“Anticipate the difficult by managing the easy.”
~ Lao Tzu ~
The peculiar vocabulary and concepts inhabiting an options trader’s
thoughts are often the source of confusion to visitors to my world. I
have often pondered that learning to understand options is a lot like
learning a foreign language. When you arrive in the country whose
language you seek to learn, you need a functional vocabulary
immediately.
In order to be able to understand my world, I thought it would be
helpful to discuss a bit of my language since it is helpful to grasp a
few basics. I want to touch on some of the basic concepts necessary to
form the basis for a functional language we can use to communicate
concepts underlying a rational (hopefully) thought process leading to
trade design and management.
In ruminations to come we will return to these fundamental concepts
and begin to understand their function in the dynamic world of an
options trader. The nuances of their specific structures are beyond the
scope of this blog. We will return to consider these factors in
virtually every trade because they re-appear each and every day in my
world. For today, just shake their hands and remember their names.
One point not often discussed is the way in which options are priced.
The quoted option price is in reality the sum of two separate
components. These are referred to as the intrinsic and the extrinsic portions of the premium. I think of these as steak and sizzle respectively.
As I type, AAPL has closed at around $395. The January 390 call has
41 days to expiration and could have been bought for $18.90. Of this
sum, $5 represents intrinsic premium and $13.90 represents extrinsic or
time premium.
This is an important distinction because it is the extrinsic premium which is subject to time decay and change due to variations in implied volatility. We will get to a discussion of implied volatility in next week’s missive.
The intrinsic premium is subject to change
solely due to changes in the price of the underlying security. There is
no sizzle in the intrinsic premium; you can buy the option today,
exercise it to buy stock, sell the stock, and pocket the $5. Of course,
your trading career will not last long with that sort of trade, but my
point is that the intrinsic premium has an easily calculable true value.
The situation with the extrinsic premium is quite different. The
value changes not only with time to expiration but also with the
constantly changing implied volatility. It is
for this reason that an option trader must be very careful with this
extrinsic component. Depending on the specific option under
consideration, extrinsic premium may represent all, a portion, or a trivial amount of the entirety of the option premium.
Another important concept is that of the “moneyness” of an option. An
individual option can be classified in one of three categories of
“moneyness:”
At-the-money
In-the-money
Out-of-the money
At-the-money options by definition consist of a single strike price. Both in-the-money and out-of-the-money strikes usually contain several individual strikes within their groups.
In our example of AAPL, the at-the-moneystrike is the 395 strike. The in-the-money strikes consist of all calls with strike prices below 395 and all puts with strike prices above 395. The out-of –the-moneystrikes consist of all calls above the 395 strike and all puts below the 395 strike.
Obviously since the price of the underlying defines the category into
which an option is classified, the category into which an individual
option fits is fluid and changes dynamically with the price of the
underlying asset.
The reason for taking the time to discuss in some detail this
classification of “moneyness” is that there are important reliable
characteristics of each type of option.
At-the-money options characteristically contain the absolute greatest dollar amount of extrinsic premium. In-the-money options have the least amount of extrinsic premium. Out-of-the-money options consist entirely of extrinsic premium, and therefore only contain sizzle . . . no steak can be found there.
Because the functional characteristics of these three categories of
options differ, it is a basic strategy to combine options of different
“moneyness” to achieve trades with the best probability of success and
the highest risk/reward scenarios.
For example, buying an in-the-moneycall and selling an at-the-money call gives birth to a call debit spread, a high probability trade structure for the trader who is bullish in the underlying.
Next week we will cover the stealth concept of option trading, implied volatility. Failure
to understand the impact of this variable is the most common cause of
beginning options traders’ failure to succeed.
“No State shall enter into any Treaty, Alliance, or
Confederation; grant Letters of Marque and Reprisal; coin Money; emit
Bills of Credit; make any Thing but gold and silver Coin a Tender in
Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law
impairing the Obligation of Contracts, or grant any Title of Nobility.”
~ United States Constitution, Excerpt from Article 1, Section 10 ~
A quick glance at most of the headlines over the weekend and the
primary focus seemed to be either calling a near term top in domestic
equity indices or a focus on the Greek debt situation. Why is anyone
even paying attention to what is going on over there? Until the ISDA
declares a default where the underlying Credit Default Swaps (CDS) are
triggered, it is all just noise.
The ECB has broken the rule of law by placing itself as the senior
creditor ahead of private creditors, the Greek government is trying to
pass retroactive legislation to trap private sector creditors holding
out of the PSI, and the leader of Greece was not even elected by the
people of Greece – how much more manipulation and insanity do we need to
monitor?
Similar to the price action since 2008, central banks around the
world control everything from financial markets to the ascent of
political leaders. These same political leaders help central bankers and
planners control policy and decision making at the highest government
levels in Europe and around the world. It would seem that the United
States should change the motto from “We the People” to “We the Bankers.”
However, there is one particular asset class that even the central
bankers have a hard time controlling. While they can impact short term
price action through direct currency manipulation initiatives, in the
longer-term gold is likely to move in only one direction – higher.
The price action on Tuesday reminded market participants that actions
such as the Greek bailout come at a cost. Quantitative easing and/or
printing money (depending on what one wishes to call the practice of
producing fiat currency out of thin air) has a direct impact on the
price of gold.
Many financial pundits argue that gold has no utility, but what they
fail to recognize is that gold is the senior currency to all other fiat
currencies. Silver is also a form of currency and is senior to all other
fiat currencies as well. While one can draw the utility of gold into
question, the idea that gold is the senior most currency to all other
fiat currencies is not new.
The Constitution of the United States of America, which is over 200
years old, refers to gold and silver as forms of payment. Looking back
thousands of years the Romans used gold coins as a form of currency. The
idea that gold and silver are currencies is certainly not a grandiose
thought or a stretch of historical concept. Trying to depict gold as a
worthless asset depends on your view and consideration of fiat currency.
There are those that would argue that the Federal Reserve of the
United States is not actively manipulating economic conditions
domestically or abroad. For those that view gold as a poor investment or
hedge against currency devaluation need to consider the charts
illustrated below. The chart below was produced by Thomas Gresham of
Gresham’s Law.
Total Asset Growth of the Federal Reserve System – 1915 – 2012
It is rather obvious by looking at this chart that the Federal
Reserve has actively sought to enter domestic and foreign financial
markets. The surge in balance sheet assets serves to prove how far the
Federal Reserve Bank is willing to go to maintain markets which
seemingly are only allowed to move higher over time.
This chart is bearish for nearly any form of paper backed assets. The
above referenced chart is long-term bearish for the Dollar and
Treasuries and long-term bullish for physical gold and silver. As the
Federal Reserve continues to debase the U.S. Dollar in concert with
other central banks’ monetary easing programs, gold and silver prices
over time are destined to move higher in virtually every form of fiat
currency.
During the same time frame that the Federal Reserve has seen its
balance sheet grow exponentially, the rapid rise of M2 money supply is
staggering. The long term chart of M2 is compared to gold futures in the
charts presented below.
M2 Money Stock
Gold Futures Monthly Chart
It is rather obvious what has happened to the price of gold as the M2
money supply has grown. The idea that the Federal Reserve has not
already destroyed a significant amount of the purchasing power of the
Dollar can easily be refuted by the two charts shown above.
In the short-term, gold and silver could suffer from a pullback, but
in the intermediate to longer term it is unlikely that we have seen the
highs of this bull market for either metal. As long as central banks
around the world continue to print money and expand their balance sheets
gold and silver will remain in a long-term bull market. The daily chart
of gold futures is presented below.
Gold Futures Daily Chart
As can be seen above, it is not out of the question that we could see
gold pullback to test one of the key moving averages in coming
days/weeks. However, I expect the key support area to hold in the event
of a sharp selloff. Ultimately, I expect to see a breakout over the
resistance zone in the days/weeks ahead. However, I would not be
surprised to see gold consolidate or work marginally lower from current
prices before breaking out to the upside. Right now the primary threat
in this fledgling gold rally is a short-term spike higher in the U.S.
Dollar. The primary catalyst which could drive a flight to the Dollar
involves the sovereign debt situation in Greece and the Eurozone as a
whole.
While the short-term price action may be bearish, the intermediate to
longer term time frames are quite bullish for metals as central banks
will continue to race to debase their currencies. Quantitative easing in
the U.S. and around the world will become pervasive and gold prices
could potentially soar in value. The data from the Federal Reserve Bank
itself suggests that they are indeed increasing the money supply. As
time has passed, the money supply and gold have seemingly grown in
lockstep with one another. Surely inquiring minds do not consider this
mutual relationship between gold and the money supply to be purely
coincidental.
As further evidence that the Federal Reserve continues to use
quantitative easing to manipulate asset prices through direct entry into
financial markets, a chart of the velocity of M2 clearly depicts that
the velocity of money is declining. I am not an expert regarding
macroeconomic data, but if the velocity of money is declining to 1960’s
levels would it be a stretch to say that we may be going through a
period of stagflation? The chart below illustrates the Velocity of M2
Money Stock courtesy of the St. Louis Federal Reserve Bank.
Velocity of M2 Money Stock
For those unfamiliar with the term velocity of money, it is simply
the rate of turnover in the overall money supply. The velocity of M2 is
expressed as the number of times that a Dollar is used to purchase final
goods or services which are included in the total gross domestic
product.
Conclusion
The short term technical picture in gold is a bit suspect due to
overhead resistance and recent U.S. Dollar strength. However, the longer
term macro factors that impact the value of the U.S. Dollar and
precious metals are all telling us the same thing.
As time wears on and central banks do even more to prop up the
broader economy and failing financial institutions, it is without
question in my mind that gold and silver will both benefit handsomely
from these decisions being made by central bankers from around the
world.
Ultimately, I am very bullish of gold and silver in the intermediate
to longer-term, but in the immediate short-term frame gold could
consolidate or pullback before breaking out to the upside.
Apple (Ticker: AAPL) is doing great these days. In January, the
company reported that profits for the holiday quarter more than doubled.
The stock price shot up 8% on the news, and rallied all the way to over $526 per share in the days that followed.
On July 10th 1997, the stock was trading as low as $3.16. From $3.16 to $526+ is an increase of 16,554.75% in 15 years time.
The chart is starting to look like a bubble in the making, as price is starting to go parabolic.
Chart courtesy Prorealtime.com
When we take a look at past bubbles, we can see that Apple has now
reached the top 3 of all “Bubbles”. Only eDigital and the Poseidon
bubble did even better, with returns of 45,400% and 34,900%
respectively… Chart courtsey Sharelynx.com
Could Apple go even higher? Sure! Imagine it would rise to $1,000 per
share. It would then have gained 31,545.57%, which would be close to the
Poseidon Bubble.
In order to beat the eDigital Bubble, AAPL would almost have to tripple to over $1,437.80.
Chart courtesy Prorealtime.com
Is it possible? Yes… AAPL is trading at historically low
price-to-Forward Earnings levels, as can be seen in the chart below.
If instead, AAPL would be trading at a Price-to-Earnings Ratio of let’s
say 30, and we assume profits would remain flat over the next 2 years,
then Apple would be trading close to the $1,437.80 level.
In addition to the low Price-to-Earnings valuation, AAPL has a war-chest
of $97.6 Billion (of which $64 Billion is off-shore), which it could
use to make acquisitions, pay dividends, buyback shares, buy patents,
and so on, so Apple has a lot of possibilities to grow even further.
Chart courtesy Zacks Research Wizard
To put things in perspective: During the Tech Bubble, Cisco Systems
(Ticker: CSCO) was trading at an insane 150 times Forward Earnings:
Chart courtesy Zacks Research Wizard
Apple’s gains dwarf those of Gold and Silver, even though those two
assets also had a very impressive run since the beginning of the 21st
century:
Chart courtesy Prorealtime.com
Gold was up 663,87% from its low in 1999 to its high in 2011, while
silver was up 1,130.12% from its low in 2001 to its high in 2011.
When we compare Gold to Silver, we can see that Silver also went parabolic in April 2011 and has come down sharply since. Chart courtesy Prorealtime.com
If silver would rise as much as during the ’70s (3,099%), it would have to rise to $129.56 per ounce.
Gold (Up 2,276% in the seventies), would have to rise towards $5,975.65.
Please notice that Alf Field has often called for $6,000 gold (link).
Martin Armstrong has also had a terrific track record. Here were his predictions he made in 1998 (see the last slide of this presentation):
1998 = Collapse of Russia
1999 = Low Gold & Oil
2000 = Technology Bubble (Like Railroads in 1907)
2002 = Bottom US Share Market
2007 = Real Estate Bubble, Oil hits $100
2009 = Start of Sovereign Debt Crisis
2011-15 = Japan Economic Decline
EURO begins to crack due to debt crisis
2015.75 = Sovereign Debt Big Bang
All of those predictions up till 2011 have come true. If the last one
also comes true, then the above targets for Gold and Silver would
become extremely likely as faith in paper currency would likely smelt
like snow in the sun.
Good luck investing.
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Feb 15th - Did the SP 500 just peak at 1356?
This is somewhat of a things that make you go hmmmmmm
exercise, but lets examine this 1356 number for a second here. The SP
500 hit 1356 today and put on the brakes and reversed down to 1341 in a
possible terminal top move.
1356 actually has fibonacci relationships. If we take the last major rally which was from the Summer 2010 lows:
1010-1370 (May 2011 highs)
360 points
.786 of 360 is 283 points
Take 283, add it to the 1074 October lows…. you got 1356/57
That would mean this last rally so far is .786 of the 2010-11 rally.
Also, 1356/57 is right in my 1352-1376 pivot ranges for a Major 3 top as well
Evidence is mounting for a good sized correction here is my point.
Possible count, though many will argue not valid:
Wave 1- 666 to 1221- 555 points
Wave 2- 1221-1010- 211 points, .38% of 1
Wave 3- 1010-1370 360 points, .61% of 1
Wave 4- 1370-1074- 296 points… 38% of 1-3 (A bit more than 38%)
Wave 5- 1074-1356 .786 of 3
Only rule violation here is Wave 4 would have delved into wave 1,
which is a no-no for most E wavers. However, I would argue that 4 often
does delve into the wave 1 arena and legitimately, but that is a topic
for another article.
Nonetheless… pay attention to the fibonacci relationships… if
anything they may be warning of 1356 as an interim high and top with
correction starting. This would either be a 4th wave down with the 5th
and final wave up left… or we topped at 1356. A drop below 1337 will
confirm a correction at minimum to 1310 and then 1295 ranges.
Just food for thought…we have been lightening our positions and
raising stops at my ATP trading service. If you’d like to have regular
updates on the SP 500, Gold and Silver so you can benefit from major
pivots ahead of the crowd, check us out at www.markettrendforecast.com for a coupon offer.
Was Friday’s Price Action in Gold Signaling a Top in the S&P 500?
February 6th, 2012
“You can’t feel the heat until you hold your hand over the flame.
You have to cross the line just to remember where it lays.”
~ Rise Against. “Satellite” Lyrics ~
Friday morning traders and market
participants awaited the key January employment report from the U.S.
Bureau of Labor Statistics. The reaction to the supposedly wonderful
report was a surge in the S&P 500 E-Mini futures contracts as well
as several other key equity index futures.
The overall tenor among the financial
punditry was predictable as wildly bullish predictions permeated the
morning session on CNBC and in the financial blogosphere. However, after
the report had been out for several hours notable independent voices
such as Lee Adler of the Wall Street Examiner came out with information
that suggested the numbers were an apparition of manipulated statistics.
I am not going to spend a great deal
of time discussing the report, but the reaction to the news was
decisively bullish on Friday. The question I want to know is whether
Friday was a blow off top? In the recent past the S&P 500 has seen
several key inflection points and intermediate-term tops form on
non-farm payroll monthly announcements.
I follow a variety of indicators to
help me decipher more accurately when the market is getting overbought
or oversold. For nearly two weeks the market has been extremely
overbought, but now we are reaching truly astonishing levels. The
following charts represent just a few signals that the market is due for
a pullback and a top is likely approaching.
Percentage of NYSE Stocks Trading Above Their 50 Period Moving Average
The chart above clearly illustrates
that as of Friday’s closing bell (02/03) over 89% of stocks were trading
above their 50 period moving averages. Consequently that reading is one
of the highest levels that we have seen in the past 3 years. In
addition, over 73% of stocks that trade on the NYSE are currently
priced above their longer-term 200 period moving averages. Another
extremely overbought signal.
S&P 500 Bullish Percent Index Weekly Chart
The S&P 500 Bullish Percent Index
is another great tool for measuring the overall position of the S&P
500. It is without question that the longer term time frame is reaching
the highest level of overbought conditions in the past 3 years.
McClellan Oscillator Divergence with S&P 500 Price Action
The two charts shown above present an
interesting situation regarding the divergence in the McClellan
Oscillator and the price action in the S&P 500. The most recent
example of this type of divergence occurred in October of 2011 and
prices immediately reversed to the upside after several months of
selling pressure. In fact, this correlation between reversals in the
S&P 500 and divergences in the McClellan Oscillator works relatively
well historically.
Clearly there are bullish voices
arguing for the 2011 S&P 500 Index high of 1,370.58 to be taken out
to the upside in the near future. Additionally, several market
technicians in the blogospere have been pointing to the key resistance
range between 1,350 and 1,370 on the S&P 500 as a likely price
target. Obviously if those price levels are met strong resistance is
likely to present itself. However, as a contrarian trader I have found
that the more obvious price levels are the more likely it is that they
either will not be tested or they will not offer significant resistance.
It is obvious that Chairman Bernanke
and the Federal Reserve have embarked on a massive fiat currency
printing campaign which has helped buoy risk assets to the upside.
Through a combination of reducing interest rates on safety haven
investments like Treasury’s and CD’s, the Federal Reserve has forced
conservative investors and those living on a fixed income into riskier
assets in search of yield.
This process helps elevate stock
prices and creates the desired outcome for the Federal Reserve which
involves the perception by average individuals that they are wealthier.
The Fed calls this the “wealth effect” and they seem poised to insure
that U.S. financial markets continue to ride upon a see of cheap money
and liquidity.
Ultimately the Federal Reserve’s most
recent announcements have served to help flatten the short end of the
yield curve further while providing a launching pad for equities and
precious metals. However, issues persisting in Europe could have an
adverse impact on the short to intermediate term price action of the
U.S. Dollar.
Right now everywhere I look I hear
market prognosticators commenting on how hated the U.S. Dollar is and
how Chairman Bernanke will not allow the Dollar to appreciate markedly
in order to protect U.S. exports and financial markets. I think that the
Dollar has the potential to rally in the short to intermediate term.
Right now the U.S. Dollar Index appears to be trying to form a bottom.
U.S. Dollar Index Daily Chart
Obviously there is good reason to
believe that the U.S. Dollar Index could reverse to the upside here.
Whether it would have the strength to take out recent highs is unclear,
but a correction to the upside not only seems unexpected by most market
participants, but it seems plausible based on the weekend news coming
out of Greece.
Monday morning the Greek government
is set to determine if they will agree to the demands of the Troika in
exchange for the next tranche of bailout funds. If the Greek government
and the Troika do not come to an agreement, the Euro could sell-off
violently.
Additionally there are already
concerns about the next LTRO offering from the European Central Bank.
The measure is to help provide European banks with additional liquidity,
but there are growing concerns that the size and scope of the LTRO
could have a dramatic impact on the Euro’s valuation against other
currencies. Time will tell, but there are certainly catalysts which
could help drive the U.S. Dollar higher.
Another potential indicator that the
Dollar could see higher prices in coming days was the largely unnoticed
bearish price action on Friday of precious metals. Both gold and silver
have been on a tear higher over the past several weeks. Both precious
metals have surged since the Federal Reserve announced that interest
rates would remain near zero on the short end of the curve through 2014.
However, on Friday gold and silver
were both under extreme selling pressure. The move did not get much
attention by the financial media. The price action in gold and silver on
Friday could be another indication that the U.S. Dollar is set to
rally. The daily chart of gold is shown below.
Gold Futures Daily Chart
Obviously the reversal on Friday in
gold futures was sharp. The move represented nearly a 2% decline for the
session on the price of gold. However, as long term readers know I am a
gold bull. I just do not see how gold and silver do not rally in the
intermediate to longer term based on the insane levels of fiat currency
printing going on at all of the major central banks around the world.
The macro case for gold is very strong, but the short term time frame
could reveal a brief pullback.
At this point, I suspect a pullback
will present a good buying opportunity for those that are patient.
However, I think it is critical to point out that this move in gold on
Friday could be a signal that the U.S. Dollar is going to find some
short to intermediate term strength. If the Dollar does start to push
higher, it will likely put downward pressure on risk assets like
equities and oil
While Friday’s price action may not
mark a top, nearly every indicator that I follow is screaming that
stocks are overbought across all time frames. Pair that with the Greece
uncertainty and LTRO considerations and suddenly the Dollar starts to
look a bit more attractive. Ultimately I am not going to try to pick a
top, but the evidence suggests that it might not be too many days/weeks
away.
This
material should not be considered investment advice. J.W. Jones is not a
registered investment advisor. Under no circumstances should any
content from this article or the OptionsTradingSignals.com website be
used or interpreted as a recommendation to buy or sell any type of
security or commodity contract. This material is not a solicitation for a
trading approach to financial markets. Any investment decisions must in
all cases be made by the reader or by his or her registered investment
advisor. This information is for educational purposes only.
Friday's big rally on the better than
expected employment report has now generated the kind of euphoria that
often creates intermediate degree tops. This coming week will be the
18th week of the current intermediate cycle. As you can see in the chart
below the intermediate cycle runs on average 18-25 weeks from trough
to trough.
The time to buy "anything" is when the stock market puts in one of
these intermediate degree bottoms. It's way too late in the
intermediate cycle, especially with the NASDAQ stretched 9% above its
50 day moving average, for anyone to be buying now. Now is the time for
investors to be taking profits. And by taking profits I don't mean
selling short. I mean moving to cash.
The simple fact is that selling short is a fool's game designed to take
money away from retail investors. The only people that will ever make
any consistent long-term gains by selling short are the very elite
traders of the world, or big funds with massive research departments
that can ferret out and find sick or failing companies.
What most traders who try to sell short fail to understand is that
markets go down differently than they go up. This fact makes it very
difficult to make, and more importantly keep, any profits garnered by
selling short.
First off, tops are often a long drawn out process. They tend to
whipsaw short-sellers to death before finally rolling over. I would say
we have seen a very good example of that over the last four weeks.
Then even if one does manage to catch the top the intraday moves are
often so violent that they knock one out of their positions. And
finally, if you mistime the bottom you will give back most if not all
of your meager profits during the first couple of days of the new
rally.
All in all, the best position for 99% of traders is to go to cash when a
correction is due. As you can see by that first chart a correction is
now due. That doesn't mean that it will begin Monday morning or even
this week. What it does mean is that it is now too dangerous to
continue playing musical chairs with a market that is at great risk of a
sharp corrective move.
The fact is that ever since the dollar put in its three year cycle low
in May, trading conditions have changed. Trades have had to become much
shorter in duration and profits taken much more quickly.
Until the dollar's major three year cycle tops this trading condition
isn't going to change. As you can see in the chart below we still have
no confirmation of a major trend reversal yet. The dollar is still
making higher highs and higher lows. It's still holding well above a
rising 200 day moving average and hasn't even turned the 50 day moving
average down yet.
Once the stock market begins moving down into its intermediate cycle
low it will almost certainly force another rally in the dollar,
possibly (probably) back to new 52 week highs. That should, at the very
minimum, pressure gold to retest the December lows, and if the selling
pressure from the stock market is intense enough we could see another
marginal new low somewhere in the high $1400s to low $1500 level.
I should point out that gold still has not broken the pattern of lower
lows and lower highs despite the powerful rally out of the December 29
bottom. Technically, gold is still in a down trend. That down trend may
be reconfirmed when the stock market drops down into its intermediate
degree bottom.
I know we all want gold to immediately return to the days of strong
trending moves, long trade durations, and easy money. It's only natural
for investors to long for the good old days. It's what causes
investors to chase (in vain) the last bull market. Think of all the
investors that are still chasing the tech bubble of 2000, or the
millions of investors still trying to pick the bottom of the housing
market, or more recently energy investors struggling to figure out why
solar and oil service stocks have underperformed so badly for the last
three years.
These are bubbles that have already had their day. They are never going
to see those glory days again. Living in the past never made anyone
rich. The people that get rich are the ones that figure out early where
the next bull market is going to be.
That being said, gold is most certainly not in a bubble yet. But the
last massive C-wave obviously topped in September. That was the largest
and longest C-wave of this entire secular bull market. Once something
like that tops it takes months if not a year or more to consolidate
those gains before the next leg up can begin.
Analysts that are predicting $2000 plus gold for this year are just
kidding themselves. Gold is almost certainly going to be locked in a
very choppy, extended trading range till at least the fall and probably
into next spring before the next C-wave can breakout to new highs.
As distasteful as it is, investors need to accept the fact that it's
going to be very hard to make money in the precious metals sector this
year, and the only way to do so will continue to be with short-term
trading strategies until we have confirmation that the dollar's three
year cycle has topped.
At the moment precious metal investors have the guillotine of the stock
market hanging over them just like everyone else. Historically the
selling pressure from an intermediate degree decline in the stock
market will force an average decline of about 19% from peak to trough
in mining stocks. Right now the mining sector is in a weakened state
with the HUI holding below a declining 200 day moving average. That's
not exactly the best position to weather the intense selling pressure
generated by an intermediate degree decline in the stock market.
My advice for precious metals investors is the same as it is for
everyone else. Go to cash and be prepared to buy when the stock market
puts in an intermediate bottom in late February to mid-March.
The prevailing universal sentiment is neutral to bearish by advisors
and the general investing public. Who can really blame them given the
Euro-Zone mess, the potential bank contagion collapse effect, and the
weak economic trends both here and overseas. However, the work I do is
almost entirely behavioral based analysis looking at crowd or herd
behavioral patterns. Right now, things are adding up to a market bottom
as early as the October 7th-11th window of time and no later than October 28th .
The figures I have had for a long time are 1088 for a bottom with a
possible worst case spillover of 1055-1062 in the SP 500. We are
already eyeing the Gold stocks as bottoming out as well and have begun
to nibble and will add on further dips.
Let’s examine some of the evidence and then look the charts as well:
Sentiment in recent individual investor surveys had only 25%
of those polled bullish. Historically that average is 39% or
higher.
The volatility index has been pegging the 43-45 window
recently and historically markets have major reversals anywhere
from 45-50, with rare cases of that index going over 50 without a major
reversal
The German DAX index is carving out what looks like a bottom
channel, and if it can hold the 5300 plus ranges, it could be a
leading indicator of a US stock market run
Seasonally, markets tend to bottom in the September-October
window with favorable patterns from November into March/April.
Historically, markets tend to correct hard with a “New Moon in
Libra” which occurred last Tuesday, the same day the market peaked
at 1196 and rolled over hard. They often bottom with the
following Full moon, which is scheduled for October 11th.
Elliott Wave patterns I use indicate we are in the final 5th
wave stage since the 1370 Bin Laden highs, with a gap in the SP
500 chart at 1088 from September 2010 still to fill. That gap
happens to coincide as 78.6% Fibonacci retracement of the 2010 lows
to the 2011 highs. It’s also has a 50% Fibonacci correlation with
the 1356 high to 1101 swing move this summer.
Bottom line is the SP 500 has withstood a ton of pots and pans and
bad news over the past 8 weeks. The market tends to price in a soft
patch in the economy way before it becomes evident in the data. To wit,
when we topped at 1370 in May of this year, it was an exact 78.6%
retracement to the upside of the 2007 highs to 2009 lows. The pullback
to 1101 is an exact 38% Fibonacci retracement of the 2011 highs and the
2009 lows. Markets are not as random as everyone things, and if you can
lay out a roadmap in advance and understand where key pivots are, you
can swing the opposite direction of the herd and profit quite
handsomely. This is what I do every week at my
ActiveTradingPartners.com trading service; go against the crowd for
handsome profits.
Below are two charts showing two likely outcomes in the SP 500 index in the coming several days to few weeks:
Forewarned is forearmed as they say. If you’d like to stay ahead of
the curve on Gold, Silver, and the SP 500 on a consistent basis, take a
look at www.MarketTrendForecast.com , where you can sign up for occasional free reports and/or take advantage of a temporary 33% off coupon to join us!
Why Gold Is Shining Bright & What the Fed is Doing
January 30th, 2012
“I believe that banking institutions are more dangerous to our
liberties than standing armies. If the American people ever allow
private banks to control the issue of their currency, first by
inflation, then by deflation, the banks and corporations that will grow
up around [the banks] will deprive the people of all property until
their children wake-up homeless on the continent their fathers
conquered. The issuing power should be taken from the banks and restored
to the people, to whom it properly belongs.”
~ Thomas Jefferson ~
Well here we are, caught between resistance in the S&P 500 around
the 1,330 area and support around the 1,300 price level. My last two
articles have discussed why I was expecting a top in the coming days and
weeks ahead, but prices just continued to work higher.
One of the things that I pride myself in as a person who trades and
writes about financial markets in public is that I am always honest. If I
blow a call I fess up and admit it. When I have made mistakes in the
past, I always try to learn something new from them and I discuss losing
trades publicly with readers and members of my service.
This time is different. I honestly do not know if I am going to be
right or wrong. The price action in the S&P 500 Thursday was
certainly bearish short term, but a back test of 1,300 or possibly even
1,280 could give rise to a Phoenix. Granted, the Phoenix is nothing more
than Ben Bernanke’s pet, but that is a topic for a different time.
I have scanned through my list of indicators which discuss sentiment
based on momentum, put/call ratio, the advance/decline line, Bullish
Percent Indicators, and several ratio based indicators and they are all
SCREAMING that a top is near. The interesting thing about the previous
statement is that it would have been true a week ago and mostly true two
weeks ago, yet prices have continued to climb.
The daily chart of the S&P 500 Index demonstrates the recent
price action that has continued to climb the “Wall of Worry” for several
weeks:
S&P 500 Daily Chart
The culmination of the massive run higher for the S&P 500 was the
dovish comments coming from Ben Bernanke during Wednesday’s press
release and press conference.
The U.S. & European Central Banks are seemingly in a perpetual
race to debase their underlying fiat currencies. The race will not end
well. In fact, this type of situation smells like a Ponzi scheme where
Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the
curtains. Their loose monetary policies and forced reflation are
synthetic drugs that juice risk assets higher and ultimately Mr. Market
will have his vengeance in due time.
At this point, it seems like Ben Bernanke will do anything to juice
equity prices higher. I think his hope is that they will be able to
artificially keep the game going until the recovery is on a more sound
footing. However, when the entire recovery is predicated on cheap money
and liquidity and is not supported by organic economic growth it just
prolongs the inevitable disaster.
As an example, the daily chart of the Dow Jones Industrial Average is
shown below. I would point out that that Dow came within 35 points
(0.27%) from testing the 2011 highs. Furthermore, the Thursday high for
the Dow was only 1,356 points (10.55%) from reaching the all-time 2007
October high.
Dow Jones Industrial Average Daily Chart
I have argued for quite some time that the economy and the stock
market are two different things. If Bernanke and his cronies succeed in
reflating the financial markets and the Dow reaches its October 2007
high in the near term, more retail investors will regard equity markets
as being rigged.
Who could blame them for viewing financial markets as a giant rigged
casino that stands to win while they continue to lose their hard earned
capital? We all recognize that the current economy is nowhere near as
strong as it was in 2007. But alas, the regular retail investor does not
recognize that the stock market and the economy do not portray the same
meaning.
One specific underlying catalyst that has gone largely unnoticed by
most of the financial media during this sharp run higher in stocks is
the total lack of volume associated with the march higher. The NYSE
volume over the past 2 months has been putrid when compared to
historical norms.
As a trader, I am forced to take risk through a variety of trade
structures. However, the idea that a crash could be coming seems hard
pressed as long as Big Bad Ben is at the wheel.
If the Russell 2000 drops 10%, I am convinced that Ben will be out
making announcements that the Fed stands ready to intervene with all of
the supposed tools they have at their disposal. Let’s be honest here,
they really have one tool comprised of 3 separate functions which are
all a mechanism to increase liquidity in the overall system. To express
this liquidity, the following chart from the Federal Reserve shows the
M2 money supply levels:
Current M2 Money Supply
The 3 functions are the printing of currency, the monetization of
U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally
low interest rates (ZIRP) near 0 for an “extended period of time
(2014).” Since monetary easing is all that the Federal Reserve has done
since the financial crisis began, it begs to reason that the Federal
Reserve has no other solutions or tools available. If they did, they
seemingly would have used them by now.
The first bubble they created due to loose monetary policy was the
massive bubble in oil in 2008. Fast forward to the present, and they are
currently supporting another bubble in U.S. Treasury obligations. The
bubble that they will create in the future when the game finally ends
will be in precious metals. The precious metals bubble will be building
while the Federal Reserve and the U.S. Treasury attempt to keep the
Treasury Bond bubble from bursting.
At this point in time, if we continue down this path stocks will not
protect investors adequately from inflation should the Treasury bubble
burst. I would argue that the central planning and monetary policy we
have seen the past few years continues in the United States and Europe
that gold, silver, and other precious metals are likely to begin their
own bubble of potentially epic proportions.
As the weekly chart of gold futures illustrates below, gold has
recently pulled back sharply and has broken out. I will likely be
looking for any pullbacks in gold as buying opportunities as long as
support holds.
Gold Weekly Chart
In closing, for longer term investors the stock
market might have some serious short term juice as cheap money and
artificially low interest rates should juice returns. However,
eventually equities will start to underperform. At that point, gold will
be in the final stages of its bubble and the term parabolic could
likely be applied.
If central banks around the world continue to print money there are
only a few places to hide. Precious metals and other commodities like
oil will vastly outperform stocks in the long run if the Dollar
continues to slide. The real question we should be asking is who will
win the race to debase, Draghi or Bernanke?
I figured out early in my career that
arguing with the market more often than not ends up costing one money.
If you are one of those people who are unable to change your mind, this
business will almost certainly chew you up and spit you out. Never has
that been more true than today.
Folks, we are in the middle of an ongoing currency war. That is
creating investing conditions unlike anything most of us have ever seen
before. There's a reason why very few money managers have been able to
make any profits over the last year and most of them have lost money.
That reason is an ever-changing investing environment.
As most of you probably already know my investing strategy is based
around cycles, sentiment, a long-term bull market in precious metals,
and a dash of technical analysis thrown in to help spot entry and exit
points. Those tools give me a rough outline of what to expect going
forward. I then place my trades based on the best odds for success.
However, none of that excuses me of the responsibility to change my
mind if the market tells me my expectations are wrong. It is precisely
the ability to reverse direction 180° that enabled us to generate a 25%
plus gain in the model portfolio during the last six months, despite
being in a market that has confounded most professional money managers.
Additionally, our portfolio has always been unleveraged with never more
than 75% of capital invested at any one time. I
daresay that, on a risk-adjusted basis, the SMT model portfolio has
outperformed probably 99% of the money managers in the world.
As an example let's use my recent expectation for 2012 to be one of the
worst years in history. First off, let me explain how I came to that
expectation. To begin with, the dollar's three year cycle low was due
to bottom in the spring of 2011. And indeed, it actually did bottom in
May of 2011. Further, the stock market's four year cycle low is due to
bottom in the fall of 2012.
Since most bear markets tend to last
about 1 1/2 - 2 1/2 years it was reasonable to expect that the next
bear market would begin as the dollar started to rally out of its three
year cycle low. Low and behold what happened in May as the dollar
cycle bottomed? That's right, the stock market started to collapse as
deflationary forces began to push the dollar higher and asset prices
down. Everything was unfolding exactly as our cycles tool had suggested
it would.
However, in late November the markets started to deviate from our
expectations. As the dollar continued to rally stocks began to decouple
from the strong dollar. At this point one could either stubbornly hold
on to their bearish outlook and lose money, or they could accept that
the market was doing something different than what they expected,
change their mind, and deal with reality as it is, instead of how they
wished it to be.
The fact that the S&P wasn't
doing what it should have been doing was the main reason I've been
warning (pleading really) with traders not to sell short. This market
should have begun the move down into a daily cycle low two weeks ago.
The fact that it refuses to move down into that overdue correction is
sending a strong message that something else is going on.
The inability to change one's mind when the market tells you that you
are wrong is one of the toughest habits to break, but one that is
absolutely necessary if you are going to make money in this business.
For whatever evolutionary reason, human beings have a very hard time
admitting when they are wrong, and an even harder time reversing their
thinking 180° even after they know they're wrong. For the vast majority
of traders it is less painful to lose money than it is to admit an
error and reverse a trade.
In my previous post I went over my expectation for gold to move down
into its daily cycle low along with the stock market. This should have
corresponded with the dollar rallying out of its cycle low. On
Wednesday morning everything was set up perfectly for this to unfold.
Gold had formed a swing high and was beginning the move down into its
daily cycle low, stocks were in the process of reversing back down
through the coil, and the dollar had bounced off of the 50 day moving
average and was holding strongly above support at 80, clearly in the
process of putting in a cycle bottom.
However, as you can see from the chart all of that changed Wednesday
afternoon on the Fed statement. The stock market reversed the
early-morning weakness, closing strongly. Gold reversed dramatically,
closing up over $40, and the dollar collapsed back down through 80
negating what would have almost certainly been a powerful rally out of
that cycle bottom. One could either ignore what had just happened, thus
exacerbating losing trades, or they could recognize that something
fundamentally changed that afternoon and quickly get on the right side
of the market.
That is exactly what we did. When the dollar reversed and gold started
to rally we immediately bit the bullet on our long UUP trade, took a
small loss, and reentered GDX. None of our tools (cycles, sentiment, or
technicals) were predicting this. However, that still doesn't give us
an excuse to ignore what had happened and quickly make the correct
adjustment.
Bernanke didn't actually confirm QE3 Wednesday afternoon, but the
market obviously perceived the Fed statement as a guarantee that QE3 is
in the works. That has the potential to break the dollar's rally out
of its three year cycle low and derail the expected move by stocks down
into a four year cycle low later this year.
If Bernanke can break the dollar rally and get the dollar moving south
again there is no way we are going to experience a deflationary bear
market this year. In this scenario 2012 would be the beginning of an
inflationary period, culminating in a dollar crisis at the next three
year cycle low, due in late 2014. If this is what is about to unfold
then we need to alter our expectations from a deflationary bear market
to an inflationary bull market.
The four year cycle low for stocks,
instead of occurring in late 2012 would probably get stretched out to
late 2014. And the recession we should experience this year will be
pushed out to 2013/2014 once inflation raises high enough to poison the
economy.
The big question now is; did Bernanke break the dollar rally?
Confirmation will come once the dollar finds its daily cycle low, and
if the rally out of that low fails to move to new highs and rolls over
quickly forming a new pattern of lower lows and lower highs.
If this scenario plays out then we can jettison the deflationary bear
market hypothesis and begin positioning for the inflationary scenario
which should culminate with a dollar crisis in late 2014. This scenario
also has the potential to drive the bubble phase of the gold bull
market.
A lot is riding on the dollar right now.
Silver: Epic Reversal
On January 11th,
we expected the US Dollar to top as Sentiment was uber-bullish, which
would lead to a nice rally for Gold, Silver, and (Mining) stocks. That
day, the USD index closed at 81.35, Silver at $29.89, and Gold at
$1,641. (Click HERE for the article)
Today, the USD stands at 78.90, Silver at $33.89 and Gold at $1,733.50, so we got what we expected.
On January 9th, we posted the following chart, which compares the current silver “bubble” to the Nasdaq Bubble a decade ago:
Just like the Nasdaq, Silver has set a lower/equal low, accompanied
by a higher low of the MACD index, and has now rallied quite sharply:
Compare this to the Nasdaq:
An overlay of both charts shows us where we are today:
If we zoom in a bit:
If the pattern holds, we should be about halfway the “Bull trap”, as many will view this as the Return to “normal”.
If the pattern doesn’t hold, and silver blasts through $40, it’s
probably on it’s way to the all-time high. In that case, the next big
move would be to the upside, with potential targets of $70 and
potentially tripple digit silver prices.
As long as the pattern holds, I would be careful if silver hits $38.
It has been my theory that this year
we would see one of the worst performances by the stock market since
2008. However that has always been dependent on Bernanke not being able
to break the dollar's rally out of its three year cycle low. As of this
morning the dollar has printed a failed daily cycle. More often than
not a failed daily cycle is an indication that an intermediate degree
decline has begun.
I have begged and pleaded with people not too short the stock market
over the last several weeks. For one it's very hard to make money on
the short side for the simple reason that markets move down differently
than they move up. Now I'm going to give you another reason not to
short the stock market.
If the dollar has begun an intermediate degree decline then we should
see it continue generally lower for the next 7 to 10 weeks. If this
turns out to be the case then we are not going to see any meaningful
declines in the stock market during this period. As a matter of fact
the risk is great that the stock market could enter a runaway type
rally if the dollar has begun the move down into an intermediate degree
bottom.
As you can see in the chart below the last runaway move in 2006 lasted almost 7 months.
Runaway moves are characterized by randomly spaced corrections, all of
similar magnitude and duration. As you can see in the chart above the
corrective magnitude in this particular runaway move was about 20-30
points.
Keep in mind we don't have confirmation that a runaway move has begun
yet. We would need to see how the first correction unfolds. If it is
mild and brief, followed by the market moving back to new highs, then
the odds would escalate that a runaway move has in fact begun.
Another big clue will come when the dollar bounces out of its daily
cycle low, which is now due at any time, and if that bounce fails to
make new highs before rolling over. If that happens it will reverse the
pattern of higher highs and higher lows and confirm that an
intermediate decline has indeed begun.
The scary part is that this may also signal the top of the three year
cycle. If so then we are looking at an extremely left translated three
year cycle that should generate huge inflationary pressures by the time
the next three year cycle low is due in the fall of 2014.
It has been my expectation that we would see another deflationary
period in 2012 before the cancer infected the global currency markets.
As of this morning I'm not so sure that process hasn't already begun
and the deflationary period has been aborted. Bernanke may have broken the dollar rally yesterday.
If this scenario unfolds it has the possibility of generating the
bubble phase of the gold bull market. I elaborated on this in last
night's premium report.
I am currently still running the one week, $10 introductory offer for the SMT premium newsletter.
It seems like most analysts, and
gold bugs are now assuming that the reversal on December 29 marked the
bottom of golds D-Wave decline. It's certainly possible that we saw a
bottom two weeks ago but it's still too early to make that assumption.
Gold, and most assets are about to be severely tested. How gold handles
that test will be a big clue as to whether or not the correction is
over.
What many analysts are overlooking is the impending daily
and intermediate cycle correction that is coming due in the stock
market. When the stock market moves down into a cycle low, especially
an intermediate cycle low, it generates a tremendous amount of selling
pressure. Invariably that selling pressure bleeds into virtually every
other asset class, even gold, as you can see in the chart below. Over
the last two years there were only two daily cycle corrections in the
stock market where gold was unaffected (I've marked them with green
arrows).
The stock market is now in the timing band for a move down into a
daily cycle low. As you can see in the chart below those tend to occur
almost like clockwork about every 35 to 40 days. As of Friday the
stock market was on day 33. On top of that we have a larger
intermediate degree cycle that should bottom sometime in March/April.
The selling pressure generated at an intermediate bottom is much more
intense than a mere daily cycle low. That means sometime around the
middle of March or early April things are going to be looking pretty
bleak. My best guess is at that time interest rates will be spiking in
France and maybe the UK (along with all of the other countries that are
already having debt issues).
It's late enough in the daily cycle that there is a good chance
the market began that move down into its daily cycle bottom on Friday,
despite recovering most of the sell off before the close. I say that
because we have a coil pattern playing out in the stock market.
Contrary to what most people believe, the initial break out of a
volatility coil is usually a false move that is soon followed by a much
more powerful and durable move in the opposite direction. In our case
the volatility coil broke to the upside and by Friday it was already
trying to reverse. Once the stock market moves back through the coil
zone it would be very unlikely to recover those levels until after the
next intermediate degree bottom, which like I pointed out isn't due
until March/April.
Sometime in the next 4-8 days we should see the stock market
break its cycle trend line. It's very rare for a move down into a daily
cycle low not to break the cycle trend line. So for our purposes I
think we can probably assume that it will.
If the stock market just retraces 50% of the daily cycle advance
(assuming 1297 is the top) then we should see a pretty hefty sell off
in the next week or two.
That kind of selling pressure will almost certainly have some
affect on gold. If the D-Wave is still in progress it's going to have a
sharp affect on gold, probably forcing gold back below the $1523
December bottom. How gold handles the stock market moving down into its
daily cycle low will give us a big clue as to whether the D-Wave has
bottomed or not.
And even stiffer test is going to occur as the stock market moves
down into its intermediate bottom in March/April. If gold can't hold
above $1523 as stocks move into a daily cycle low then it is going to
get driven much lower during the intense selling pressure that will be
generated when stocks move down into a larger degree intermediate
bottom.
A couple of things to keep in mind.
The last C-wave was the greatest in both magnitude and duration
of the entire secular bull market. Is it possible that a 2 1/2 year,
100%+ rally can be corrected with only a 38% retracement in four short
months?
There is also the problem with the last intermediate cycle in
gold running very short at only 13 weeks (normal duration is about
20-25 weeks). More often than not a short cycle is followed by a long
cycle that evens out the next larger cycle. In this case the next
larger cycle would be the yearly cycle.
If December 29th did mark an intermediate bottom then we would've
had two intermediate cycles of only 13 weeks each. A short cycle
followed by another short cycle is a pretty rare occurrence. In this
case exceptionally so because the yearly cycle low isn't do until
February/March. If I take into account nothing else I would have to
assume that gold still has about 5 to 6 more weeks before the final
D-Wave and yearly cycle low are formed.
That doesn't mean that gold has to drop a considerable distance
below $1523. If it does turn out that gold continues lower into a more
normal intermediate timing band I doubt that gold would move below the
50% Fibonacci retracement level, which is at about $1400. That also
corresponds with the extensive consolidation zone in the summer of
2010.
One other thing to consider is the powerful correlation of a
stronger dollar whenever the stock market moves down into a cycle low.
We should continue to see the dollar spike higher over the next couple
of weeks as the stock market drops down into its daily cycle trough,
followed by a much more powerful rise during the intermediate degree
decline due later in the spring. As you can see in the chart below gold
has had little ability to resist a rising dollar.
So unless you think that the stock market will never drop down
into a cycle low again, or that the market and the dollar will drop
simultaneously (very unlikely), then gold is going to be severely
tested as the dollar spikes sharply higher during the next few weeks
and months as the stock market works its way down into first, a daily
cycle low, and then a much more serious intermediate degree
correction.
Right now investors need to be on the sidelines while we wait to
see how gold handles the stock market's move down into its daily cycle
low. If gold can hold above $1523 while the stock market suffers what
is likely to be a rather sharp correction then the odds will improve
dramatically that the D-Wave did in fact bottom in December.
If however gold follows the stock market down and breaches that
$1523 pivot then the odds are very high that the D-Wave is still in
progress and will not bottom until late February/mid-March.
I am currently still running the one week, $10 introductory offer
for the SMT premium newsletter. Since we should see the stock market
form its daily cycle low sometime in the next 1-2 weeks now would be a
perfect time to sample the newsletter.
Gold Trend Forecast for 1st Quarter of 2012
January 16th, 2012 at 11:11 pm
Over the past five months gold has fallen sharply and is no
longer headline news which it once dominated back in 2011 when it was
making new highs every day. The shiny metal has been under pressure
because traders and investors started to pull some money off the table
to lock in gains. Gold prices had surged so fast most advanced traders
knew that final high volume surge was not sustainable. But the main
reason gold topped out in my opinion was because the US Dollar index had
put in a bottom and started to build a base. As we all know a rising
dollar typically means lower stocks and commodity prices.
I have posted some charts below covering gold in detail using
multiple time frames. The weekly which is long term, daily which is the
intermediate trend and the 4 hour chart which shows gold momentum and
intraday action. At the very bottom I talk about the US Dollar and what
is happening with that.
Gold Weekly Long Term Trend Analysis
The weekly chart is not the most exciting time frame to follow as you
will grow old watching it. That being said it is crucial for
understanding the long term trend, price and volume analysis.
Below you can see that gold’s recent pullback has been a 3 wave
correction, which is a normal pullback for any investment. But taking
into account the rally from 2008 – 2011 I feel this pullback will have
one more low put in before bottoming out. This would make for a 5 wave
correction much like what happened in 2008.
Daily Chart of Gold Showing the Intermediate Trend
The daily chart allows us to see gold intra-week price action and use
the 150 moving average which is my preferred daily moving average. As
you can see we are getting a similar pullback as 2008 with gold now
trading under the 150 MA.
I would like to see gold make another lower low in the next 2-3
months. If that happens I feel it complete the correction and trigger a
strong multi month or multiyear rally in gold.
4 Hour Intraday Chart of Gold
The 4 hour chart of gold allows us to see all the intraday price
action which would normally not be seen with a daily chart. It also
gives us enough data to build our analysis upon.
My preferred setup for gold which I feel if happens will trigger
major buying in the yellow metal. If/when we get a rally in gold would
also likely mean some more economic uncertainty has entered the market
either from within the USA, Europe or China…
Weekly Dollar Index Long Term Analysis
The dollar has the potential to rally to the 87 – 88 level before
putting in a major top. For this to happen we will need to see the Euro
crumble (both currency and countries divide) in my opinion.
If you look at the weekly chart of gold and this chart of the dollar
index you will notice that gold topped when the dollar bottomed. Over
the past couple year’s gold and the dollar have had an inverse
relationship to each other.
With all kinds of crap about to hit the fan overseas I think it’s
very possible gold will rally with the dollar. Reason being there is way
more people overseas who want to unload their euro’s and with all the
negative talk and doubt with the US Dollar individuals will naturally
want to buy more gold.
Weekend Trend Trading Conclusion:
In short, I expect a bumpy ride for both stocks and commodities in
the first quarter of 2012. With any luck gold will pull back into my
price zone shaking the majority of short term traders out just before it
bottoms. And we will be positioning ourselves for a strong rally
buying into their panic selling.
To just touch base on the general stock market quickly. I have a very
bearish outlook for stocks. If the dollar continues to rise it is very
likely the stock market will fall into a bear market. So I am VERY
cautious with stock at this time.
If you would like to receive my Weekly reports, updates and trading education videos each week join my free newsletter here: www.GoldAndOilGuy.com
