Seeing a little bit of short covering today as traders are not sure what will happen this weekend. Many are hoping for a weekend resolution to the European banking crisis.
The markets have halted at some interesting points:
The S&P 500 has retested lows established earlier this year. Many traders look to this area for a short term bounce. If the market breaks below this area, then we are most likely heading to last summer’s lows.
Gold has been breaking down as well. This time of year is historically strong for gold – but has been sold off in the recent decline. Two schools of thought on the sell off are:
1) Investors who were leveraged received margin calls and needed to liquidate in order to pay for the margin call. Investors typically sell their winners first, and gold has been a winner this year.
2) Beta collapse – Some are worried that the European banking crisis will get much, much worse. This causes practically all asset groups to sell off as investors liquidate entire portfolios and move into cash.
If we start seeing a continued move down by multiple asset classes, then it is a good indication that we are looking at a bigger global decline and possible some global liquidity issues.
In the meantime, gold has also retested it’s lows:
Bottom line – be careful and use tight stops.