Gold, Silver, and Miners going higher?

As we noted, US stock indexes may be forming big topping patterns. Today, we'll look at whether gold and silver miners may be breaking out from a significant bottom.

The following chart is a daily chart of GDX (gold miners ETF):

GDX traded above $66 in 2011. By mid-2015, it was at $13. At the beginning of 2016, it seemed poised for another big decline as it formed a classic continuation H&S top. The breakdown on January 19 was decisive. But in the last 2 weeks GDX made a U-turn and has now closed decisively above the right shoulder high of the continuation H&S top. Now we have a false breakdown and a H&S top failure, which I learned from Peter L. Brandt is a separate pattern that can produce big moves. Of course every pattern can fail. And I expect much volatility in the weeks and months ahead. But if GDX builds a base above the $15 level and make sustained moves higher, then we may have a significant reversal in the precious metals and mining sector.

Please remember to stay patient. There will always be other trades.

State of the US equity market

Let's get to it. Today's first chart is the weekly chart of the NYSE index:

I see a possible massive Head & Shoulders top forming in the major U.S. equity indexes. Does this mean that a 25%, 40%, 50%, or even larger drop in stocks is inevitable? No, charts do not predict, let alone guarantee, financial or economic developments. Charts - and our interpretation of them - only inform us of possibilities. It is possible for stocks to rally and negate this topping interpretation.

Still, the possibility of a serious drop is real. Remember, recessions happen (and it seems we always know only in hindsight), and stocks drop quite a bit during an average recession. If we experience a more serious global financial trauma, then a 50% or even 60% or greater decline is possible. Stocks lost 90% of their value during the Great Depression. Anything is possible. We can only try to control our emotions and limit our risk as traders.

The next chart is a daily NYSE chart for a closer view of the set-up:

After declining more than 10% from late December, stocks have rebounded in the last 2 weeks and seem to be in the middle of a rally. Nobody knows how much higher this rally will go.

As noted, we can only control our entries, exits, and risk. Positioning and staying patient are vital. We can be "right" about the market and lose money. Say that we expected the market to break down. If we shorted heavily after the indexes broke below the neckline, then we may be surprised and dismayed by the market's recent rally. And such panic is understandable. After all, the market may continue to rally for weeks or even months as it not only negates the H&S top but also starts another uptrend. Nobody knows. So positioning is vital. If we have not shorted yet, then the current rally (if it continues) may give us a chance to short at a spot (higher) that better controls our risk.

If we piled into short positions just before the market rallied, then covering them may be appropriate. If the market resumes its downturn, then we'll have conserved enough financial and mental capital to re-short at an appropriate place. If the market continues  higher, then we'll also have conserved our capital as we wait to see a potential inflection point before the market turns down again.

Remember to stay flexible. If the market doesn't decline but instead starts an uptrend, then we can trade accordingly. Or not. No one forces us to be in the market. Don't trade if you don't want to trade. The key is preserving our capital so we have a choice.

There are no certainties in trading except risk. Always remember that there will always be more set-ups to trade.

Double top in QQQ?

A 18-month daily chart of QQQ:

Next, let's zoom in on the potential second peak:

Now let's look at a 2-year daily chart of SPY:

I see a possible 20-month H&S top where the head is itself a 6-month H&S top (from which SPY broke down during the August sell-off). After rallying for 4 months from the August 2015 low, SPY now has a potentially very bearish set-up. Let's zoom in on the last 6 months:

 As of the market close on Friday, December 18, I see a potential breakdown from a 4-month channel as well as a completion of a 6-week horn top. Of course, nobody knows where the market will go on Monday and beyond. Both QQQ and SPY can rally off support levels and invalidate our set-ups. The only things we can control are our trade entries and risk management.

Merry Christmas!

3-week H&S top in Nasdaq 100 (QQQ ETF)

After the heightened volatility of August and September, QQQ rallied more than 10% off the the September lows as seen in the following daily chart:
 

In the process of rallying to all-time highs, QQQ formed a 3-week H&S top. The following 30-minute chart shows the H&S top more clearly:

So is the top in and we're headed for another plunge? Nobody knows. It could be that this relatively small H&S top has already served its purpose. After all, it has already declined almost to the measured price target. And now the QQQ could start another strong rally to all-time highs.

But small patterns can also start huge declines. In late 2012, a 1-month H&S top started a 40% decline in the price of Apple stock.

The only thing we can control and should concern ourselves with is limiting our risk. Enter trades only at advantageous spots and quickly cut losses by using stop-loss orders.

Long-term bonds: trying to break out?

Let's look at the chart of TLT:

 
TLT broke out of a 6-month channel in August and has been retesting the channel's upper boundary for three weeks. Now, it is trying to break out of a 3-week channel.

In my chart trading mode, I don't make macroeconomic predictions or engage in economic analysis. Instead, I follow the price. Still, it is fun to think about the implications of particular price moves. If stocks struggle while long bonds shoot higher, we might suspect that the economy is slowing and/or investors and traders fear deflation. Then of course there is what the Federal Reserve may do in response to low inflation expectations (QE 4?) and the Fed's effect on stocks, bonds, and commodities.

Or, we can just follow the price.

UPDATE: S&P 500

Let's look at the SPY chart:

For three weeks an ascending triangle has been forming. Today SPY broke above the horizontal upper boundary in a seemingly decisive breakout. But by the end of the day prices reversed and closed at a loss: a classic reversal day.

Now what?

First, the strong reversal was not so surprising. After all, there is strong resistance in the 200 to 203 level.

Second, today's reversal does not preclude another breakout attempt that may take SPY to new all-time highs.

Third, anything is possible. Patterns can morph and change into something else over a matter of days. The ascending triangle? Over the next several days it may become a bearish rising wedge that produces a decisive breakdown. 

All we can do is accept the price action and trade when the reward-to-risk ratio is favorable.

Analysis of U.S. stock indexes

Last month, we discussed possible topping patterns in U.S. stock indexes and individual stocks. Let's see what the charts have done in the two weeks since the start of heightened volatility.

Let's look at the SPY (S&P 500) chart:

We see a dramatic breakdown from a 6-month H&S top. Prices rebounded from the October 2014 low and have been coiling in a pennant pattern for 2 weeks.

Today SPY was decisively turned back at the 198-199 resistance (formerly support) level. This rejection does not mean that the current 2-week coiling pattern will become a bear pennant that continues the decline. There are no "musts" and "shoulds" in trading other than the utmost importance of limiting our risk on every trade. The current coiling pattern can launch a move up and retest the 204 level and even beyond. Again, there are no guarantees in the market. Especially this market, which has been an epic bull run since the March 2009 low. We must be open to all possibilities. And it is possible that the market will break down and ultimately become a harsh bear market but only after SPY races back up to 204 or even a new all-time high.

So we must keep our eyes open and accept the price action as it is. If we are short, then we must have a strict stop level at which we cover our shares - no ifs or buts. The same for longs: we must stick to our stop level where we will sell and cut our losses.

Please remember that there will always be more set-ups to trade. Let the price action tell you the market's intention. Prices are coiling now. That means the market can go up or down. If it breaks down, then we might look for an advantageous entry spot for shorting. If it breaks up, then look for a good spot to go long . Or, don't trade. We are not required to trade. Doing nothing is often the most profitable move.

Stay patient. We need psychological experience in the market, and that comes through living through a complete market cycle. Then we have a chance of accepting what we see rather than what we want to see.