Quarter Turn: Bond Breakout Gold Gets Rejected

With the first quarter of 2013 behind us we are left wondering if the equity markets will repeat their trend of the past few years.  Will they once more get the animal spirits revved up with strong gains going into April to only punish the late arrivals by giving back nearly all those gains by June or will this year be different?

Only time will tell and while there are many possibilities the charts and tea leaves are showing some interesting divergences that should make equity bulls a bit cautious.  The first and foremost is the recent strength and breakout in treasuries despite the peppy step of market bovines.  For a visual we offer this graph of the ETF that tracks the 20yr Treasury (TLT).


There are a few things that intrigue me about this picture.  First, is the strength in Treasuries since the middle of March.  While equities have stolen all the glory in the press no one has mentioned that Treasuries measured by TLT have increased roughly 3% since Mid March outperforming equities in the same time frame.  Second is the break of the down slopping trend line in red.  Not only has this trend line been tested multiple times over the past 8 months but the breakout seems to have completed a successful back test of this trend line.  In simpler terms, this holding has crossed over a line that it has had troubles crossing in the past and subsequently the momentum to the upside has seemingly increased in response.  Lastly, we have continued strength in the relative strength index represented by the green line and a daily buy signal on the MACD (green Circle).  All signs that investors are gravitating to lower risk assets in spite of all the new records being set by equities.

Naturally this leads us to the next thought- where may the equity market head next? (Represented by SP500)  Before we get into the shorter term time frames and what may occur I think it is important to note that the longer term picture for equities and risk assets looks to be positive, for now.  We are going on the assumption that as long as the central banks of the world continue to flush financial markets with cheap money risk assets should continue to rise over longer term time frames.  The trick will be when and if the central banks begin to change their tone in regards to running the printing presses through the night.  With that being said let’s move to a visual of equities with this chart of the S&P 500 by Big Charts.

Excuse us if this chart looks a bit like John Maddens white board as there is a lot to look at here.  First, would be the daily sell signal registered on the MACD and relative strength.  While this is no guarantee that markets will correct lower these signals tend to give us fair warning as to when we may want to reign in our risk appetites.  Second would be the note of a potential “ending diagonal” pattern.  This pattern tends to be one of two things, either an ending pattern indicating a decline to come in the near term or the platform for a market to spring higher.  Based on the position of this pattern in the bigger picture I am favoring the view that it is an ending pattern but as always we must stay aware of all options.

So let’s say the market does correct lower in the near term.  Where may an investor who is interested in deploying capital for the long term do so?  If the markets intention is to be huber bullish then I would think the correction would hold above the blue dotted line.  The most likely suspect in my opinion would be where the 2 green support lines merge, somewhere between 1460 and 1480.  I should warn you that it is difficult and a bit careless to be picking entry points prior to a correction any forming so this will be updated in real time in our future commentaries.

As a wrap up let’s discuss our good old shiny friend that can’t seem to get any love this year, Gold as represented by GLD.  A few weeks back we scribed “Could Gold Be Bottoming” and for a week or two the Green support zone has held and now we get to see who will win.  The red resistance trend line or the green support zone.  Updates to follow as this saga plays out over the next few weeks.

The opinions expressed are those of Colby Mcfadden and Quiver Financial as of 4-4-13 and are subject to change due to market and /or other conditions.  This is not a solicitation or recommendation of any investment or security.  Consult your own financial representative prior to making any investment decisions.  Colby Mcfadden is a registered rep with Newport Coast Securities and this publication is not to be construed as market research or analysis.  Securities offered through Newport Coast Securities member Finra/SIPC.  Advisory services offered through Newport Coast Securities and Registered Investment Advisory.