Are gold, silver and stocks topping, bottoming or just taking a pause?

The past eight weeks investors and traders have been watching the market wiggle its way lower. Each new low that formed has taken place with panic selling. Panic selling puts the market into a short term oversold condition. These extreme oversold conditions are typically great for a one or two day bounce but after that the down trend takes control once again pulling stocks and commodities back down.

The question everyone is asking is where are stocks and commodities headed next?

To be honest that is a tough question because of the current market conditions. The chart below shows a green indicator at the bottom and when that indicator spikes up it means there is panic selling in the market. Typically after multiple waves of panic selling we see stocks and commodities bounce/rally.

So looking at the SP500 daily chart below you can see there are two possible scenarios. First one for lower prices and wild price swings (consolidation), the second is a dip within the bull market uptrend.

Personally I would prefer to see the market bottom and start a rally here because choppy market conditions make for difficult trading unless you trade options and focus on Theta (time decay). What happens next to the stock market has a lot to do with the US dollar.

Dollar Index 4 Hour Candle Stick Chart
If you take a look at the dollar index you can see there is a large pennant/base forming. If the dollar breaks out and rallies through those resistance levels then I would expect stocks and commodities to continue selling off and then eventually forming a choppy consolidation pattern which will be tougher to trade. If resistance can hold then we are at the beginning of another move higher for stocks and commodities as a falling dollar is good for the market.

Silver and Gold 4 Hour Candle Stick Charts
Both silver and gold have been moving with bearish price and volume patterns since the May selloff. If we see the US Dollar breakout and rally then I figure silver and gold will quickly move lower as stated on the charts.

Weekend Market Wrap-Up:
In short, the market has been trying its hardest to shake traders out of positions. I also feel that the market is also trying to wear us out by taking up so much time before bottoming.

A lot of traders are getting frustrated with the recent choppy intraday price movements and I will admit I’m starting to get really tired of possible setups vanishing hours later because sellers step back into the market. But there is not much we can do at this point but continue to wait for the market to tip its hand giving us an edge for the next major move.

Chris Vermeulen