foxex: Taco Tuesday

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, May 05, 2020

1. Late sell off disappoints investors

2. Market volume profile shows resistance ahead

3. A look at demand for Gold and Silver

Market Moves

Stock indexes rallied strongly throughout the day, only to give back a significant portion of those gains in the last hour. Two headlines propagated through the web seemed to coincide with the sell off. The first was the news that Federal Reserve Vice Chairman Richard Clarida expressed concern that the economy may need more support and a rebound is three months away.

The second involved a study that documents how the original strain of virus that started the COVID-19 pandemic has mutated and is likely to be more contagious than previously thought. The result was a sell off not strong enough to cancel the gains, but sharp enough to remind investors that nothing about the market nowadays is like it used to be. (A timely meme about the pandemic-dampened Taco Tuesday seems oddly appropriate.)

The chart below captures how the late sell off hit Invesco's Nasdaq 100 index ETF (QQQ) and three of its major components: Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN). Each of these stocks responded differently at the end of the day, revealing which stocks investors were more willing to hold on to. This is actually a bullish alignment because if investors thought the pandemic's effects were to worsen, Amazon should have been the clear winner, and Apple the loser. The opposite outcome suggests this sell off is likely temporary.

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Market Volume Profile Shows Resistance Ahead

The rebound in stocks since the March lows is likely to meet with resistance in the coming days. The chart below displays a volume breakdown at different price levels. This kind of analysis is also known as a volume profile study or a price by volume chart (PBV).

This breakdown uses State Street's S&P 500 index ETF (SPY) to point out the prices where the highest relative volume has been traded in the previous quarter. These levels are then likely to translate in to support and resistance for the coming quarter. If the markets are going to rally higher, buyers will have to endure significant selling activity in SPY near price levels of 295 and 305.

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A Look at Demand for Gold and Silver

The price of gold and silver often tend to trade in very similar fashion, and many investors have considered the two metals inextricably linked in price. However, recent circumstances have demonstrated how each metal can be driven by differing supply and demand dynamics.

The chart below compares State Street's Gold price index ETF (GLD) with iShares' Silver price index ETF (SLV). Since the beginning of the year, and as the pandemic has spread its impact, the price of these two metals has diverged in an unprecedented way. The additional comparison of State Street's Industrial sector index ETF (XLI) tells the story.

Since over half of the demand for silver comes from industrial manufacturing (where only 9% of the demand for gold comes from), manufacturers cutting back on production means less demand for Silver. Like so much of everything else nowadays, investors hope this is only temporary. Many are considering investing in an inverse Gold index fund such as ProShares UltraShort Gold ETF (GLL) while simultaneously holding SLV for a paired trade. Experienced chart watchers are likely to recognize that it might be better to simply watch these assets for an indication of when things are, in fact, beginning to return to normal.

The Bottom Line

Stock indexes opened higher and rallied into the final hour where they suffered a disappointing sell off. This kind of resistance is likely to recur in the weeks ahead, on occasion, as prices revisit levels where significant volume occurred. The comparison between Gold and Silver prices may serve as a useful indicator of when manufacturing activity is on the mend.