It’s a crazy trading environment out there. Whether you are in bank stocks, gold stocks, silver stocks, or even cyclical stocks, the stock market risk is high at this time, as we just completed a volatile week of trading.
The European debt crisis is keeping buyers on the sidelines and waiting for something magical to happen. The economic recovery is showing improvement here, but, with a high unemployment rate and declining home prices, it will continue to be a difficult path.
On the charts, the blue-chip Dow Jones Industrial Average breached below 12,000 and its 200-day moving average (MA) last Wednesday, but has managed to hold in positive territory for the year.
The NASDAQ and S&P 500 broke below their respective 200-day MAs and are back to the loss column. The S&P 500 is holding just above its 50-day MA of around 1,200.
The stock market risk is high especially since the charts continue to show a bearish “death cross,” with the 50-day MA below the 200-day MA. The stock indices need to hold at the critical 50-day MA; otherwise, there could be downside moves.
The light volume on up days is a red flag and indicates stock market risk. The buying has been associated with light volume, which does not support mass market participation. The end result is a bearish divergence forming between price and volume, and adds to the stock market risk.
An interesting fact is that the key stock indices have peaked on three successive upward moves, but the tops of the peak have been lower.
There is also stock market risk with the moving average convergence/divergence (MACD) indicator, which appears to be topping. The MACD on the NASDAQ looks the worst, with a minor sell signal emerging.
The NASDAQ could drift down towards the 2,400 level, which we last saw at the start of October, if sustained buying support fails to emerge.
In the commodities area, copper appears to have found some legs after its recent slide. Copper is playing off the prospects for the global economies after a bullish double bottom.
I continue to recommend adding some gold to your holdings as a counter to the stock market risk. Although at times the bullion has had a rough ride, prices have turned around significantly after first breaking above $400.00 and we believe the spot price of gold could take a run at $2,000 in 2012 should the global economies and stock market risk continue.
Silver is a trading commodity based on the economic recovery and demand for electronics and industrial applications. A strong break above $35.00 would be positive and could drive a rally to around $40.00.
The December WTI Oil remains bullish—breaking above $100.00 on November 16 after data showed a decline in U.S. oil supplies. The problem is that higher oil means higher gasoline prices, which could ultimately impact consumer spending and the stock market risk.
Whatever you are trading, the key is prudence; do not over-commit to any one area.
Given the risk, make sure you are hedged via put options, which you can read about in Protect Your Money Made From the Rally (PC103111).
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