FTSE sell-signal
I have to welcome the markets finding direction again. As a trend follower, there's nothing I find more frustrating than sideways drift. True, I was rather hoping that the next significant move in equities would be upwards, rather than downwards. But I didn't make the mistake of positioning myself ahead of the move beginning, so no harm done.
Is this the start of the sort of major correction that some bears have been talking up? The swing-chart sell signals mean no such thing, of course. Since the bull market began in March 2009, the S&P has given 13 change-of-trend 'sells' before this one. All that this latest clutch of bearish signals means is that there is a near-term short-selling opportunity. There is every chance that the larger bull market is still in force.
What is spooking traders right now is the prospect of the impending cutback in Fed money-printing, or so-called 'tapering'. It is important to recall that tapering is a reduction in stimulus, rather than a withdrawal thereof. The consensus seems to be, for example, that the Fed might lower its monthly injections of freshly minted cash from $85bn to $75bn. In itself, this shouldn't be a huge problem. The markets, however, will be thinking ahead to even deeper reductions.
Past S&P buying entries
The selling so far has already gone quite some way to setting up the next potential buying opportunity, in my view. In the past couple of decades, there have been many good entry points in the S&P 500 when the index has pulled back to its 55-week exponential moving average, with a weekly relative strength index (RSI) reading perhaps in the low 40s. I'd definitely be interested in buying a bounce from such levels, assuming the market gets down that far.
Gold's buy signal
Among those who believe stocks are set for a really big fall, there seems also to be a belief that gold will enjoy a really strong rise. For example, Hubert Moolman http://bit.ly/14VKTqn draws comparisons between the price action in the Dow and gold in the 1970s and today. Like me, Hubert is a big gold bull. However, I am less convinced that the next stage of its long-term bull run has got under way. If stocks now get hammered, it'll most likely be because of QE tapering. I suspect precious metals would suffer in much the same way, under those conditions.
Still, short-term bullishness on precious metals has paid off lately. One trader who called it just right is Richard Jennings, who manages the Titan Precious Metals fund using spread betting positions. Highlighting the despondency of many traders right now, he's put his money where his mouth is and is so far reaping the returns. His call for silver to return to $23 has paid off in particular style.
Silver soars
Given my long-term bullishness on both gold and silver - I see them heading to new record highs above $1,925 and $50, respectively - I am happy to play along with the latest rally, now that it's taken root somewhat. In gold, a crossover of the 21- and 55-day EMAs would be further confirmation, whereupon I'd be especially interested in buying bounces off the first of those lines.
