Spain's Downgrade: Dollar and Gold

Spain's downgrade, along with broader European concerns, had the dollar and gold trading higher simultaneously, an uncommon event.
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By Chris Vermeulen of TheGoldAndOilGuy.com

Spain's downgrade and the widening European debt crisis have made this an interesting week.

Investors are looking at the dollar (USD) in a new light, thinking that maybe it's not that bad of an investment after all. As of Wednesday evening, the dollar and gold had risen so far this week on the news about Spain's downgrade as well as broader worries about Europe.

A simultaneous rise in the dollar and gold is not very common.

However, with financial crises popping up around the world I think the dollar and gold will continue to strengthen (with some corrections along the way). (See the first chart below.)

I think it will take another 12-24 months before another wave of issues arises in the financial markets. Until then we'll just continue to focus on buying the dips and corrections and making an occasional short play on the larger corrections.

S&P 500 Daily Chart

On April 14 we saw an extreme level of selling that sent the broad market sharply lower. This selloff was followed by value buyers pushing the prices back up to new 2010 highs. (See the second chart below.)

Well, this week we have seen the same extreme selling volume, and the question this time is whether there will be buyers again.

Gold is in a bull market but it was set up for another round of selling, but this Spain issue has been a pain. If we had had another downward move on gold to the $1115 to $1120 area it would have washed out the majority of gold bulls, setting up the commodity for another big rally.

The Europe debt crisis has thrown a twist into the picture by helping boost the price of gold. Gold could still head lower, washing out the weak positions, but the picture is fuzzy. Silver did not react much to the news of Spain's downgrade as it's not really seen as the safe haven that gold and dollar are.

As for the stock market, it looks and feels like we are about to start a correction. But this week we saw fear in the market again, with the VIX and selling volume surging higher to levels that have triggered temporary bottoms in the past. The problem I see here is that some key price levels have been taken out, so the odds are pointing to lower prices in the near future.

Tuesday's panic selling has pushed the market into an oversold condition, so we should see a drift upward for one to four days before sellers get active again as they want to sell and short the market at premium prices.

In short, precious metals are not giving any clear price action to take advantage of yet, and the S&P 500 looks like it's on its last legs before heading lower for a meaningful correction, which should provide a short setup and then a nice long setup once it bottoms out.

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Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.