning at the investment game.  Charts simply give you an idea of where changes may take place -- but nobody's charts are certainties; they help you with the odds, with hanging in there despite the pain, but there is, of course, no such thing as a sure thing.  Charts are all here.  Charts are courtesy of StockCharts.com.

 

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