It's certainly a sign of the times when investors are relieved when the major indices lose "only" 3% to 4% in one day, but that's undoubtedly how many investors felt going into the weekend. After being "lock limit down" in the pre-market last Friday morning, the S&P 500 and Nasdaq 100 futures were indicating a potentially disastrous day of losses, but stocks quickly stabilized on the open, then drifted sideways to modestly higher throughout the session. The Nasdaq Composite closed 3.2% lower, the S&P 500 shed 3.5%, and the Dow Jones Industrial Average fell 3.6%. The small-cap Russell 2000 declined 3.8%, as the S&P Midcap 400 lost 2.9%. All the main stock market indexes finished near the middle of their intraday trading ranges.

Turnover eased across the board, but the lower volume losses offered investors little encouragement -- remember, the Nasdaq already suffered three straight days of higher volume losses (aka "distribution days") earlier in the week. Total volume in the NYSE declined 8%, while volume in the Nasdaq was 16% lighter than the previous day's level. Trading in both exchanges remained above average levels. In both the NYSE and Nasdaq, declining volume outpaced advancing volume by a margin of approximately 6 to 1.

As investors typically view gold and silver as a "safe haven" in turbulent times, their sharp price declines in recent weeks has been surprising. So far this month, spot gold has lost 16% and spot silver has tumbled 23%. Although these double digit losses are outperforming the main stock market indexes in October, it's definitely nothing to be excited about. Nevertheless, we noticed Gold Continuous Futures Contract (@YG) has come into long-term support of its 200-week moving average, as well as a significant prior low of August 2007. This is shown on the weekly chart below:



Drilling down to a shorter-term daily chart, spot gold also formed a bullish reversal candle last Friday, after bouncing off the support levels illustrated on the weekly chart above. This is shown on the daily chart below:



The long-term support levels of gold, combined with its shorter-term reversal pattern, prompted us to buy Gold Double Long (DGP) last Friday afternoon. Specifically, we entered DGP after it rallied above the previous day's high, then pulled back slightly. Our protective stop is just below last Friday's low. For those not familiar with DGP, it moves in lockstep with the price of the spot gold commodity, but at double the percentage movement. If, for example, spot gold gains 2%, DGP will gain roughly 4%. The more popular SPDR Gold Trust (GLD), on the other hand, is simply designed to move the same percentage as the underlying spot gold contract (and also trades at roughly 1/10 the price of one ounce of gold).

Long-time followers of my commentary know I personally enjoy owning physical gold and silver bullion; preferably coins, but also small bars. Over the years, I've made small purchases of physical gold and silver on pullbacks into major areas of price support, via well-known online distributors such as Kitco. This past weekend, I tried to do the same, but was shocked to learn that physical gold coins are apparently in very short supply, all around the country. Calls to a handful of local coin dealers were basically met with, "You want gold coins? Get in line, buddy!" After some Googling, I learned the U.S. Mint has halted production of some options of Gold Eagle coins. The reason? Unprecedented demand for gold coins has been far exceeding available supply. Considering the recent drop in the price of spot gold, this is indeed quite interesting. Perhaps investors fearing "the end of the world" have been stockpiling gold coins, just in case they may one day be able to barter for a new roof on their house with the shiny stuff.

Last Friday, all the main stock market indexes set new multi-year closing lows, but are still clinging to support of their intraday lows of October 10. Expect to see another test of those pivotal support levels today, along with the whippy, indecisive trading action that will likely accompany such an important test of support.

In the pre-market, the S&P and Nasdaq futures are once again pointing to a decidedly lower open. As of ninety minutes before today's open, the S&P 500 is poised to open at or below last Friday morning's low. The Nasdaq 100 is positioned to open just above its prior day's low. As such, it's shaping up to be another interesting morning. As long as the major indices are toying around in the vicinity of their multi-year lows, it's really just a daytrader's market. As new swing trading patterns develop, either on the long or short side, we'll be sure to point them out. Other than our new gold position, we're still on the sidelines.

Open ETF positions:

Long - DGP
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.