Gold Traders Almanac

Larry Kudlow has once again proven his stupidity as his latest, polyannish, little verbal tic of ”drill, drill, drill,” turned against him as energy markets crashed faster than world stock markets. Now spastic outbursts of “oil price tax cut.” are heard as he peddles his ridiculous notion that the drop in oil prices will save the American consumer and economy.  Remember Goldilocks? That was another of his repetitive utterances heard throughout the 2002-2007 bear market rally referring to an economy that was “just right.”  Well, now everyone realizes how very wrong he was. Kudlow over the years has constantly flipped his view to whatever supports buying stocks and whatever is in favor of “the investor class”  referring to the pig men elite that he represents.  Kudlow has been wrong on everything and should have absolutely no credibility. The real bottom will be in when he is finally expunged from CNBC and replace with a more balanced, objective, fair, and  gracious host. Recently I was watching as A. Gary Shilling, economist and long time deflationist, attempted to explain his four-stage deflationary scenario. He was unable to finish without Kudlow’s continuous bursts of manic blathering.  I really give credit to Gary’s calm persistance trying to get his message through, thinking the whole time why any viewer just as I would not be completely irritated with the rude manner in which Mr. Kudlow talked all over him. I read Mr. Shilling’s book simply entitled “Deflation” back in late 1999 when he was a lonely contrarian in the midst of the “New Economy” and Tech boom. His reseach, analysis and predictions have been right on and I still highly recommend reading his book. Mr. Shilling initially thought there would be an era of “good” deflation primarily caused by excess supply, but lately he has been warning that his view is changing  to one of “bad” deflation created by persistent lack ofdemand. He originally identified potential risks that may cause ”bad” deflation: 1)another long, expensive war and/or 2) massive derivative deleveraging and severe systemic financial distress. Well, now we got ‘em both!    (Continued)

The HUI FCS remains on SELL after a dismal year so far at a 15% loss,  still the system has provided a whopping return over the past 6 years trading one tough, volatile market.  In early August, multiple long term indicators went negative and I unloaded all my energy and half of my precious metal long term investments the day before departing to my Canadian home. Unfortunately I am unable to access the internet from that location.  Here are the charts I use for long term positions showing the exit signals and major trendline breaks:

           HUI                            OIH  

                      click to enlarge                     

I am very concerned that despite the current extreme global financial panic and stock market crash gold has not been able to take out it prior two peaks, this to me is very bearish and says that deflation is weighing in stronger than safe haven appeal.

Lets look at the chart:

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The upper trendline is resistance and a rally up to it provides a third watch, solid break out from this level at 950 and I will re-enter.  On the downside, which I currently favor as the likely outcome, the last low at 723 is critical, if it gives I expect a rapid C wave decline to 500-550.  Boxed are some pretty bearish candlesticks suggesting a bearish reversal is near!   The HUI is in full retreat, the major impulse 2-4 trendline has been decisively broken and the 250 level at half the high hasn’t held causing my consternation and belief we have further downside.

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The .618 retracement is just below at 220 and must be watched carefully!

In my last post, way back in June, I explained the SP 500 was in a large degree C-wave decline and to beware of the viscious nature of such. As previously posted here I exited the market in January, in early June a secondary ALL SYSTEMS SAY GET OUT warning occurred (see post)   Trying to catch C- wave bear rallies is like standing in front of a freight train and fortunately I exited the long trade without a loss before the June short signal. This short trade remains in effect with a big, juicy gain.  It is so much safer to play the short side only, but even that can be stomach wrenching and not conducive to position trading without daytime focus, much experience, and nerves of steel.  During these relentless events, bag holders (buy and holders) are unmercifully and repeatly beaten and teased until they finally get frazzled and bail out at the end. Most of the liquidation here is so-called smart money, most 401K’ers were like deer in the headlights this went so fast.  They are always last to get bulldozed and that will be in the final wave down yet to come.  

So let’s look at this sad picture:

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Interestingly, I don’t see any real support until 640ish.  Right here the trend mirror tells us there may be a period of consolidation say from this low at 830 to 1080.  Yeah, big range but I will watch this carefully now, either we stay rangebound here, it fizzles fast and down to 620 or if we break back above 1080, could get quite a spectacular rally into early next year before the final plunge.   My twenty year composite cycle turns sharply up Nov-Jan, then we enter a steep downphase for 2009 suggesting the big bear rally into next year scenario.

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We are witnessing a deflationary tsunami brought about by a credit collapse of historic magnitude.  This is a major turning point in our nations history and my view is that we are likely entering a long period of slow growth, extreme consumer retrenchment (death of the American materialist dream), and persistant overall deflation. The magnitude of this pandemic decline of all asset classes at light speed is indicative of a major change in global economic dynamics as immensely leveraged debt implodes.  I am skeptical of the hyperinflationary scenario unfolding here and still hopeful that a complete collapse of the American financial system in relative isolation from the rest of the world is an unlikely event.  In future posts I will further provide reasoning for my position.  For now a mammoth tidal wave of deflation is undeniably crashing on our economic shore:

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So once again my friends stay safe with a little gold (don’t get too attached to it), short term Treasuries, and lots of cash.  Be content preserving your wealth and don’t do stupid things like trading markets without a proven system and discipline!

The HUI FCS has been on a buy signal since early May and I am holding a GDX/GLD split long position. This has been a trade that really tested patience with the system as minor rallies fizzled and most of the time the trade was flat. Finally it looks as though we have hit pay dirt with a nice triangle pattern break out this week. Also, June-July has been a common seasonal change in trend for gold all through this bull market. Hopefully this is the start of a seasonal move up into the end of the year. Gold looks to be ready for another run to 1000 plus. Here is the HUI FCS chart:

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Friday, as the Dow dove and wobbled after the previous days 300+ point plunge the CNBC experts continually debated if this was yet a bear market. After intense discussion the conclusion was that it was just a “crummy” market, not a bear market. Their sophisticated analysis required a market to be 20% off its highs to be labeled a bear market and the Dow ended only 19.5% off its high after the close. Obviously, I am only mentioning this to reinforce what has long been recognized here at the Wall Street Examiner; the incredible amount of worthless misinformation disseminated on corporate Crapvision. Here is the SP 500 chart I use to track bull/bear transitions with a very simple moving average cross over that has reliably made this decision for decades, and one that usually saves waiting for a 20% loss.

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Lee Adler using various technical measures as well spotted a major top forming last Fall and confirmed a bear market shortly thereafter. Again, on Crapvision a Dow 11,300 major support level was somehow identified. Sorry, but I only see minor support there, next major support on my charts falls at 10,750. The SP has major support at 1170, then 1080. I have continually referred to the Philly Banking Index relative performance chart and previously commented that if the last support gives (100% retracement) a total collapse of the broad markets is in the cards. Well, this has swiftly transpired the past few weeks. There is one last stand support which is a simple Gann 50% of a market’s all time high (check where the SP 500 ended its 2000-2002 bear market, yep, precisely at 50%) the BKX is there now, which is only slightly below the 100% last bull market leg retracement. If this level goes, complete decimation can easily take place. Lee Adler has commented he thinks it could go to ehhhh, well, zero. The ramifications of such an event for our nation are very frightening but I now must acknowledge that technically we ARE on the edge of the ABYSS. Here is an update of the BKX/SP relative performance chart:

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The first week of June EVERY broad market indicator I use turned negative. I broke even on the bear rally long trade and now well in the green having gone short 3 weeks ago. My OIH oil service FCS signaled a buy 2 weeks ago and is up slightly, this still would be a good place to buy in yet, I like trading the XLE etf. I continue to see foolish top calling in Crude. I do believe we will see a very significant drop after the top does finally come in due to the parabolic nature of this ascent. Since the beginning of the year I have reiterated to STAY SAFE. Holding cash isn’t easy either with raging inflation but it is still better than losing it.

This bear market has years ahead of it. The loss of confidence in our financial system, goverment, military, and leadership in general over the past 8 years is taking a terrible toll. Trust in American institutions has justifiably been lost and middle America is going to take the brunt of the consequences. The only long term investments I continue to hold are in energy, precious metals, and foreign currencies (primarily Canadian). I have a summer cottage in Northwestern Ontario that may sooner than I think become my year round home.

The HUI FCS gave a buy signal this week and I am long GDX/GLD in halves.  The weekly gold chart printed a bullish harami candlestick formation which has been a very reliable reversal formation in gold (green boxes on chart.)  This has occurred off moderately strong fibonacci support at the first level identified in my last post.  There still remains a much stronger support level just under $800 that remains a much higher probability long term support level for the end of this wave 2 of 3 correction.  In other words, I remain cautious about this trade,  both Raff and DTF indicators now are negative on the weekly charts as well. 

(Continued)

Gold dropped over $100 the week following a surge to its all time high price of $1,011 an ounce. The following week, CNBC parrots repeated several times a day that gold just suffered its largest one week drop ever. During the huge move to new highs, gold was infrequently commented upon. This reluctant sentiment was interesting to witness, however now some respectable technical analysts are giving a long term bearish view based on what they interpret as a powerful reversal pattern evident in the HUI gold bugs index.  (Continued)

The HUI FCS is currently on a BUY signal and up a bit.  The system suffered a nasty whipsaw but still posted a gain of 3.3% on the last trade; without the whipsaw that trade would be up 15% These types of “losses” are an unavoidable consequence of system trading due to the risk containing aspect of any trend following system.  The FCS has captured nearly a 30% gain (current trade included) of this larger degree move up that commenced last August.  A buy and hold if you had timed it perfectly would have you at a 50% gain.  I have received several e-mails commenting on the systems reduced performance particularly since this latest whipsaw and strongly advised they view a valuable trading lesson found at this link:  http://www.youtube.com/watch?v=xK0Xep5j2SM Here is a chart of comparative performance of the HUI versus gold.  So far the 0.5 ratio has held steady but the increased volatility of the miners has been the culprit in robbing performance with the FCS system.  In my last post I suggested trading 50:50, GDX:GLD positions as a way to possibly increase returns. However, these relationships can change very quickly and generally in the past as strong rallies in bullion unfold the miners gain relative strength and end up outperforming gold, that is, the Gold:XAU ratio declines as rallies mature. I am going to stick to GDX only trades. (Continued)

The HUI FCS issued a BUY signal this past Monday and so far the trade is up 7.5%  This signal occurred with a confirming pattern trade, a triangle break-out, adding to its validity and profit potential.  The mining stocks have been struggling compared to gold itself and GDX is underperforming bullion since this move up began last year.  In addition, the volatility has been substantially higher in the stocks, especially in corrections.  I have posted a perf chart of GDX versus GLD to illustrate this and I would not fault someone for trading the system 50/50, GDX/GLD.

(Continued)

The HUI FCS issued a SELL signal today with an 8.2% gainer.  Price behavior is maintaining a very bullish posture and another buy signal will be issued shortly.  I am looking at the daily wave count and maybe this is completing as a flat with this being the final wave down to a low very soon.  But a much more likely and easier to enter completion pattern would be a triangular consolidation for the Y wave (see chart).  A non-limiting type that really coils up with a huge drop in volatility would be so cool right before the third of a third wave rips through HUI 500 and gold $1000!Either way the HUI 410-420 level should hold up.

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(Continued)

The HUI FCS continues on a BUY signal and my GDX position is currently up 15.2%  I see growing strength developing in this move as silver and the mining indices have now all joined gold and taken out their previous highs.  The HUI:Gold ratio continues to remain steady at .5 and showing no favoritism, gold continues to outperform silver, and so for now  I will continue trading the system using GDX.  The HUI FCS chart shows an extremely strong thrust initiating this move with no bearish divergences warning it may stop, yet.

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(Continued)

The HUI FCS continues on a SELL signal but could change to buy very soon.  Gold is consolidating just above $800 and forming a very reliable continuation pattern; the high, tight pendant formation.  A convenient feature of this structure is they frequently mark the midway point of strong price impulses; so another surge to $975 appears to be close at hand! This is a very low risk pattern entry to begin accumulating physical gold or adding to exisiting holdings.  Gold loves to form triangular (pendant) consolidations in all time frames and as long as this bull market continues they are great trading patterns to buy in. (Continued)