The question now is not whether risk is on the brink of a drop but rather how much of a drop?

The question now is not whether risk is on the brink of a drop but rather how much of a drop? My answer is simple and straightforward: 1661.22 for the Gold and 1369.33 for S&P500.

The end of the last week finished for the Gold (symbol: XAUUSD) with massive liquidation of longs and we have  a top confirmed by a Head and Shoulders pattern. If you look at my previous post "Is risk on the brink of a drop?" the picture is not much different now only that we are much lower now and the risk/reward is pretty much 1:1 if you wanna trade it on the daily chart. The RSI and Twiggs money flow continue to drift lower into negative territory, the 50day SMA provided no substantial support and it seems like the Gold futures market is headed for a meeting with one of the most common used indicators the traders use - the 200day SMA which in our case coincides with the 50% Fibonacci retracement taken from the lows at 1526.70 to the highs at 1795.75.

The S&P500's setup wasn't as easy to play last week as it was for the Gold. It seems that somebody was quite desperate to hold this market from falling all week - lots of large algos were bidding it in a desperate attempt to hold it until the elections. Will they succeed? I don't think so, the markets are bigger even than Bernanke and Obama, and no matter how much they're trying to manipulate it from the background once the king market decides to correct lower, nobody, and I mean nobody, can stop it from falling.
So what do we see on the technical picture here? Plenty of bearish signs - triple top, lower lows and lower highs, broken ascending channel, negative RSI divergence with last top topped at 60 (which is my upper bearish boundary), decreasing Twiggs Money Flow (below 0).
I'm sure I can find many other bearish signs in this market if I add more technical indicators but you got the point. Risk is going lower and it will be rather sooner than later. Think about it - crashes occur when nobody expects them and now everybody expects the stock market SPX, and risk trends in general, to remain strong until the elections, nobody is expecting them to crash now, so if a flash crash is about to occur now is the time, not after the elections when everybody expects it.

Is risk on the brink of a drop?

Leave the fundamentals, QE3 (which was a total failure), elections and all other distractions aside and concentrate on the technicals, they usually don't lie. What do you see? Technical weakness all around the block. The markets are starving for correction, all these short-term european and US election rallies have exhausted the markets totally, nobody is willing to take any more risk at these high levels.

Let's look at the GOLD futures' daily chart first.
I can instantly mark several bearish signs and not even one bullish.
- The first and most important is the Head and Shoulders pattern that usually marks a top after a strong bull move and is considered a strong reversal signal. Look how beautifully it played - the price broke the neckline first, then came back to retest it for resistance, rejected it and finally plunged down to 1754 where it close the friday session.
- 1790 has been proven as a strong resistance this year many times and it holded this time too despite the massive easing from most central banks, which leads to the conclusion that the GOLD futures market is not as strong as most people think.
- Bearish RSI divergence with price closing friday's session below 50 which is another bearish confirmation.
- Twiggs money flow divergence with price action and actively decreasing since 22nd of august, meaning that the GOLD futures market is a massive speculative bubble pumped on speculative bets and not real money inflow.
- Stochastic oscillator gave a strong sell signal with MA's crossover below 80.
- Golden cross - the Golden cross pattern (crossing of the 50day and 200day SMA) is one of the most bullish patterns observed by traders and usually comes with a correction right after it which we didn't see yet but should occur anytime soon.

It gets even more interesting when we look at E-mini S&P500 futures (symbol: ES_F December 12 contract). What do we see here? Not much different than GOLD - fully matured bull trend, divergences, exhaustion, weakness.

- The first and most important bearish sign I would like to bring to your attention is the break of the ascending channel's and price action's support around 1430, then price returned to test for resistance and rejected beautifully to finish on a daily and weekly low at 1421.00.
- Bearish RSI divergence with price closed below 50 barrier of the oscillator.
- Stochastics bearish crossover in the lower area of the oscillator.
- Twiggs money flow big decrease and close below 0.

With all technicals pointing to a drop/correction in the said markets I am strongly bearish and I am looking to short them. Friday was a great opportunity to do it but unfortunately I missed it because I wasn't on my desk and besides that I am forbidden to open positions at friday. However, there are infinite opportunities out there and I am looking to jump on the next one and ride it with the wind.

I wish you a profitable trading in the week ahead and stay out of trouble, folks. Ciao.