Yesterday morning as I readied for the first big earnings week of Q1, stock futures and of course commodities were flashing red on my iPad. My first thought was that the one-two punch of last week’s premature bid of stocks into earnings season coupled with free-falling commodity prices should have been the tell going into this week. After a few moments of ‘doh’ and ‘shoulda coulda added more shorts into Friday’s close’ I reminded myself that I must stick to my process or pay the steep price of adding emotions into the mix.
After it was all set and done the S&P 500 finished the day with a 3 standard deviation move lower and the largest one-day down-move since August 2011. As the saying goes, risk happens fast, and one better be prepared.
Before looking at the charts of gold and silver, let me point out the following two charts;
With the aforementioned move the S&P 500 in one day erased all of last week’s rally and slipped right back to its November up-trend line. After the early April test of said line, this second test seems to have more velocity and thus will likely slice through. My next support line is 1538, a break of which should move the index at least toward 1500 in coming weeks.
The carnage in the world of small caps is best viewed via the following chart of the ishares Russell 200o IWM. After last week’s re-test of the underbelly of the broken November up-trend, the stock last Thursday formed a suspect shooting candle, followed by Friday’s Doji – all of which was confirmed with yesterday’s swoosh lower. With yesterday’s move the Russell 200 closed below its early April low thus confirming a lower low after last week’s lower high.
Further testimony to yesteday’s key sell-off day was the spike in the VIX, which reached the highest level since late February.
However significant yesterday’s price action was in stocks, it was even nastier in the precious metals corner.
Gold as measured by the SPDR Gold GLD slumped another 8.78% after a big sell-off on Friday, and silver as measured by the iShares Silver trust SLV crashed another 12.62%.
As I so often point out, these are typical moves of assets that get too crowded. I could point to Apple Inc (AAPL) or a plethora of other examples for that matter. Once the crowd wants out there is only so much space in the exit frame and prices slide fast.
Needless to say the charts of GLD and SLV are both broken beyond repair and those looking to play any long-side bounces better pick their spots carefully. These are not charts to play with. Unless you are glued to your screen all day there are better long-side plays to be had for the time being.
The GLD, after forming a series of lower highs since September 2011 finally and violently broke key lateral support (blue line) on Friday and the downward spiral accelerated rapidly. The $120 area looks to have better support for now.
The picture for silver looks much the same where last Friday’s breakdown is simply too violent to step ahead of. Next better support on the SLV is around the $19 – $20 area.
Volatility in the commodity space often serves as a precursor to volatility in stocks, as such the moves lower in gold, silver and oil among other commodities has thus far been a good leading indicator.