If you’re even mildly tuned in to the financial markets, you’re no doubt aware the Dow Jones Industrial Average tumbled more than 200 points Friday, the biggest one-day drop in nearly three years. The traditional financial press placed the blame on “earnings jitters,” but earnings haven't been all that bad. Perhaps there’s something more going on here.

I look at many, many charts each and every day, and there were other significant and, to an extent, disturbing moves in a number of markets you might not be looking at. I’m going to show you some of these and then discuss the implications--potentially ominous and, at the same time, full of opportunity.

I already mentioned the Dow, but the S&P also fell more than 2 percent, and Google’s crash exceeded 8 percent.

What about the world markets? Will these offer a degree of safe diversification? Well, the Japanese Nikkei futures also tumbled Friday during the day in Chicago (after the Japanese market closed), signaling a poor start to this week’s trading in Asia. Many US investors have been unaware of the Nikkei’s major, one-year bull market. Take a look at the following chart of the Chicago Mercantile Exchange Nikkei 225 Futures Index.

Nikkei

www.commodity.com

For the first time in nearly a year the Nikkei Futures Index closed below its 50-day moving average, an ominous indicator of a trend change from up to down.

How about gold, traditionally a safe haven in times of stock market instability? It hit a new 25-year high on Friday morning, but couldn’t hold that level and ended up lower on the day.

Now take a look at platinum, a relatively thin market. Most of you haven’t seen a platinum chart lately, but this industrial/precious metal has been on a tear. In the last three years platinum has nearly tripled in price, while gold prices haven't even doubled. However, as you can see on the chart, platinum formed a major key reversal down, quite a rare occurrence, on Friday.

A key reversal down is formed when a market registers an all-time high (platinum hit a high of $1,056 per ounce Friday morning) but then can’t hold the high and closes lower than the previous day’s low on big volume during the same trading session. During the years, I’ve learned to respect these patterns as fairly good indicators of tops.

Platinum

www.commodity.com

Take a look at the spot heating oil chart below. You’ve probably heard crude oil rose above $68 Friday on Iran tensions and is now knocking at the all-time high just above $70. Most consumers think first of how this will cost them at the gas pump. But let’s bring it closer to home for those who heat with oil: Not only was heating oil up 7 cents a gallon on Friday (and 15 cents for the week), but heating oil futures broke out and closed above their 50-day moving average. This is an equal but opposite indicator of the type of trend change described above for the Nikkei.

Heating Oil

www.commodity.com

I could show you more charts depicting interesting major trend changes in unrelated (or, perhaps, it is all related) markets last week, but you get the idea: Something big is brewing.

The markets will tell us what to do; I’ll get more specific for trades in Futures Market Forecaster, but the overriding message here is caution. Be particularly cautious before increasing exposure to stocks, both foreign and domestic. Do not assume the traditional refuges of gold, bonds or certain currencies will provide safe alternatives. Each market class has to be evaluated independently. Remember, it’s easier to go with the prevailing winds--the trends--than to paddle upstream.

Finally, volatility has increased in recent months due to the proliferation of large hedge funds involved in trading every market class in the world today. It’s probably time to trade smaller positions because this will allow you to ride out the random fluctuations that seem to be bigger and more erratic than they were in calmer times.

© 2006 George Kleinman
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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

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Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.