Stock Market Update: Selling Capitulation in Place

Stocks plummeted over three percent at the open on Thursday, as the selling capitulation held despite several up days due largely to the oversold technical condition.

My investment guidance is to stay on the sidelines and wait for a base to form before entering into new positions. High frequency trading, specifically on the short side, could make the selling worse, as we have seen in the past. The stock market is dangerous.

Driving the bearish sentiment is increased concern towards the slower growth and debt issues in Europe, along with weak jobs and inflation data domestically.

The worrying about Germany’s sluggish growth is conjuring up fears of another potential recession if the top country cannot reverse the situation. France is also slowing. There are also concerns that the major European banks with exposure to bad debts around the weaker European countries will be in trouble, which could trigger a financial crisis.

Morgan Stanley cut its global GDP forecast for 2011 and 2012 and added that the U.S. and the eurozone were “dangerously close to a recession.” Not exactly an endorsement. This tells me that the S&P downgrade of U.S. credit may have been the correct call.

And making matters worse was a jump in the headline Consumer Price Index (CPI) to 0.5% in July, above the 0.2% estimate and the 0.2% decline in June. Excluding food and energy, the core CPI was in line at 0.2%. This, along with a rise in the Producer Price Index (PPI), is worrisome.

The current sentiment does not look positive. In this country, we have the massive debt, the credit downgrade, stalling growth, high unemployment, and weak housing.

The charts continue to be negative, with a bearish death cross. Oil is also showing this. The near term is ominous. Be careful, as there is a lack of confidence in buying.

The near-term technical view remains BEARISH, as the key indices trade well below their respective 50-day moving average (MA) and 20-day MA on relatively weak Relative Strength.

The NASDAQ, S&P 500, and Russell 2000 continue to display a bearish death cross on their respective charts, an indication of potentially additional losses.

The downside risk remains extremely high and bearish.

I continue to sense that gains will not be sustainable. Until there is firm buying support and a base formation on the charts, it may be worthwhile to buy after a big dip and sell on a bounce. In other words, trade the current volatility.

The best call at this time continues to be gold. The October Gold broke $1,800 to a record $1,819 on Thursday morning. The chart looks bullish on strong Relative Strength. There is a golden cross on the chart, with the 50-day MA of $1,591 well above the 200-day MA of $1,467. I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.

The best strategy for risk-averse traders is to protect via put options.

Again, you may want to be careful when buying on the current weakness. To be safe, stay on the sidelines.


Gold Stock Market Update: Selling Capitulation in Place