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The MACD is close to giving a buy signal and the stochastics are already giving a buy signal. The downtrend in the RSI appears to have been broken and NEM has crossed above it’s 10 week ma of $41.49.

1) Starting January 1, 2013 banks worldwide are going to count gold as an asset at it’s full value. Presently it is counted at 50% of value. I have read that the deadline may be extended but the recognition of gold as a currency is just around the corner.

2) Central banks have been net buyers of gold and China and Turkey are huge buyers of gold.

3) Gold is no longer fluctuating in anti-relationship to the US dollar. It appears to be attempting to find its value in relation to other currencies.

4) There are serious problems in the mideast involving Syria. There is a possibility chemical weapons may be used or just obtained by hostile parties. Such an event would probably push gold through the roof.

5) The price projection for gold if it breaks out to the upside is in the 1840-1860 area. A confirmed break below the uptrend line would be bearish and could cause a 100 point drop although support may be found at the 200 day ma of 1663. The odds favor an upside breakout however.

Just as gold is exhibiting a bullish pattern Silver is also exhibiting a bullish pattern in the form of a cup and a handle. A break through the neckline at 35 has a projected price target of 41.

Conclusion: Don’t fight the Fed, the ECB or the trend. The bull is charging so either ride it or get out of the way.

Conclusion: With chunks of Europe in a recession and captial fleeing the Eurozone, there’s an excellent chance the U.S. stock market will be dragged down until there are some signs of stability coming out of Europe. Of course another dose of QE will give the markets a lift and take the funk out of gold. Since we are in an election year, in all probability we will see more QE if the market drops too low.

In the late afternoon word came down that a run on Greek banks is underway. While the ECB claims there is a firewall around Greek banks, viruses have a nasty way of penetrating firewalls. At this point in time it is unclear as to which banks are exposed to European debt and how far things could spread. We know that MF Global made some bad bets on Europe and now JP Morgan is being investigated for trading losses. While we don’t know exactly what led to JPM’s trading losses, there’s a good chance it involved European debt.

It also looks like the really bad news may just be starting. Greece could not form a government and will require a new election in June. A run on Spanish and Italian banks could start at anytime if the citizens of those countries start to panic because of what is happening in Greece.

The U.S. Dollar has been on a rip and has broken through both short and longer term downtrend resistance. While there are horizontal resistance points at 82, 83 and 86, the multi-year downtrend resistance stands at just under 88. If the dollar were to surge that high the S&P would probably drop to about 1000. The question is will Ben Bernanke allow that to happen.

Since this is an election year the incumbents will probably do everything in their power to prop up the markets. It’s unclear at what point the Fed will step in with further easing but I doubt they will allow the markets to drop that far before the election.

Gold as evidenced by the chart of GLD may be approaching a double bottom. GLD is almost at the December, 2011 low and I would think that traders are waiting for it to get there before hopping in. While there will probably be some sort of bounce off that level, it is unclear if it will just be a blip in a larger downtrend of if a new rally will start.

Oil as evidenced by the chart of WTIC may also be approaching a double bottom. Oil broke down from a rising head and shoulders pattern and the pattern looks like it is near completion. An interesting scenario would be if the Fed announces a new round of QE just as the S&P, Gold and Oil hit their projected downside targets.

Conclusion: It looks like the stock market is heading lower. At some point the Fed and ECB will probably step in with further QE.

The stochastic on this chart is extremely oversold and is the most oversold it has been since 2010. Each time the stochastic hit this level of oversold a substantial rally has ensued. The RSI is at the level it was in January, 2012 when Gold staged a nice rally to the top of the consolidation pattern
If we look at the daily chart of Gold, we can see that it is culminating in a descending wedge pattern. Typically these patterns break out to the upside. The RSI is extremely oversold and is at the level it was in Janury, 2012 when a rally ensued. The stochastic is also at the level it was at other times subsequent to that when some type of uptrend ensued.

Sentiment on Gold is extremely bearish. One commentator on CNBC said Gold was heading to $700. per ounce. The talking heads are questioning as to whether the bull market in Gold is over. Even long term bulls are getting discouraged and predicting lower prices in Gold. These type of events generally mark a bottom in the underlying asset.

Conclusion: The technical parameters are pointing to either a temporary or final bottom in Gold with a rally to at least 1700 looking like it is in the cards. If Gold makes it that high it will have to be seen as to whether it can break through the upper downtrend line. If Gold fails to hold support at 1580. then the upward consolidation will have failed and much lower prices for Gold could be seen.

As I indicated in my entry of June 21 a possible head and shoulders pattern was forming on the S&P 500. Then in my entry of July 14 I indicated that an inverse head and shoulders pattern appeared to be forming in the near term. We can now conclusively say that the inverse head and shoulders pattern has been negated and there are fully formed head and shoulders patterns sitting on the S&P and DOW.

Just because a head and shoulders pattern has formed on the major averages does not mean the market is going to drop further as a reversal off the neckline is bullish. In order to find out where the market may be headed at least in the short term we will look at various charts and technical indicators.

The S&P has dropped slightly below it’s 50 day EMA and is sitting right at the neckline of the H&S pattern. RSI at the top of the screen is in a downtrend and has not hit the bottom of the channel nor is it at oversold levels. The MACD looks like it may be turning up near the 0 level. The bottom indicator is Williams %R, an indicator that uses momentum to measure overbought/oversold levels. Readings below 80 indicate oversold levels. Right now it is reading 99.99 a condition that is extremely oversold. The last time it hit this level was in March, 2009 just prior to the start of the bull market. Also each time it has dropped below 80 since March, 2009 it has indicated a near term market bottom and quickly reversed upward.

If we take a look at the DOW the picture is almost identical except it hasn’t quite hit it’s 50 day EMA.

The U.S. dollar has formed an uptrend channel. There is a downtrend line from the May, 2010 top that was briefly broken through in July but the dollar retreated to the bottom of the channel. That downtrend line now coincides with the 20 day EMA which has acted as near term resistance.

Gold has been on a rampage but appears to have hit an intermediary top. A look at the chart shows that it has rallied right to the top of a huge ascending wedge pattern. A breakthrough of the top line would be incredibly bullish but this line should act as strong resistance. The RSI is in overbought terrritory as is Williams %R. Each time the RSI has moved into overbought levels it has tended to either quickly pull back or consolidate for awhile. (Note: In after hours trading gold has traded above the upper trend line. It remains to be seen if this will turn into a confirmed breakout.)

Conclusion: From a technical perspective the markets appear to be at a reversal point. I would expect a bounce in stocks and a pullback in gold. The current economic outlook appears to be deteriorating but the market looks like it has already factored that in.

The bull market since March, 2009 has been earnings driven. If earnings start to trail off then the market will correct for that. The U.S. dollar is in the dumps and there no longer seems to be a direct correlation between a weakening dollar and a rising stock market. Gold and bonds are acting as the risk off trade as opposed to the dollar. If the dollar can manage to rally it might be good for stocks as it would indicate that the U.S. economy is experiencing a sustainable recovery but the fundamentals do not appear to confirm that view. There is always the possibility of a QE3 which would put even more pressure on the dollar and further inflate the price of gold and other commodities.

What is causing this reversal of fortune is a combination of fundamental factors:

1) China is dumping U.S. treasuries and is buying European debt.
2) U.S. economic data looks weak in the short term.
3) U.S. government debt problems are starting to come to the forefront of economic news.

Even if the dollar manages to head back up, there is now massive resistance at 22.

The breakdown of gold miners indicates that the market believes the rising price of oil is a greater negative to gold miner’s profits than the increasing price of gold is a positive.

I have dissected the above chart of the SPY into various channels. Since the March 2009 bottom, the S&P has been rising in an ascending wedge pattern denoted by lines A and C. Right now the index is getting squeezed near the apex. While this pattern is normally bearish, a breakdown near the apex implies a small move. Therefore I would not put too much credence into this pattern.

Lines A & B form a parallel uptrend channel that the S&P has traded within since November 2008 except for 2 months between February and April 2009 when it dropped to the lower channel denoted by lines B & D.

The MACD at the bottom of the chart has been in an uptrend since November 2008 and it is now touching the uptrend line. The MACD is well above 0 and in order for it to continue rising along the uptrend line the market would need a strong surge.

The RSI at the top of the chart is at levels where it moved higher along with the market since November 2010.

The S&P has been rallying along it’s 10 day EMA since September 2010 and is sitting right at it now. It has also flagged down to it.

All the moving averages are in positive territory as the 10 day is above the 20 day, the 20 is above the 50 and the 50 is above the 200.

Conclusion: Overall the chart of the S&P looks bullish but there are 2 problematic features to it: 1) The MACD is touching it’s long term uptrend line at a high level. It would take great market strength for it to push higher from this point. 2) The S&P is coasting along the top of it’s uptrend channel. While it could ride the upper trend line, at some point it would either have to break through to the next trend channel or head lower.

If the MACD breaks below it’s uptrend line then it would probably head to the 0 point. The last time it did that was in July-August 2010 when the S&P hit the bottom of the uptrend channel twice during that period. The bottom of the uptrend channel currently sits at about 1175 so a similar move in the MACD would in all likelihood take us down to that level.

The 1200-1250 area is a strong area of support. The next major level of support is at 1150 which is below the lower uptrend line. A strong break below line B would indicate that we are heading into a bear market phase with a target of line D that is about 975.

Bear markets generally happen when everything is rosey and then some thorns appear. That is not the case today as there are more thorns than roses, so I do not believe we are heading into a bear market. We may however be setting up for a steeper correction. A correction could also consist of sideways trading where the market is range bound for a few months before it heads higher.