Friday, July 18, 2008

Oils T1 and Golds A wave

Sounds like a 60's psychedelic rock band doesn't it?

Oil appears to be in the beginning stages of correcting the large T1 move out of the 07 lows. You can find all the technical rules on the lower right side of the home page. We should now see oil test the consolidation zone. I see where the media is already labeling this a bubble. Baloney! Bubbles form when the public piles in. Bubbles form when supply swamps demand but price still rises. Neither one of those has happened yet.

All that happened is human emotion got a little carried away and too many people jumped on the energy complex in a market where nothing else was working. Now that bullish sentiment needs to be corrected to set up the next leg of the bull. I suspect this correction will take some time. We're not going to wipe out the extreme bullishness in only a month or two. Oil is probably going to have to trade sideways to down for a year or more. Makes sense as we are now in a rescession and demand destruction is occuring.

The second chart shows Golds 4 wave pattern. We are currently in the A wave that may or may not top out as oil rolls over. I suspect that gold will follow oil down. I also suspect that Gold is going to resist oils pull. It's already happening as the gold:oil ratio is starting to trend in favor of gold. During the first phase of the commodity bull oil outperformed gold. During the second phase gold should significantly outperform oil. So far oil has increased over 1300% and gold about 300%. During the second phase expect gold to fill that gap.

Once Gold's B wave finishes it will be time to get long precious metals in a big way. It will also be time to concentrate on the metals and forget about oil. That's not to say oil won't go higher, it will. Just that the big % gains are now over in the energy markets. The real opportunity now lies in the precious metals sector for years to come.

I'm watching for the first sign the the FED is ready to panic again. Oil breaking is just the out the FED needs to start cutting, which is going to be necessary in order to save the banking system and Bernanke has made it abundantly clear that this is priority #1 and to hell with what happens to the rest of us. Once we smell the cuts are coming it will be time to load up on the metals.