I can see already how the fiscal cliff is being handled in a very specific way and that when lawmakers finally come together on a deal that they will stand together hand in hand in front of the cameras to announce how tirelessly and bravely they and their colleagues rose to met the immense challenges of putting together an acceptable financial package. Nothing could be further from the truth.

Instead, all of us are being mislead, manipulated and held hostage to a group of egotistical and irresponsible representatives who should never have let it go this far in the first place. It has individuals nervous and left businesses of all sizes wondering how it might affect their future. And all because the spirit of bipartisanship left Congress and the White House a long time ago.

Its not only the lawmakers who should feel ashamed. Throw in the networks who devote endless time and energy to the fiscal cliff so they too can ramp up the scare meter and sell advertisements. I even saw one network yesterday with a “fiscal cliff countdown”; I couldn’t make this stuff up.

Of course when news of the horrible situation in Newtown came up that’s all the media cared about; all of the sudden the fiscal cliff was shoved into the background, where it belonged in the first place. Even the president was brought to tears by this unspeakable event and perhaps this solemn occasion will actually be what it takes for the “adults” representing us to come to their collective senses and work out a deal that will provide the most benefit to the most number of people in our country.

If I offend anyone by making my point by referring to such a horrific event, I apologize. But maybe things can be put in perspective here as we move into what is supposed to be a festive and joyous time of the year with a quick resolution instead of the shameful circus it has become.

The daily chart of XME also shows a possible down-trending channel.

On the daily chart XME closed on Monday (today) below SMA(200) however the volume increased on the Monday’s toll candle. MACD is negative with histogram already positive. SMA(50) and SMA(20) are below SMA(200) in the bearish order: SMA(20) below SMA(50). This timeframe has 50/50 probability rate in any direction.

XME would have to close above SMA(200) to help MACD cross above zero line before the successful challenge of the resistance.

The weekly chart confirms the importance of the same down-sloping resistance line. MACD is negative and histogram went back to zero line.

Any weekly close above this resistance line would be a warning sign for the bears. This timeframe also has 50/50 chance in any direction.

The longest (and the slowest) time frame, the monthly one also shows the same resistance line. Either December or January should decide the longer term direction. MACD is still below the zero line but ready to cross over.

I suppose we are all waiting for more clarification if $$$ will be flowing freely to the market next year.

Eva

TECHNICAL ANALYSIS:

PRICE/VOLUME COMBINATION:

The battle rages on. The bulls aren’t giving in as they hold onto the gains they built since mid-November. But neither are the bears, who are trying their best to protect the combination of price resistance and 50 day SMAs.

On the S&P 500, the reaction closing high at 1428 needs to be cleared to encourage more sideline money into the market. On the NASDAQ, last week’s gap open at 3000 represents short-term resistance, though the much bigger level from a technical perspective resides at 3033. Today’s earlier high at 2998 closed in on the first resistance level and has thus far failed. Apple (AAPL) is in the spotlight as it remains under pressure. It gapped lower earlier, opening in its support zone at 525 before rebounding. That 520-525 area is VERY significant. If it’s lost, the overall market is likely to suffer as well.

MACD DIVERGENCES:

The daily MACD is pushing higher and making a bullish centerline breakout on the NASDAQ, a positive development. Should the market pull back one more time, the MACD is very likely to provide us clues as to the duration of such a pull back.

MOMENTUM OSCILLATORS:

The stochastics and RSI are as follows on our major indices:

Dow Jones: 98-59 S&P 500: 90-57 NASDAQ: 72-53 Russell 2000: 93-60

From the numbers above, it’s quite obvious that the NASDAQ is lagging, never a great short-term sign.

SENTIMENT:

The VIX is up approximately 1.5% today as the market meanders back and forth. This index that measures potential volatility ahead is providing us few clues at the moment.

MAX PAIN:

We’ll take another look at max pain at the end of next week.

HISTORY:

The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.

UPDATE: ALL OF OUR MAJOR INDICES ARE NOW BEARISH AND WILL REMAIN SO UNTIL FRIDAY’S CLOSE.

SECTORS:

Transports ($TRAN) are having a solid day as they make another stab at key resistance near the 5200 level. Since June there have probably been 20 attempts to clear the 5200-5300 resistance zone. Obviously, a break above this area in time would be quite bullish, leading to a significant inflow of technical money. Until it happens, however, we must view this 5200 area as an exit point, not an entry.

Biotechs ($DJUSBT) are having a solid day, but I posted a few weeks ago that any fresh breakout here would result in a long-term negative divergence, a sign of slowing upside momentum. The big problem here is that this negative divergence would be appearing on the WEEKLY chart, not daily. Therefore, as we head into 2013, this is one industry group that I’d consider avoiding. There is more potential for upside near-term, but just keep in mind that serious long-term negative divergences are just around the corner.

Technology and healthcare are leading the advance, while financials are amongst the laggards. The rotation back and forth between sectors and the whipsaw action we saw last week is continuing. Because we’re seeing little commitment from either the bulls or bears at this juncture, reigning in your risk probably isn’t a bad strategy. We need to let the market tell us if this rally is for real. Constant rotation in a narrow trading range just beneath key levels of resistance doesn’t provide us any sort of confirmation.

ECONOMIC AND EARNINGS REPORTS:

There are no economic reports of significance today.

INDIVIDUAL STOCK ANALYSIS:

The quick GLD trade discussed in Friday’s Market Chatter proved to be a good call. Short-term GLD traders could walk away from the trade with a quick 0.5%-1.0% profit.

Today, HUN looks interesting. Volume appears to be accelerating as it attempts a descending triangle breakout to the upside. A close below the 20 day EMA should be respected. But a strong finish this afternoon with commensurate volume would be bullish.

SUMMARY:

If history plays out here, look for a bit of selling this week. Obviously, if we can clear the key price and gap resistance levels discussed earlier, not to mention 50 day SMAs, it would bode well for the bulls.

My guess is that we’ll struggle at these key levels, barring some sort of agreement amongst lawmakers to avoid the fiscal cliff that is quickly approaching. I wouldn’t be surprised by a surge into yearend, however.

Happy trading!

Tom Bowley Chief Market Strategist Invested Central

If this seems frustrating try going back to December 31, 2007, when the S&P closed out the year at 1411. Since that time the S&P has gained 3 points, closing at 1414 last Friday. Of course you can go back to the end of 1999 and see that the S&P has barely budged in 12 years but the last 5 years seem more relevant given what we’ve gone through during that period of time.

Think of it this way. If you had put your money to work in the S&P back on New Years eve in 2007 and then taken a five year nap you would wake up today seeing that the S&P hadn’t budged. In fact, you would have seen that your money had lost value on an inflation adjusted basis.

Of course, in the midst of the five year period we went through the worst economic recession since the Great Depression. So, if you think of it in those terms, coming out with your money in tact isn’t so bad.

But, that’s not how most traders think. Instead, they hope to make money all of the time, no matter the market conditions. Yet most investors aren’t active traders and rely on professional money managers to help them grow their assets. So, if they had hired someone who managed to match the performance of the S&P over the past 5 years, they would have seen a lot of ups and downs in their portfolios over that period of time and resulting in no gain. So much for holding stocks long term.

Adding insult to injury the majority of homeowners saw their house value deteriorate during that same period of time. So, not only a stock portfolio with no gains, but a house that had depreciated, with 25% of homeowners under water. That’s a double whammy and it is why the economy has had such a difficult time recovering.

It might also explain why so many people have up and left the market. After all, who will be in a position to retire with no real gains after so many years? But, the alternatives haven’t been great either, with government bonds barely paying anything and a housing market that has left many homeowners underwater and the lucky ones simply holding an asset not worth as much as it once was.

Of course, no one can predict with any real confidence where the market will be 5 years from now. But, if it hasn’t budged by the time we get to 2017, the economy will still be in trouble. Maybe active trading is the answer after all.

After it peaked in September 2008, dollar initiated the long-term downtrend channel which still proves to be intact. The most recent rejection happened in July 2012. I noticed a shorter term up trending channel that started in May this year – but look what happened! UUP could not continue trading within it – it was pulled back into the longer term down trending channel.

What is the story within the daily chart of UUP? It doesn’t look good either. UUP failed the test of resistance at SMA(200) on November 16th 2012. It is currently trading toward the support at $21.6. Look at SMA(50) below SMA(200), SMA(20) turning lower, and MACD going below the zero line.

There is a very solid resistance for UUP between $22 – $23.20

I will be watching for signs of breaking resistance of the long-term falling channel – It may be “watching the grass grow” exercise…

Eva

Remember that the market hates uncertainty. By coming out with specifics, the market now has had time to price in what Obama and the Democrats consider to be their bottom line, meaning any compromise at this point will probably be seen as a positive by the market.

Everyone knows that Republicans are trying to limit any tax increases while Democrats are trying to keep entitlement programs in tact. But, its highly likely that there will be some give and take to get a deal done, and that should be well received by the market.

Of course you can expect the media to keep the fiscal cliff hype going as long as possible. There’s not much else going on at the time (that’s a good thing, no?) so they need to fill their headlines with something. Luckily for traders, that’s really all it is at this point; a bunch of hype.

In fact, if you go back to my blog of a month ago “Fiscal Cliff – a Mountain or a Mole Hill” you will see that I poo pooed the idea of the fiscal creating a major economic calamity, saying in fact, “don’t buy it.” Since that time the S&P has broken even. So, while no movement higher, no movement lower either. That’s because we’re all being fed a heap of hype.

If anything, investors are probably more concerned about where corporate profits are headed, given the recent disappointing earnings quarter. So, if anything, savvy investors are trying to handicap if the economy in general and Corporate America are on the mend.

Don’t expect the media hype to slow anytime soon, certainly not until a true deal is announced. In the meantime, stay focused on what the charts are saying, because they will tell the true picture.

In the two charts above, I have plotted the silver:gold ratio below the S&P 500. This will allow us to test the hypothesis that a rising silver:gold ratio is supportive of a rising stock market. I have drawn 5 vertical lines to separate the rising silver:gold ratio phases from the falling phases. Let’s examine how this relates to directional moves in the stock market.

The first vertical line occurs in late August, 2010 and begins an eight-month rising trend in the ratio. Correspondingly, the stock market rose right on cue and peaked at the exact same time as the ratio. The ratio then proceeded to decline for the balance of 2011. While the ratio’s call of the previous top was very impressive, it provided a late signal regarding the market bottom, which in fact occurred some three months earlier in October. The ratio then peaked in March, 2012, a month before the market. The market then bottomed in June of this year and the ratio bottomed two months later in August.

The silver:gold ratio has a strong directional correlation with the stock market. It is less effective as a timing tool than as an indicator to confirm the market’s direction.

I think we are today at a very interesting juncture in terms of this indicator. The ratio has just closed at .195. This is where it peaked at the end of October which correlated exactly with the recent stock market peak. If the silver:gold ratio turns down from here and does not exceed that prior peak (by a reasonable margin) that would suggest that the rally of the last two weeks was a rally within a declining trend. A move to .2 or higher would suggest a continuation of the risk-on trend. It will be very interesting to watch next week and see what signal the silver:gold ratio gives and how the market reacts.

The weekly chart shows quite well the strong resistance between $35 and $40. A lot of shares were traded in that zone in March and September this year. This would be a battle field for the bulls to work through.

Just the quick check of the monthly chart confirms that SLV is ready for a fight. MACD is still negative but trying to cross the zero line.

If you like a lot of action trading you may want to look at SLV. Be ready for a rollercoaster ride!

Eva

Gold needs to be analyzed in terms of its supply and demand. The World Gold Council recently published its quarterly report (must-reading for all gold investors) which showed that demand for gold slipped 11% in Q3 12 over Q3 11.

While that drop in demand may appear bearish at first glance, it needs to be taken in context. The drop is compared to record demand in Q3 11. But the level of demand actually rose from the previous quarter and is now relatively close to the 5 year average.

The picture for gold becomes more problematic when supply is thrown into the equation.

The supply of gold has risen appreciably since 2008. Manufacturing demand has fallen fairly consistently since 2005. Yet the price of gold has quadrupled in the last 10 years. What is driving this? It is speculative demand. An enormous amount of gold is purchased for speculative/investment purposes and held in bank vaults around the world. Central banks are one of the biggest purchasers of gold for speculative/investment purposes.

The World Gold Council reported that central bank purchases of gold in Q3 were at a near-record pace, and are headed towards exceeding the all-time high established back in 1964. Gold reserves at central banks increased by 97.6 metric tons during the July-September period, albeit at a slower pace compared with a record year-ago quarter. The official sector accounted for 9 percent of overall gold demand during the third quarter. Central banks around the world bought 374 tons of gold in the first nine months of this year, higher than last year’s 343 tons for the same period.

Individual investment demand for gold continues to increase. The World Gold Council reported that “Demand for ETFs and similar products in Q3 was up by 56.0% on the previous year to 136.0t.”

Growth in speculative/investment demand for gold continues to lend credence to the rising gold price trend.

There are few more sizable locks to expire in the months ahead and it will be worthwhile to take a note how they trade.

My expectations are that after the locks expire and more shares are in the market, FB will start trading better.

Currently FB is trading below resistance. If it breaks out above $24.60 and closes well, it should test resistance of $25.50 – $25.80. If that is broken, then FB should trade toward $27. If all these tests are positive with solid volume, FB may be out of the base and finally trade, without just being slaughtered mindlessly.

Eva