How To Shake Off The Blues In Stocks And Break Out In Gold

The week just over brought a heavy decline on rising volume in stocks – is this the dreaded sizable correction start, or the general February weakness I warned about a week ago? I‘m still calling for the S&P 500 to be in a bullish uptrend this quarter and next, though I‘m not looking for as spectacular gains as in the 2020 rebound.

Many are calling for a start of a deeper than a handful of percent correction, and it‘s not difficult to come across charts with rising wedges or trendlines. These inevitably get sooner or later broken through pure inertia, because every market needs to take a rest sometimes. Refusal to keep rising without a pause shouldn‘t be confused with readiness to take a plunge though.

Look instead at what has changed and what has not. The Fed is still activist, and not really willing to discuss tapering – not that it would be on the table anyway, but even to talk its contours. The current balance sheet expansion commitment is sizable enough to keep short squeezes in GameStop GME, silver, and elsewhere in check, as this might be part of the explanation for the broad-based selling in many stocks.

Leading economic indicators are crucially still pointing in the direction of economic expansion, and red-hot copper and other base metals, are merely pausing in a sideways trading pattern. The same for oil, which I called back in October as likely to surprise on the upside (XLE ETF, specifically). The economy keeps rebounding, yet stocks would lag behind commodities, is my call.

Gold remains in a wait and see mode, and in the latter half of today‘s analysis, I‘ll dig deep into its near-term prospects, which are mixed, unlike the bullish medium-term outlook that I have covered a week ago.

I don‘t see gold plunging to any dramatic number such as $1,700 but given that the dollar looks to have stabilized for now, and may even attempt a modest and brief rally from here, gold may get again under corresponding (and weak) pressure again – should the silver squeeze be defeated. Would a stock market correction get gold under pressure just on its own? If you look at the below chart, your answer is probably also going to be no, as the two assets haven‘t really displayed any kind of stable correlation one way or the other (charts courtesy of www.stockcharts.com).

gold and stocks correlation

Bottom line is that it‘s the stock market that is the one more vulnerable here, not gold.

S&P 500 Outlook

S&P 500 weekly

Friday‘s trading brought stocks under pressure, and Wednesday‘s lows didn‘t hold. The result is the month of January finishing in the red. Will the S&P 500 turn down from here much deeper, as the weekly indicators are enticing the bears to sell?

S&P 500 daily

The daily candle isn‘t marked by higher volume than on Wednesday‘s selloff. Lower knot, intraday rebound attempts, and still respectable volume – that‘s part of the search for local bottom in a whiff of risk-off environment to me.

Before diving into its anatomy, let‘s quote how I described it in the second intraday follow-up analysis (Friday mid-session):

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