Confused yet?

To say this has been a difficult market lately is putting it mildly. The other day I noted in one of the daily updates that I thought it was going to be a waste of time to try and trade this market with any kind of technical approach be it patterns, retracements, support and resistance, Elliot wave, etc., etc.

Here's my opinion on what I think is going on. The market is trying to rally. However the fundamentals are so rotten that there just isn't any way to justify a higher market. The chop over the last couple of weeks hasn't helped either. Traders are now too nervous to hold for any length of time. Not exactly conducive to a trend developing.

With all the government intervention traders have no idea if tomorrow they are going to come in and the rules will have suddenly been changed. Also not conducive to a trend.

On top of that we just witnessed a crash, of historic proportions, that originated from below the 200 DMA. That's pretty unusual. As I noted the other day we are still extremely stretched below the mean. So I think it's going to be tough to crash again from these severely depressed levels.

In order to get the next big leg down I think the market is either going to have to find a way to rally and close some of that big gap between it and the 200 DMA or we are going to have to continue trading sideways and let the 200 DMA catch up to the market.

Gold long term chart

Ever since gold's break of the intermediate down trend I've been wondering if we didn't see the long term bottom a little earlier than expected. Of course there is no way to tell at this point but I wanted to point out the size of the consolidation that we are talking about here.

I've pointed out in the past that the size of the consolidation is often a clue as to how large the rally will be once an asset breaks out of the consolidation.

I'll have more in tonight's update.

Will we ever regress to the mean

I suspect most investors have forgotten that the market is still extremely stretched below the 200 DMA.

I'm going to go over the implications in tonight's report.

Gold:XAU ratio in buy zone

Following up on my last post. If the breakout in gold is for real (and even if it isn't) the miners are a sreaming buy right now.

During the forced liquidation in Oct. and Nov. the miners got beaten down unmercifully. Compared to the price of gold they have never been this cheap.

Even after rallying over 100% the miners are still incredibly cheap. In fact at the current gold price the XAU would have to rally to $220 just to be fairly valued.

Is the golden bull back?

With yesterday's rally gold has now broken the down trend line and is potentially set up to break the pattern of lower lows and lower highs that has been in effect since March.

I think we have some potentially interesting developments in the precious metals markets.
I'm going to go over them in depth in the weekend update.

The banks went too far too fast

Yesterday's 19% swoon in the banking index was enough to trigger a Bollinger band crash trade. You can see from the chart that these crashes are usually followed quickly by a snap back rally. However they have also been followed by more weakness.

The general market obviously needed the banks to rally to have any hope of a sustainable rally. We didn't get it last Thursday or Friday and that led to more selling Tuesday. Finally with yesterday's crash the BKX got oversold enough to bounce.

The question is did today's bounce signal the daily cycle low we've been looking for? Maybe!

I still have concerns though and even if we did get the short term low we were looking for virtually none of the criteria for an intermediate low have been met. So the assumption is that any bounce here will be of the dead cat variety and may be rather short lived.

More details in tonight's update.

Dow Theory nonconfirmation

We now have a Dow Theory nonconfirmation. The Transports have closed below the Nov. lows but the industrials have so far not confirmed. I expect that the industrials will eventually confirm the move by the transports as it now appears the weekly cycle has rolled over again.

I'll tell everyone what I told subscribers. We are going to get the buying opportunity of a lifetime, probably in the fall of 2010 but you have to get there with your capital intact. Almost every mistake I made last year was on the long side. Duh we are in a bear market!

Make no mistake this is probably the most dangerous market in history. Those that think they are smart enough to play both sides of this thing will most likely end up getting chewed up and spit out before this is over.

I will not be playing the long side anymore with the possible exception of very small positions and only at weekly cycle lows. There are two courses of action here. One can sell into rallies or one can be in cash. Either way, the goal of every investor should be to just make sure they get to the bottom in 2010 with something left.

Something for nothing

My daddy taught me a long time ago that there is no free lunch. You just can't get something for nothing in this world.

Governments embrace Keynesian economics because we all want to believe that we can get something for nothing. That all we have to do to cure any problem is print money or hit a computer key nowadays.

I can see it in the hope on peoples faces as Obama promises to fix all of their problems. They want to believe in magic.

How is he going to do it? With a stroke of the computer key of course. It doesn't really matter that the US is technically broke. The theory is that we can rectify that by simply printing more money and creating more and bigger debts.

Let me ask you a question. If you were broke and couldn't pay your bills does it really help you to get another credit card and max it out? When you do max it out does it really make sense to repeat the process again and again?

Well that is exactly what the US is doing. If it doesn't work for an individual why should anyone think it will work for a country?

The downside is of course if an individual does this he eventually takes down not only himself but any credit card company that was dumb enough to give him credit .

The scary thing about the big picture is that the whole world has been issuing credit cards to the US. Not only are we spending ourselves into bankruptcy but we are now trying to take down the rest of the world along with us.

At what point do we accept the fact that we really can't get something for nothing? When does it finally dawn on us that we can't keep spending trillions of dollars in a fruitless attempt to avoid taking our medicine? And when do we realize that the longer we avoid taking that medicine the more bitter it becomes?

The most important chart

I'm just guessing here but I think the dollar rallying back above the 200 week moving average and rising unemployment are going to be the most important themes of 2009. Both are deflationary.

Until I see the dollar move and hold back below the 200 week moving average I'm going to assume that deflation is the name of the game for now.

Actually as long as unemployment continues to rise I don't really expect any easing of the deflationary pressures. So I have my doubts that we will see the dollar back below the 200 this year and maybe not next year either.

As a side note; I expressed my opinion in a prior post that gold demand would drop in a global slow down since the largest use of gold is in jewelry. It appears to have started.

possible 1-2-3 reversal

We have the makings of a possible 1-2-3 reversal starting on the S&P. However I have some serious concerns at this point. I'm going to go over them in the weekend report.

Gold

I just wanted to do a quick post on gold today. I'm still see incredible bullishness in the gold bug camp.

I think most inflationists assume the incredible expansion of the Fed's balance sheet is going to immediately lead us into a hyper inflationary environment.

While I agree that this will be the eventual outcome and this is exactly the unintended consequences that are going to result from the Fed's current actions I don't think it's going to happen quickly.

I have a feeling all the gold bugs loading up on gold right now are going to be too early and probably end up selling at the exact bottom.

I'll remind everyone that the main source of demand for gold is jewelry. I don't see that demand skyrocketing in a deflationary environment or with unemployment over 10% (where I expect we will be at some point this year). Actually if unemployment were still calculated in the same way it was several years ago we probably already have over 10% unemployment.

There will come a time to buy gold and silver again but I think it's probably still too early at this point.

Dollar rally back on

I've been watching the dollar rally for a close back above the 200 week moving average. Yesterday we got that close. If the dollar can hold above this major support level into Friday's close then I think we may have seen the end to any rebound in commodities and probably stocks.

I've been saying in the daily reports that a move back above the 200 week moving average would constitute confirmation that the dollar rally is back in force and deflation is still in control.

60 minutes on oil

This is all over the Internet today and I'm going to throw my 2 cents in also.

The basis of the 60 minutes story was that the spike in oil last summer was caused by speculators. Duh ya think?

But there's so much more to the story than that. The beginning of the oil bull market was rooted in fundamentals just like any bull market. The end of a the bull market was carried on the back of speculation and greed again just like all bull markets.

However the ultimate blame has to fall squarely on the Fed. They are the ones that turned on the printing presses in the ill planned attempt to stop the recession. All of a sudden trading desks and big banks had billions of excess dollars to work with. Unfortunately there was only one thing going up at the time...oil. The logical choice was for all this excess money to flow into the one market that was resisting the bear, the energy markets.

I warned for months and months this was what was going to happen when I saw the dollar start to tank. I also warned for months that a spike of 100% or more within a year's time would lead to a recession.

Geez one has to wonder when the media will finally figure out that all our troubles are being caused by the idiots at the Fed that everyone seems so inclined to put their trust in. How far must they run us into the ground before we wake up.

Sell treasuries

I've been hearing, for some while as a matter of fact, that foreigners are going to bail on our debt. The reason given of course is that the dollar is collapsing.

I guess most of these people haven't looked at a chart recently. The dollar isn't collapsing, on the contrary it's soaring. Anyone who bought our debt back in July not only got a 3.5% coupon (give or take) but they enjoyed a 22% rise in the value of the dollar. Even recently as bond rates have collapsed buyers of US debt managed to score a 7.5% gain in the value of the dollar.

Since I think the dollar is destined to go much higher in this deflationary environment I don't see buyers of our debt bailing until the dollar tops out.

I don't see that happening as long as the powers that be refuse to let any broken companies go bankrupt and as long as unemployment continues to rise.

As long as the bailouts continue these zombie financial companies will continue to act as a huge drain on the money supply.

Economics 101: too little supply equals higher prices.

Unemployment is good

Counter intuitive isn't it? How can high unemployment be good? Actually I wouldn't say it's good, but it is inevitable.

I've been saying that 2008 was about the collapse of the financial system but 2009 is going to be about unemployment.

Here's the problem. Americans make too much money. Again sounds counter intuitive doesn't it. That is the problem though. We've had it too easy for too long. We want to get paid big salaries for doing the same job that a Chinese worker will do for 1/10th the cost.

As long as that imbalance is in place we are going to continue to lose jobs in the US. As long as this imbalance continues our companies (think autos here) are going to remain unprofitable.

We could start to cure the problem by willingly lowering wages. In a deflationary environment we are in the best possible scenario to weather a voluntary pay reduction. However that's not going to happen. It's very hard to take something away once it's been given.

So the market is going to take it away for us. It's going to take it away with high unemployment. People who don't have a job are more willing to accept a pay cut. Workers who can't or won't willingly work for lower salaries run the risk of losing their jobs to someone unemployed that is desperate and will work for less.

Ultimately if the US is going to bring back it's manufacturing base and if current businesses are going to survive and compete in this climate wages are going to have to come down.

So I guess in the long run unemployment is good for the long term business structure of the United States.

"Inflation is coming, inflation is coming"

That’s the cry from the inflationary camp. It’s obvious to any respectable gold bug that the incredible amount of liquidity the Fed is currently shoveling out is going to immediately lead to inflation and possibly hyper inflation.

I do agree that it will eventually take us in that direction I’m just not so sure about the timing.

This summer before the banking system started to collapse the Fed was also printing mountains of money. At the time that money had no where to go but into commodities, oil specifically. The situation has changed though. Now we have somewhere else for all this money to go. That somewhere else is the incredibly large holes in the financial sectors balance sheets.

I don’t see how much if any of this money is going to be poured into commodities at a time when every penny is being used to try and keep the financial system solvent. Of course now we’ve added another money pit to the equation in the form of the US auto makers. Every bailout, and keep in mind that all these bailouts are just the beginning, just add more holes to drain capital out of the system.

Until all the excess debt gets washed out of the system this demand on capital is going to continue. The quick way to end this is to let these companies go bankrupt. That would put an end to the vicious circle immediately. Of course that solution won’t even be considered because it’s too painful.

Unfortunately the market is going to enforce this final solution whether we like it or not. We can buck up and take our medicine now. Go thru some really painful withdrawal symptoms for a couple of years and be done with it or we can continue to try and fight a losing battle and turn this into a decade long nightmare.

That’s the cry from the inflationary camp. It’s obvious to any respectable gold bug that the incredible amount of liquidity the Fed is currently shoveling out is going to immediately lead to inflation and possibly hyper inflation.

I do agree that it will eventually take us in that direction I’m just not so sure about the timing.

This summer before the banking system started to collapse the Fed was also printing mountains of money. At the time that money had no where to go but into commodities, oil specifically. The situation has changed though. Now we have somewhere else for all this money to go. That somewhere else is the incredibly large holes in the financial sectors balance sheets.

I don’t see how much if any of this money is going to be poured into commodities at a time when every penny is being used to try and keep the financial system solvent. Of course no we’ve added another money pit to the equation in the form of the US auto makers. Every bailout, and keep in mind that all these bailouts are just the beginning, just add more holes to drain capital out of the system.

Until all the excess debt gets washed out of the system this demand on capital is going to continue. The quick way to end this is to let these companies go bankrupt. That would put an end to the vicious circle immediately. Of course that solution won’t even be considered because it’s too painful.

Unfortunately the market is going to enforce this final solution whether we like it or not. We can gsabuck up and take our medicine now. Go thru some really painful withdrawal symptoms for a couple of years and be done with it or we can continue to try and fight a loosing battle and turn this into a decade long nightmare.

Dollar weekly chart

One of the things I'm watching is if the dollar can close back above the 200 week moving average on a weekly basis. With the strong move up today it is again knocking on the door.

It's been over six long years since the dollar has been above this level. The fact that it has moved back above and is threatening to do so again would suggest that something different is going on.

Even though the Fed is printing money like it's going out of style the dollar is not responding like it has for the last half decade.

I think the difference is that we are now experiencing deflation. I've got to say that finding a dollar bull these days is like trying to find a needle in a haystack. Needless to say they are few and far between. That by itself makes me leery about being on the short side.

As long as the dollar holds above the 200 WMA then I'm going to assume that deflation is still in the drivers seat. As long as that's the case all other asset classes are probably going to struggle.

Rally is starting to get stretched

With Fridays move up to 931 the current rally is starting to get stretched. (More in the weekend and Sunday update for subscribers.)

Just looking at the point and figure chart we can see stiff resistance coming in at the 960/970 level. I have my doubts the market will be able to penetrate this resistance without first testing the lows.

Also take note that we now have 14 X's in a row. Anytime a market or stock can put in 20 X's or more without a pullback it is a sign of a severely overbought market. I'm not sure we will be able to tack on another 6 X's before a correction as many of the sentiment and breadth levels are already pushing into moderate to excessive overbought or bullish readings.

If we do manage to reach 960/970 without a pullback it would probably be a low risk short entry for any short term traders.