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Tuesday, May 04, 2010


Update: Stocks Sell Off, Gold/Nasdaq 100 Ratio Buy Signal

From Sunday's update:

This breakdown from the rising wedge, along with the weekly bearish engulfing candlestick, VIX breakout over 20, and the excessive bullishness of newsletter writers, increases the likelihood that the market is in for more selling. A number of other indicators point to more selling to come, though there's a possibility of a short-term bounce first after Friday's sharp sell-off. Any market bounce should be used to sell non-mining stocks.

Monday's short-term market bounce proved to be a great opportunity to sell stocks, and this pullback in silver and mining stocks, which were caught up in today's 225-point market selloff (likely hedge fund liquidations in thin markets), should prove to be a great buy opportunity for anyone doing this portfolio re-allocation.

As for the monthly Gold/Nasdaq 100 ratio chart, the stochastics lines have crossed back up:

Right now, this portfolio re-allocation strategy indicates a shift to long gold and short the Nasdaq 100 should be made. This ratio is just coming off the 36-month EMA, and the stochastics lines are oversold below 20, and look like they should cross back up soon.

Sunday's chart:

As you can see above (bottom pane), the black stochastics line was 11.84 while the red stochastics line was still above it at 13.50.

After today's action, the black stochastics line (16.62) has crossed back above the red stochastics line (13.93) to trigger a stochastics buy signal:

Keep in mind that this is a monthly chart, and May has just begun. It's the end of the month that counts on a monthly chart, so the stochastics lines will need to remain crossed back up at the end of May for this buy signal to be valid. Also, May is just one month -- this longer term chart could take several months to generate a stochastics buy signal if this cross doesn't hold.

It's a good start so far for this portfolio re-allocation strategy shift, but it won't be proven a success for a few more months.

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