Dead Cross Is Confirmed.

Several weeks ago I wrote about the death-cross phenomenon in The Death Cross Sell Signal Analyzed. The death cross occurs when the 50-day moving average crosses the 200-day moving average on the downside. These patterns, when combined with other technical indicators, can predict major market downturns. You may have read articles from the bullish camp and from many technicians contending that the death cross isn't a proven or a contrary indicator. I, however, assert that this warning indicator prevented many wise investors who heeded its signal from losing their life savings in 2008.

The recent post-Fed free-fall is confirming the death cross as this will be the third major failure of the 200-day moving average. When a technician starts seeing bearish signs, it's important to look for subtle clues in chart patterns. In this case, the clue was the bearish rising wedge: It's a rally that trades up on decreasing volume. This bearish rising wedge took place concurrently with the right shoulder formation of a head-and-shoulders pattern. This breakdown coupled with bearish price-volume action confirms that selling pressure far exceeds buying. When all these signals happen at the same time, you can expect a rapid downturn to follow. This correction is putting pressure on the 200-day moving average slope. If that moving average begins to slope down, it becomes a heavy area of resistance and will confirm the death cross from early July. The odds of a long-term downtrend are becoming highly probable. These signals could possibly indicate the start of a 12- to 18-month down cycle.

Gold, on the other hand, has shown great relative strength despite the general markets correcting and negative sentiment about the economy from Washington. On July 28, I wrote that gold was reaching major long term trend support and when everyone was selling, it was exactly the time to be buying. That day proved to be a pivot day for gold.

Gold is breaking out compared to the general markets and especially to the euro. It's significantly rallied over the past couple of weeks and has broken above its 50-day moving average, which showed little resistance. Now that 50-day has been broken to the upside, it should act as support as it builds a base to challenge new highs.

The Fed will continue to ease and print money, which should be excellent for gold and silver stocks.