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II Highlight 
16 October 2012

Dear Insight readers

Welcome to the October edition of Investor's Intelligence free monthly newsletter.

In the last issue, at the start of September, we were bullish and net long in our portfolios. However, the technical situation changed mid-month and we quickly reversed our view on U.S. equities to bearish. That was relayed to our subscribers at the time. Some of the evidence for turning negative on a dime is highlighted in the report below. We also review two of our point-and-figure indicators which further support our view.

The upcoming Presidential election would have passed by the time we publish the November edition of II Insight. The election will no doubt create volatility so now is perhaps a good time for non-subscribers to consider a trial subscription. If interested, please follow the links in the report below for further details.

Happy charting!

Tarquin Coe

Technical Analyst, Investors Intelligence, New York office

Ominous pattern on the S&P 500?

The Fed announced its next phase of quantitative easing on the 14th September. In the Coe Report, which was 180% net long that day, we analyzed the market's reaction:

"The S&P 500 has blasted through the May 2008 high as well a trendline drawn between the peaks of May 2011 and April 2012. This morning the index was at its highest level since December 2007. The resistance breaks are highly bullish but coupled to the very positive news this week, the present run is beginning to look too good to be true."

From that point we acted fast to cash profits and unwind the net long position (portfolio now stands net short).

In that Coe Report on 14th September we also highlighted a potential rising wedge on the S&P 500. It's a monster of a pattern and if it plays out the index could recoil all the way back to 1100! The pattern is yet to confirm but it is a dark cloud lingering on the horizon.

A monthly subscription to the Coe Report is available for just $40 a month.

Indicator reviews

The NASDAQ High-Low Index is a ratio of the number of NASDAQ stocks showing new 52-week highs divided by the sum of the total new highs and new 52-week lows, smoothed using a 10-day moving average.

The start of this month saw the indicator reverse from overbought. A reversal from the same 80%/90% region occurred in March/April, after which, the NASDAQ 100 corrected some 10% down to its June low. The present downturn by the indicator is only in its infancy so further weakness looks set for the NASDAQ 100.

The indicator is updated daily and subscribers have full access to this and many other indicators on our website. A subscription to the US Daily Hotlines, which provide daily commentary on the indicators, comes with website access.

 

The NASDAQ Cumulative Advance/Decline chart is updated daily and is simply the cumulative total of the number of advancing stocks less the number of declining NASDAQ stocks.

At the start of the month this indicator also reversed down. It shows that on an on-going basis more stocks are falling than advancing. This present condition is not indicative of a healthy market. In fact the breadth trend for the past two years for the NASDAQ has been down reflecting a tiring market.

Coupled to the message from the NASDAQ High-Low Index, investors need to be cautious about chasing the NASDAQ for the time being. That view would change only when these indicators both reverse to the upside.

This indicator is also updated daily and covered in the US Daily Hotlines. Subscribers are able to plot the indicator, along with hundreds of others, at any time on our website.

 

Gold topping out?

 

Is the rally over for gold?

On 15 October, the precious metal slumped through $1750 level for the first time since early September. This downside breakout followed shortly after a failed upside breakout at $1,800 (see below). 

Technically, gold's daily chart certainly looks bearish and short-term toppy.

However, I am uncertain how far the downtrend will persist, simply because there is support at the 50-day moving average, followed by another at $1670, where the 150-day moving average is currently situated. If that goes, there is another support at $1600. 

Therefore I would not short the metal from here, preferring to buy it on further setbacks after the weak hands are forced out. The entry range for gold is at $1700-$1670; for silver $31.00-$30.00.

 

As a matter of fact, the UK Stock Service has been making bullish calls on gold, silver, and precious metal miners since late July.

For example, I recommended a buy in Fresnillo, one of the largest silver miners in the world listed in the U.K., several times before prices rallied 25% (see right). The firm recorded a 15.1% rise in gold production this month. 

At the moment, we are running a promotion for II UK Stock Service, where you can take the full service for just £199 per annum. Click here to subscribe!

 

Dr Jackson Wong, London

New high for Natural Gas, but...

 

The mid-September to early-October advance by the Natural Gas contract became overbought and a correction duly occurred.  Note that support arrived near old resistance from the summer high during that phase, with the 200-day moving average also helping to provide a lift. 

Now, following that consolidation period, prices have moved up again.  However, we have resisted the temptation to open new longs at this point for a couple of reasons.  Firstly, the RSI momentum indicator is near overbought levels again.  Secondly, there is late-2011 resistance nearby.  Dips could be used to buy, or add to existing longs.

Interested in Investors Intelligence's superb calls in commodities? Click here to subscribe.

Cornelia Dichio, London

 

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US Sentiment holds the key
The Advisors Sentiment Survey continues to provide advance warning of major market turning points.  
The analysis and data regularly feature in the international financial press as a key indicator of market reversion.
Examples of these articles can be found on Barrons, NY Times, and Investor's Business Daily.
Read what CNBC said about the biggest switch in sentiment for 7 years.
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Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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