S&P and Gold Divergence
The stock market plunged, while gold rallied in a safe-haven bid after Congress rejected Treasury Secretary Paulson’s proposed $700 billion financial bailout package on Monday, September 29. While I think these trends will reverse in the short-term once some sort of relief package passes, in my opinion, the economy is weak and the stock market remains on shaky ground. I think we will continue to see a flight into gold and out of stocks until the global economy stops bleeding, and am recommending trading strategies accordingly.
The stock indexes started the day down Monday, and rally attempts failed as the market began to crumble as the day wore on. The Dow Jones Industrial Average plunged nearly 778 points, or 7 percent, it’s worst one-day drop ever, while the S&P 500 fell 106 points, or 8.8 percent and the Nasdaq Composite dropped 199 points, or 9.1 percent. A lot of people were speculating the bailout would be wrapped up Sunday, it would be signed, and the stock market would cheer the news. You can see the breakdown on the 5-minute chart of the E-mini S&P futures when that didn’t happen.
We saw a lot of buying come in around 12:30 on the chart in the middle of the screen, where you see a very large red candle, then a small green and large green candle. That’s when the news was reporting the Congressional vote and showing more “yeas” than “nays.” But then, the market turned and fell off steeply into the afternoon when the votes were finalized and the plan rejected.
Read the rest of Phil’s article, including trading ideas.