Fibonacci & Key Levels – An Eventful Week for Stocks and Commodities

First, our thoughts are with those affected by the tragedy in Boston.

After a quiet time in the markets with steady gains throughout 2013, it’s been a wild and woolly run in the financial markets in recent days. The S&P 500 Index (SPX) (SPY) just made a long awaited all-time high, meanwhile Gold (GLD) had its biggest 2 day drop in 30+ years. Other commodities have been crushed as well. The best measure of option trader sentiment and expectations, the CBOE Volatility Index (VIX) (VXX), popped to over 17 on Monday afternoon, following a test of the multi-year lows around the 12 level.

Let’s take a bigger picture look at these moves to gain some perspective. We discuss key downside levels that could be reached (and upside on the VIX), if we see continued volatility increase and potential downside going forward this Summer — but that is not a certainty to occur. The market could well shrug off the recent turmoil — and gold could stabilize/rebound as well.

First take a look at the SPX Daily Chart below. Assuming the recent high we just made is a significant trend top, we can place a new Fibonacci Retracement based on the November 2012 low to the April 2013 high.

This gives several key levels to watch, including 1486 (50% retracement), 1438, 1497, 1534 (other Fibonacci levels) — note that one of of these is right around a key SPX level such as the round 1500 strike and the 1473 SPX trend top reached in September 2012.

SPX Daily Chart

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Gold’s plunge has been swift and sudden — the fall just in the past 2 trading days has been breathtaking in its size and scope. Using the 2013 Continuous Gold Futures data from TradeStation, the 9% drop we just saw occur was the biggest 1 day down move over the past 12+ years. Other sources are reporting this as the biggest 2 day drop in Gold since 1980.

On the Gold Weekly Chart below, the key uptrend from 2008 lows to 2011 highs was broken some time ago — we’ve been aware of and discussed (and traded) this trend many times — also occurred in other Commodities such as Silver (SLV) — and other metals like Copper (JJC) as well.

Note here that 1338 is 50% Fibonacci Retracement, and this was actually hit yesterday according to this data. The rapid nature of the decline, especially over the past 2 weeks, indicate, that the high volatility is likely to continue in the coming weeks/months. Key levels on this chart to watch going forward in 2013 (round level/Fibonacci Retracement level): 1000/1017, 1200/1194, 1500/1482, 1650/1659.

Gold Continuous Futures Weekly Chart

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On an even longer-term perspective, Gold had been in a huge uptrend for 10 years+. See the chart from kitco below. After a long period of stagnation and consolidation in the 1990s, Gold went from around $300/oz. to nearly $1900. However, if this major uptrend was broken (as it appears it has been) — a 50% simple retracement gives a downside level to watch in the 1000 to 1100 area.

Gold Long Term Chart

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Finally, let’s take quick look at volatility. The CBOE Volatiity Index (VIX) (VXX) measures the implied volatility of SPX options, and is pretty much the best measure of sentiment among option traders. After many years of higher volatility due to the Mortgage and other economic crisis, recently the VIX has been reaching multi-year lows around the 12 level. You can see the key levels and ranges to watch on the VIX going forward short-term and in 2013 — 12 to 20 is a key range, 16 is a key level, and 30/40 look to be potential upside outliers.

VIX Daily Chart

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The VIX has tended to be more of a “smart money” indicator in recent years, in my view, and if it shrugs off the recent events and heads back lower quickly, that could mean the rally in stocks may resume/continue shortly. Gold and commodities are another story, as they are charting a different course than stocks currently.

Also, currencies and bonds will play a part in the upcoming story. Will money flow further into the US Dollar (UUP) and Treasury Bonds (TLT) as it often does in times of uncertainty.

We’re likey to see continued volatile moves in the coming weeks/months in my view in a variety of assets. It’s prudent in general for traders to shorten holding periods during such times.