Gold Hits Record Highs as Market Stalls into Resistance

Gold Hits Record Highs as Market Stalls into Resistance

(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)


Good day! Volume was light on Wednesday as the indices continue to test the upper end of the trading channel that has been in place over the past several months. The Veterans Day holiday played a partial role due to the U.S. bond market, government offices, and most banks being closed for the day. Nevertheless, the placement of price action was also a factor. The indices have experienced strong upside momentum over the past week and they have begun to run out of steam. We saw this in Tuesday's narrow-range session and the slow-down continued into Wednesday. Even though the market made higher highs on the week on Wednesday, most of the day's gains were established early on and the indices spent the remainder of the session struggling to hold onto them.

Dow Jones Industrial Average ($DJI)


The session began with a larger-than-average upside gap into Wednesday's opening bell. Strong manufacturing data in Asia helped the foreign markets head higher and the index futures broke out a trading range along highs with the open of the overseas markets at 2:00 am ET. Chinese industrial production rose 16.1% year-over-year in September, while Japanese machinery orders rose 10.5% in September.

Extreme gaps in the overall market have a better chance of filling than in individual stocks on the day of the gap, unless the gap itself has triggered a setup on a 60 minute time frame. On Wednesday the gap did break the Nasdaq futures past October's highs to hit new highs on the year, but the daily trend was still extended, which left it in a tug-of-war situation.

The typical strategy for a larger-than-average gap in the indices is to wait for the 15-20 minute highs or lows to break. Watch the pace of the action in those first 15-20 minutes. Slower pace on the upside in the first 15 minutes would suggest a break lower, while slower pace on the downside would suggest a break higher. This was the case on Wednesday. The market based with a very slight pullback off the opening highs, suggesting an upside breakout. A setup occurs when those highs or lows break. It took almost half an hour for that range to give way on Wednesday. This triggered a buy setup, but it lacked the volume to confirm the move. Most setups such as this will trigger a trend that lasts throughout the morning at least, but the placement in the larger trend kept that tug-of-war going and the market rolled over out of the 10:15 ET correction period.

The market sold off sharply from 10:30 into the 11:15 ET correction period. The 15 minute 20 period simple moving average served as support. It quickly became apparent that the intraday action would follow Tuesday's lead. The remainder of the session played out in a manner very similar to that of the previous day. The sharp morning upside was followed by a stronger reversal and a return to the morning lows. The 5 minute 20 sma then became resistance and the pace shifted after a second attempt at lows was made mid-day. The market then slowly reversed course and pulled up into the close, although the pace of the buying was slow and choppy.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) rose 44.29 points, or 0.43%, on Wednesday to close at 10,291.26. Bank of America (BAC) was the strongest Dow performer. It closed higher by 2.50% and was followed by a 1.83% gain in Home Depot (HD), and a 1.74% gain in Intel (INTC). 4 Dow components posted a loss. The drug companies were the biggest drag on the Dow. Merck (MRK) fell 1.16%, while Johnson & Johnson (JNJ) fell 0.59%. Going into Thursday, keep an eye out for earnings from Wal-Mart (WMT) ahead of the bell.

Meanwhile, the S&P 500 ($SPX) rose 5.50 points, or 0.50%, and closed at 1,098.51. Homebuilders had a very strong session after luxury homebuilder Toll Brothers (TOL) reported a surprising 42% jump in new orders and a drop in order cancellations. It also beat estimates on its quarterly revenue. Four of the top five S&P 500 gainers on Wednesday were home builders. Pulte Homes (PHM) rose 8.14%, followed by K B Homes (KBH) with a gain of 6.68%, Lennar (LEN) up 5.73%, and D.R. Horton (DHI) up 5.73%. Macy's faired the worst and led retailers lower after it reported lower-than-expected guidance despite stronger-than-expected third-quarter earnings results.

The Nasdaq Composite ($COMPX) rose 15.82 points, or 0.74%, and it closed at 2,166.90 on Wednesday. In the Nasdaq-100, both Google (GOOG) and Amazon.com (AMZN) made headlines with new 52-week highs. Microsoft (MSFT) was shy by 5 cents.

Nasdaq Composite ($COMPX)


Gold hit record highs once again on Wednesday as it closed in on the $1,120 an ounce level. It fell back ahead of the close to end the session at $1,114.60. It remains very extended on the daily and weekly time frame at these levels and will be a higher risk investment at this time. A daily correction is imminent and we should start to see prices pull back over the next several weeks. As I pointed out earlier in the week, however, the pace of the correction is not likely to be a sharp one. Instead, we would expect a slowdown in the momentum of the buying before a correction begins. This would be similar to what took place off September and October highs. This will make it higher risk also to attempt to go against the trend other than on shorter intraday moves since a correction to a strong upside move such as this will often be followed by a number of days in which prices overlap a great deal.

So far this week, nothing has changed in regard to my current market outlook. As I said on Monday, the upside momentum on the daily time frame will make it difficult for the overall market to correct quickly. Essentially, the overall market is in similar circumstances as gold. Since the previous highs were surpassed in Wednesday's session, the upper end of the trend channel will now serve as resistance in this same zone. I am expecting more rounded highs than a sharp, sustainable correction, so there continues to be room for very slightly higher highs on the daily time time frame, but do not expect the strong upside momentum as seen heading into this week.