Thursday, July 29, 2010

Did the Market's Corrective Pattern Top Out Today?

I have been warning investors for many months now that this market is going to suck in the maximum amount of long participants before beginning its larger-scale decline.

Today's gap-up from the open was a very high probability exhaustion-gap which carried the Dow to a new intraday recovery high.  From that point on, prices started falling immediately and the movements look extremely impulsive.  This indicates that a new trend has developed.  Chances are, the correction going all the way back to June 8 is complete, leaving huge potential for downside all the way into Dow 8,000.

Gold, silver, and the stock market have been moving in a high-correlation lately, and with gold's turn down from all-time highs to rapidly break down from its rising trendline, it appears likely that a minimum target of $1000.00 / oz gold could be met sometime this fall.  Silver's initial target is $14.00 / oz with larger bearish potential as time goes on.

Another fantastic trading opportunity is in oil, which we recommended a short position on several months ago at $86.00 / bbl - Crude's downside potential is into the $50.00 / bbl range which makes this an extremely high-profit short potential.

The Bottom Line:  Virtually ALL asset classes without exception should decline in tandem as the next phase in the credit contraction gets rolling.  The USD also appears to be either just completing its multi-week correction or within days of doing so.  Once this trend reverses watch out.  Gold and silver are not an exception to this rule and they should decline in tandem with stocks, commercial paper, and other commodities.

While central banks around the world have beent trying, and will continue to try, to pump liquidity into the system and inflate credit markets, this activity has exhausted all their ammo and will soon exhaust their credibility.  This is a positive for the future as massive deflation will destroy many "wise" central bank balance sheets - these cartels have left themselves exposed 100% to current market forces and foregone the usual safe-falls.

The question might just be:  Who will bail out the Fed? 

The coming market behaviors will be one for the history books.  Make sure you have your cash safe (keep a significant reserve OUT of banks), and for investments are purchasing the safest cash equivalents in USDs.  When there is actually a real chance of inflation you will read about it here and the investment strategy will change to ensure that purchasing power is retained.  Until then, deflation is the name of the game and many will be taken by total surprise.

Make sure you aren't one of them.

Have a great week, and enjoy the summer days.

Derek Blain.