Happy Memorial Day Slopers! Before I dive into the Revolution roadmap, I would like to offer my sincere appreciation to the men and women of the U.S. military. Bravery and sacrifice are to be honored, and I thank you for that. With that said, bring our troops home, where they belong.
Now, let's get to the charts. I continue to use GDOW as the best overall view of what is truly going on in the markets. From a fundamental standpoint, I would argue that U.S. markets have been skewed higher as money has fleed other global markets, fearful of currency/sovereign crisises.
GDOW is currently resting on trendline support coming up off the March '09 bottom through the October '11 bottom. A break of this trendline, should lead to a quick impulsive move down. Also, notice the structure of the overall decline since the 2011 top. From February '11 through July '11, the index formed a downward sloping head & shoulders top. It then formed a similar structure from February '12 through April '12, as the move higher off the October bottom topped out. Ideally, what I would like to see is another similar structure develop. Let's take a look how 2012 might play out.
What I'm looking for over the next two weeks is a break of the trendline support, and then a quick move down beneath the October '11 low. This would then be followed by building a right shoulder through June/July '12, backtesting the trendline break as well. A break lower out of this downward sloping head & shoulders structure would have the potential to yield a powerful bearish move, a la 2008. Is this possible? Let's take a look at GDX and the VIX to see what they are saying as well.
As has been well documented on the Slope by our gracious host, the GDX head & shoulders top continues its breakdown. After making an initial impulsive move beneath it's neckline, GDX has enjoyed a bit of a bounce, moving back into overbought territory on the daily stochastic. It is ready to resume it's fall. Looking back at the 2008 GDX analog, I would put us around the beginning of September 2008. From September 2nd through September 11th, GDX fell from 37.19 to 27.86. The move was swift. I believe GDX is signaling the same thing it did in 2008, a deflationary crisis event.
On an aside, for my view on where gold is heading once this flush is finished, I encourage you to read a post TK (and Serge) made last August. Goldy von Moldy.
Lastly, let's take a look at the VIX. After breaking out of its inverse head & shoulders setup, the VIX impulsed higher, and then has since moved back to ease off its overbought levels, backtesting its breakout as well. Ideally, I'm looking for a quick move higher into the low 40's, before running into trendline resistance coming off the August/October '11 highs in the VIX. Notice that the VIX has continued to honor it's uptrendline on the daily MACD. A break beneath this trendline would be a red flag.