Saturday, February 28, 2009

gold popularity

Unless you live under a rock you've noticed the increasingly numerous ads in the media about gold (nothing on silver yet). On the one hand this could be a contrarian indicator signalling a top is near.

While that's always a possibility I have my doubts. For one, the Dow:gold ratio is only at 7 right now. That's a far cry from the 1:1 that I expect to see at the final blow off top.

Second, gold was only about 11% above the 200 DMA recently. Again a far cry from the 60% that I expect to see at the final top.

Let's face it, in order for the gold bubble to happen we need the public to come into the gold market. I think we are still in the initial stages of the public becoming aware of the golden bull.

Another thing I've noticed is that most of the advertisements for gold are offers to buy gold. That sounds more like smart money trying to part you from your gold instead of savvy investors trying to unload at the top.

Friday, February 27, 2009

Dollar breakout

Today the dollar marginally broke out above the Nov. closing highs. I've been watching the ongoing T1 pattern as it unfolds. Today's breakout above the 88 level if it holds will likely spell trouble for equities.

I'll go over the implications of the breakout in the weekend report. Well at least my opinion of what it implies.

Tuesday, February 24, 2009

Silver or gold?

It's no secret that I've turned bullish on gold. Yes, it appears we are starting a correction. Unfortunately all bull markets have them. Nothing goes straight up as they say.

The question is will this just be a minor correction followed by gold breaking the $1000 barrier or will we see another test of $850 or even a move to new lows? Nobody knows for sure least of all me.

However what I do believe is that we will see the Dow:gold ratio go to 1:1 before this is over. As long as one has patience, human nature should run its course and make any timing mistakes meaningless in the long run.

That being said I think there is a better place to be than gold. Lets say for the sake of argument that gold eventually goes to $4000. Sounds far fetched I know but then again bull markets always rise farther than anyone expects (just like bear markets drop deeper than anyone expects). A powerful bull market can easily do 2000% from trough to peak. Gold bottomed at $250. You do the math.

Now I want you to take a look at the chart. That's the ratio of silver to gold. Historically that ratio averages roughly 20 to 1. The panic selling this fall took this ratio to a ridiculous 88 to 1.

Now maybe silver doesn't get all the way back to 20:1. Let's just say for arguments sake that silver goes to 30-1 when gold tops out. That would put silver over $130 an oz. if gold reaches $4000.

Buying at today's price of $14.00 that would be an almost 900% gain as opposed to only 300% for gold.

I think the really big money is going to be made in silver as the next phase of the precious metals bull gets underway.

Sunday, February 22, 2009

Is gold topping?

This seems to be the general consensus everywhere I look. It seems like everyone has noticed that gold is overbought and somehow that means gold has topped out. Don't get me wrong, it is entirely possible that gold has gone as far as it's going to go.

I just wanted to point out a few things. First off overbought doesn't necessarily mean top. Just go back and look at the breakout in 07.

Next, I want to take note that gold has now closed over $1000 for the third time in history. It's only a few dollars from closing at all time highs. Gold is already at all time closing highs on the weekly and monthly charts. Granted the month isn't over yet.

The COT isn't especially negative on gold yet and silver is still extremely bullish.

Gold has been moving steadily higher since Nov. I'm not really sure what's bearish about that.

Gold is still in a secular bull market.

The 50 day moving average has crossed back above the 200 day moving average and the 200 day moving average is turning back up.

Silver is forming a powerful rounded base. So are Platinum and Palladium.

The mining stocks are still stupid cheap compared to the price of gold.

The junior sector is exploding for the first time in quite a while.

Volume has been very heavy in the ETF's and mining stocks in general.

Other than biotech, which is questionable, precious metals are the only bull market in town so to speak.

As far as I can see the miners are the only sector that has improving earnings potential. The price of their product is going up and their expenses are coming down. I don't think we can say that for just about any other sector.

So sure gold could top anytime but until it does it seems like a waste of energy to try and pick a top. I think the greater danger is if gold breaks out of the year long consolidation above $1000 and enters the next phase of the bull market and one isn't on board because they were worried about an overbought oscillator.

Ultimately gold will finish the secular bull market no matter what the dollar or Euro or any currency does. So even if one doesn't spot every short term top correctly the overall trend will eventually correct any timing mistakes. That is if one has the patience to let the bull work for them.

More in the weekend update...

Friday, February 20, 2009

SPX Bollinger band crash trade

We now have another Bollinger band crash trade signal. The Bollinger band crash trade is and has been one of the most successful mechanical trading strategies during this bear market. It was in the 2000-2002 bear market also.

I expect we will see a bounce off the Nov. lows which will have all the bulls crying double bottom. I seriously doubt the double bottom will hold but we should get a bounce at least back above the Wednesday open.

Don't forget there are gaps in both the SPYDER's and Cube's from Tuesday's gap down open that are still begging to be filled also.

Thursday, February 19, 2009

Golden sentiment

Granted these things are hard to quantify but it seems to me that the prevailing sentiment right now towards gold is that it is overbought and due for a correction.

I'm not really seeing the panic buying that typifies most tops in gold.

I've pointed out before that overbought can get a heck of a lot more overbought in a powerful bull market.

All those traders that sold their silver because it was overbought only managed to miss a 30+% move.

If we do get a correction, great, I'll be able to put the rest of my capital to work. But selling simply because a bull market is overbought? No thank you!

Wednesday, February 18, 2009

"Old Turkey"

I love this story from Reminisces of a stock operator. It is so appropriate as the second phase of the gold and silver bull get underway.

"Most let us call' em customers -- are alike. You find very few who can truthfully say that Wall Street doesn't owe them money. In Fullerton's there were the usual crowd. All grades!Well, there was one old chap who was not like the others. To begin with, he was a much older man.

Another thing was that he never volunteered advice and never bragged of his winnings. He was a great hand for listening very attentively to the others.He did not seem very keen to get tips -- that is, he never asked the talkers what they'd heard or what they knew. But when somebody gave him one he always thanked the tipster very politely. Sometimes he thanked the tipster again -- when the tip turned out O.K. But if it went wrong he never whined, so that nobody could tell whether he followed it or let it slide by.

It was a legend of the office that the old jigger was rich and could swing quite a line. But he wasn't donating much to the firm in the way of commissions; at least not that anyone could see. His name was Partridge, but they nicknamed him Turkey behind his back, because he was so thick-chested and had a habit of strutting about the various rooms, with the point of his chin resting on his breast.

The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock.They would tell him what they had not done with the tip so he would tell them what they ought to do. But whether the tip they had was to buy or to sell, the old chap's answer was always the same. The customer would finish the tale of his perplexity and then ask: "What do you think I ought to do?"Old Turkey would cock his head to one side, contemplate his fellow customer with a fatherly smile, and finally he would say very impressively, "You know, it's a bull market!"

Time and again I heard him say, "Well, this is a bull market,you know!" as though he were giving to you a priceless talisman wrapped up in a million-dollar accident-insurance policy. And of course I did not get his meaning.

One day a fellow named Elmer Harwood rushed into the office, wrote out an order and gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to John Fanning's story of the time he overheard Keene give an order to one of his brokers and all that John made was a measly three points on a hundred shares and of course the stock had to go up twenty-four points in three days right after John sold out. It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it. Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, "Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I'll be able to buy it back cheaper. So you'd better do likewise. That is, if you've still got yours."

Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out."Yes, Mr. Harwood, I still have it. Of course!" said Turkey gratefully. It was nice of Elmer to think of the old chap."Well, now is the time to take your profit and get in again on the next dip," said Elmer, as if he had just made out the deposit slip for the old man.

Failing to perceive enthusiastic gratitude in the beneficiary's face Elmer went on: "I have just sold every share I owned!" From his voice and manner you would have conservatively estimated it at ten thousand shares.But Mr. Partridge shook his head regretfully and whined, "No!No! I can't do that!": 'What?" yelled Elmer. "I simply can't!" said Mr. Partridge. He was in great trouble."Didn't I give you the tip to buy it?""You did, Mr. Harwood, and I am very grateful to you.Indeed, I am, sir. But --" "Hold on! Let me talk! And didn't that stock go up seven points in ten days? Didn't it?""It did, and I am much obliged to you, my dear boy. But I couldn't think of selling that stock."

"You couldn't?" asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers."No, I couldn't.""Why not?" And Elmer drew nearer."Why, this is a bull market!" The old fellow said it as though he had given a long and detailed explanation."That's all right," said Elmer, looking angry because of his disappointment. "I know this is a bull market as well as you do. But you'd better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.""My dear boy," said old Partridge, in great distress "my dear boy, if I sold that stock now I'd lose my position; and then where would I be?"

Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: "Can you beat it?" he asked me in a stage whisper. "I ask you!"I didn't say anything. So he went on: "I give him a tip on Climax Motors. He buys five hundred shares. He's got seven points' profit and I advise him to get out and buy 'em back on the reaction that's overdue even now. And what does he say when I tell him? He says that if he sells he'll lose his job. What do you know about that?""I beg your pardon, Mr. Harwood; I didn't say I'd lose my job," cut in old Turkey. "I said I'd lose my position. And when you are as old as I am and you've been through as many booms and panics as I have, you'll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don't feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It's a bull market, you know." And he strutted away, leaving Elmer dazed.

What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market.The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me.

Tuesday, February 17, 2009

When the time comes

Granted it's still way too early for this trade but I'm taking notice of the relative strength in tech.

The Dow is on the verge of breaking the Nov. lows and the S&P isn't far behind. However the NDX hasn't even broken below the last trading cycle low yet. As a matter of fact it's still 16% above the Nov. lows.

As long as this relative strength continues to hold I will be looking at this sector for a counter trend trade late this month or early next month when we get the next cycle low.

Monday, February 16, 2009

Miners are on the move

As I've noted in recent posts, I believe we've seen the long term low for gold. The signs are many. Gold is now making higher highs. The down trend line from March has been broken. The 50 DMA has turned up and crossed above the 200 DMA and the 200 DMA has turned marginally higher.

All that is well and good but I'm more interested in mining stocks at this time. The weekly chart of GDX shows the ETF has solidly regained the 06/07 consolidation zone and the rally is coming on gigantic weekly volume.

On a daily basis the GDX has just broken out of a pennant continuation pattern, again on huge volume.

All that being said, I think there is a much better place to be than gold or gold miners. The complete analysis is in this weekend's report for subscribers.

Saturday, February 14, 2009

Crash again?

Could the market crash again?

It seems many of the bears are banking heavily on that happening. While anything is possible I think we would need some kind of catalyst for the market to crash twice. I will also note that we have never seen two climax selling periods one on top of another.

As I've pointed out in prior posts the S&P is still 25% below the 200 DMA. It's pretty tough to keep an index that depressed below the mean much less look for another massive move down from these depressed levels.

It took an implosion of the credit markets to start the last crash. Now we've just witnessed the first negative earnings in S&P history and the market has responded by trading sideways.

I'm not sure what we would have to see at this point to get another crash started but obviously poor earnings isn't going to do it.

It seems more logical to expect the market to either continue to trade sideways or slowly drift lower as unemployment continues to rise.

My guess is that the market will probably trade sideways for a bit longer and allow the 200 DMA to catch up a bit before we get the next serious leg down.

This could be a process that lasts into the summer so I'm not sure taking big short positions right now is the safest investment decision.

This probably explains why we aren't seeing any really heavy selling into strength readings lately.

Friday, February 13, 2009

Find the trend

Investors trying to trade the indexes are getting whipsawed to death. That's probably putting it mildly.

The bears think the market is ready to crash down to the 600 level.

The bulls say the market has already crashed, valuations are cheap and after a more than 50% decline this is already one of the worst bear markets in history. Hence we probably have a long term bottom.

Here's the problem as I see it. The market is still 25% below the 200 DMA. It's probably going to be tough to fall off a cliff again with the market still stretched so far below the mean. Not impossible mind you but tough.

Fundamentally earnings are going in the wrong direction. Until we see some indication that the recession is ending and earnings are heading back up it's going to be tough for the markets to rally much. Sure the Fed can just devalue the dollar and spark a rally that way. It worked in 2003. However we have a deflating credit bubble that is putting enormous deflationary pressure on the system. At this point its a stalemate.

The end result has been a market that is just trading sideways never giving us a sustainable trend. Investors trying to do anything other than day trade are getting fleeced.

There are two sectors however that are trending. Precious metals/miners and refiners. One has to ask themselves if it's really worth the stress of trying to second guess the daily swings in the market when they could just get on board one of the two areas that are moving higher and let the trend do the heavy lifting for them.

The longer the market stays in this vicious trading range the more investors are going to gravitate to these two trending sectors.

Thursday, February 12, 2009

gold sentiment and the dollar

I'll be the first to admit that gold sentiment is getting too bullish. At some point gold is most definitely going to have to correct and wipe out a big chunk of this bullishness.

However an interesting correlation has developed recently. Gold instead of trading inversely to the dollar has developed a tight positive correlation to the dollar. That has very bullish implications for gold.

The reason being that the dollar is now threatening to break out of the consolidation zone of the current T1 pattern. Once this happens we should see a second leg up in the dollar roughly equal to the first leg. That gives us a target of 93ish on the dollar chart.

As long as the positive correlation remains in play that would suggest a huge move higher for gold ... and don't even get me started on silver.

More in last nights update for subscribers.

Wednesday, February 11, 2009

Dow Theory

I think we have an important test coming. According to Dow Theory the primary trend is still down. However there is a nonconfirmation in progress. So far the transports have broken below their Nov. lows but the industrials have not. That is potentially bullish as many bottoms and tops occur with just such as nonconfirmation.

I've included the oil chart because I think it is going to be key as to whether the Dow confirms the transports or not. The reason being is that XOM and CVX are the number 2 and 3 heaviest weightings in the Dow. If oil breaks below $35 the energy stocks are going to probably react badly. We know the market can't rally with out the banks but I would say it's not going to be able to rally without energy either.

There is another consideration that could be calling for another forced liquidation like we saw in Oct. and Nov. I'll go over this in tonight's report.

Monday, February 9, 2009

Oil vs. gold

During the first phase of the commodity bull, base metals and energy were the outperformers. That makes sense as we were seeing the incredible expansion of emerging markets around the world especially China and India.

Once the second phase of the commodity bull starts, and I'm not convinced it has started yet, I wouldn't look for energy and base metals to be the leaders again. Remember the old leaders rarely lead the next bull market.

I suspect everyone will want to jump back on the energy bull once commodities do bottom and start the second phase. Granted oil will definitely rally. It may even make new highs again. I suspect it will. But it's not going to be the leader anymore.

The global economy has been far too damaged by the bursting of the credit bubble for demand in this sector to recover quickly.

No the second phase will be lead by the commodity sectors that underperformed during the first phase. It will be lead by the commodities that will benefit not from surging economic growth but surging money supplies. That would be precious metals and to some extent agriculture because infrastructure in this area has been neglected for years.

Liquidity will always flow into undervalued sectors.

During the 2001 to 2008 period oil gained over 1400%. I can pretty much guarantee that before the second phase of the commodity bull is over we will see the same thing happen in gold and probably more so as it's much easier for the general public to invest in gold and silver than oil.

You need the public to come into a asset class for a bubble to form. Yes, precious metals will undoubtedly end up in a bubble before this is over.

Let's just say I won't be at all surprised to see $3000-$5000 gold before this is finished.

That being said we are now due for a correction in the precious metals markets. Ultimately it will be a buying opportunity whether gold holds above the 1980 highs at $850 or if there is still one more leg down before we get a final low.

Friday, February 6, 2009

Watch the dollar

As we all know the market has been stuck in a difficult trading range for the last three weeks. Perusing the blogosphere I'm seeing countless methods being employed to try and forecast the direction of the market. Needless to say none of them are working at this point.

In my opinion the only thing we need to watch is the dollar. The Fed is going to try to debase the dollar and inspire another phony rally based on nothing more than inflation. However the forces of deflation are pressing down relentlessly.

We have the potential for a T1 pattern (you can find the technical rules on the lower right side of the home page) developing in the dollar. If the buck breaks out of this consolidation to the upside then we will most likely see the market move to new lows.

If the dollar explodes higher out of this consolidation then we could see another climax selling event.

Until the dollar decides where it is going I'm not going to try to second guess this market.

Wednesday, February 4, 2009

Stuck again

The market is again stuck in a range. Until it breaks out one way or the other there just doesn't appear to be anything to do right now.

A break to the downside has serious connotations though.

Tuesday, February 3, 2009


Gold has now been rallying for 15 weeks. We should get the first major test of the weekly trend line anytime now. If gold has put in a long term low then I would expect the trend to hold. I would like to see the 1980 highs at $850 hold during the coming test.

I would also want to see the 75 week moving average hold. That average acted as support throughout the entire bull market until we got the forced selling in Oct. and Nov.

My assumption at this time is that a giant T1 pattern in gold is now in play and gold will hold above these support levels. We'll just have to see how the decline unfolds as gold works it's way into the daily cycle low. I'll be monitoring this cycle in the daily updates.

Monday, February 2, 2009

Not a good sign

The move below the Jan. lows this morning isn't a good sign. I'll explain in detail in tonight's report.