On Monday morning, as I readied for the first big earnings week of Q1, stock futures and, of course, commodities were flashing red on my iPad. My first thought was that the one-two punch of last week’s premature bid of stocks into earnings season coupled with free-falling commodity prices should have been the tell going into this week. After a few moments of, “Doh, shoulda, coulda added more shorts into Friday’s close,” I reminded myself that I must stick to my process or pay the steep price of adding emotions into the mix.
After it was all said and done, the S&P 500 finished the day with a 3 standard deviation move lower and the largest one-day down move since August 2011. As the saying goes, “risk happens fast,” and one had better be prepared.
In one day, the S&P 500 erased all of last week’s gains and slipped back to its November uptrend line. After the early April test of this line, this second test seems to have more velocity and, thus, will likely slice through. My next support line is at 1,538, a break of which should move the index at least toward 1,500 in coming weeks.
With Monday’s move, the Russell 2000 closed below its early April low, confirming a lower low after last week’s lower high.
The carnage in the world of small caps is best viewed in the chart of the iShares Russell 2000 Index (NYSE:IWM). After last week’s retest of the underbelly of the broken November uptrend, on Thursday, the stock formed a suspect shooting candle, followed by Friday’s doji — all of which was confirmed with Monday’s swoosh lower.
With the key sell-off day in stocks, the CBOE Volatility Index (VIX) spiked to its highest level since late February.
However significant Monday’s price action was in stocks, it was even nastier in the precious metals corner. Gold, as measured by the SPDR Gold Shares (NYSE:GLD), slumped another 8.78% after a big sell-off on Friday, and silver, as measured by the iShares Silver Trust (NYSE:SLV), crashed 12.62%.
As I so often point out, these are typical moves of assets that get too crowded. I could point to Apple (NASDAQ:AAPL) as an example, or a plethora of others for that matter. Once the crowd wants out, there is only so much space in the exit frame and prices slide fast.
Needless to say, the charts of GLD and SLV are both broken beyond repair, and those looking to play any long-side bounces better pick their spots carefully. These are not charts to play with. Unless you are glued to your screen all day, there are better long-side trades to be had for the time being.
After forming a series of lower highs since September 2011, GLD finally and violently broke key lateral support (blue line) on Friday, and the downward spiral accelerated rapidly. The $120 area looks to have better support for now.
The picture for silver looks much the same, where last Friday’s breakdown is simply too violent to step ahead of. Better support on SLV is around the $19-$20 area.
Volatility in the commodity space often serves as a precursor to volatility in stocks. As such, the moves lower in gold, silver and oil, among other commodities, has thus far been a good leading indicator.
For more insight into the situation, here’s my video commentary: