Friday, March 26, 2010

The Long Term HUI

One of the tools I use in forecasting is the Elliott Wave theory - this, coupled with indicators in sentiment and momentum, along with measuring the disconnect between fundamentals and reality, allow me to get a clearer picture of where the market is today and where it is most probably headed tomorrow.

The two highest probability wave counts for the HUI Index both indicate at least a near term decline in the price of gold stocks, both also indicate that gold should begin the largest bulk of its bull market within the next 24 months.

If the first scenario plays out (which in the context of a deflationary period is the most probable), the HUI will make a much lower-low than where it stands today.  If the second scenario plays out, the HUI will make a lower low, but will resume a bull market much sooner, and start from a much higher point.

Scenario I

Scenario II

As for the rest of the markets, the nearer term pictures is not as clear as the US Dollar and precious metals.  The move upward from March 2009, however, does not look impulsive unless one stretches to impose an impulsive structure onto them, and as such the primary degree trend still appears to be down.

How long it will take to hit the top and resume the long term bear market is not entirely clear, however with more retail investors piling onto this rally every day, the safest bet is less time than more.

Have a great weekend!

Derek Blain

Thursday, March 25, 2010

Waning, Waning, Waning...

Markets spiked upward today right off the open and continued to push higher, while a look at the underlying foundation shows cracks galore.

Gold has hardly rebounded off its move lower yesterday, trading a relatively tight range today, searching for its next move.  The odds are still much higher that the next move in the metals is a downward one, coupled with another small surge in the USD to finish off this first leg of the USD mid-term bull market.

The strength of recent rallies is waning fast, as indicated by the new highs on the broader NYSE versus the S&P500 index.

Every time we have seen this particul pattern play out in the past, the subsequent declines have been at least moderate, the most recent one bieing in January and shaving 8% off the index's value in less than 4 weeks.  The declines have also been getting larger, just as the divergence and underlying momentum has.  Can I say for sure that this one is "the big one"?  Absoulely not - the probability was higher in January where the actual price movement was a highly terminal one coinciding with the end of long-term rallies.

Still, a new low could be made in the broad indexes over the next 2 months, on the back of dollar strength and this next development:  China and the majority of asian stocks seem about ready to start another good-sized move down, which could pull much of the world markets along for at least part of the ride with it.  China is going to have its own probmes in the very near future (surplus cash or not, anyone who argues that every dollar of the Chinese government's investments are not at least partially malinvested needs to pick up a copy of Human Action  by L. von Mises and tell me they agree with that presumption after a historical examination of the success of any form of government spending), with the possibility of a strong deflationary period to correct many economic maladies.  This could be a good buying time for the RMB, especially relative to so-called "commodity currencies", many of which are also looking fairly terminal and ready for depreciated optimism relative to the USD.

The US markets are due for either a several percent correction or a longer period of sideways consolidation to build up momentum.  We will see what impact the rising dollar (its pull on stocks seems to be minimizing) and falling Asian markets have on North American soil.

Keep your heads up out there.


P.S. the CFTC meetings are today and, much to the surprise of many avid gold investors who emailed me over the past few days, gold has not jumped $50.00 in price at the mere thought of short-covering.  If restrictions are put in place they will take some time to be enacted, and furthermore, according to historical market psychology, they will be put in around a time that should mark a long-term bottom in gold prices, and will make an excellent reinforcing indicator to start accumulating larger quantities of physical metal.


Today's rapid push back down in the broad markets form a potential kangaroo-tail point for the markets to reverse down over the next several days.  Initial support is at 10,700, with 10,450 - 10,525 acting as an ideal retracement point.  There should be one more push upward once this correction is complete, to mark a terminal pattern in the rise from March 2009.  However, the impulsiveness and breadth of this decline are extremely important for measuring the mid-term direction of the market, as the commodities, precious metals, and also the Asian markets have turned down and made lower highs.  

This is a major non-confirmation when taken in the context of explosive credit growth which led to virtually every market topping at roughly the same time in 2007 (within months) and the CRB index following very shortly afterwards - once they all turned down decisively, the major bulk of the bear market move was underway.

Although it still appears that the bias once this correction is over will be to the upside, we will have more information once it is underway to see whether this is just a small turnback to rattle the bulls, a sideways consolidation to build momentum for another surge, or the start of something bigger to the downside.

Monday, March 22, 2010

Precious Metals are in a Key Technical Range

Gold and silver are both in a fairly tight consolidated trading range over the past several weeks, keeping both metals bound within a compressed psychological battle between mid-term bulls and mid-term bears.

This range is extremely important, and is probably the largest hurdle that needs to be overcome before a sizeable move to either the upside or the downside.  Our opinion is still that the downside is more probably than the upside, and if the range is broken down it should usher in a move to the $950 area at minimum, with our downside target somewhere around $650.

On the other side of the coin, a break to the upside would make this small multi-week uptrend in gold an impulsive-looking move rather than a corrective one.  This would indicated that there was still a larger degree impulsive move to the upside, which would probably take gold on to new all time USD highs at the $1300 mark or so.

Aside from that, the technicals on gold stocks themselves are looking long-term over-extended, with the Advance Decline level on the XAU hitting a level 75% higher than it has ever in the history of the index, despite the lower-high made in December 2009.  See here:

What's more, we are at what I would call a "very respectable" level of complacency in market investors of every ilk, with fund managers holding less than a 4% cash position at the beginning of 2010 (a record beat only by the market top in 2007 @ 3.6%), and the VIX just recently moving down to what I call the "relax" range.  The RSI reading on the VIX is also extremely oversold, to a level hit only twice previous since 1988 - this in itself is not indicative of an immediate "market crash" or anything, as the VIX can stay "oversold" and have a slowly trending upward price movement momentum against a slowly falling actual value.

But here is the VIX portrait for March 2010:

While we still think downside is the higher-probability in the markets, irrational exuberance and "hope" takes a lot longer to fizzle out than raw fear does to bottom and reverse.

Keep your stops fairly tight out there.

Derek Blain.