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July 20, 2006

The Dow's Cold Right Shoulder
by Alex Wallenwein

Showing someone the "cold shoulder" has been a common expression in the English language since 1816. US stock investors are soon going to find out the real meaning of that phrase.

The reason: The Chart of the Dow Jones Industrials is about to complete a frighteningly beautiful example of a chart formation commonly known as the "head and shoulders" pattern. Here is a chart of the Dow as it stood on Friday last week, July 14, 2006, a chart EURO VS DOLLAR GOLD MONITOR subscribers were treated to in their most recent issue:

MONITOR DOW

And now, only a few days later, it seems like the Dow is in the process of confirming that wild and utterly unfounded hunch, based on nothing but suspicion and surmise - and on a good amount of observation, over time:

This path the Dow seems about to take could also be exemplified by another well-known, equally symmetrical configuration (if you only look at the general outline of it). It is a gesture often used as a somewhat untoward, rather impolite form of "waving goodbye," a crasser, more modern form of saying the same thing as "giving someone the cold shoulder."

The following message was attributed by an unknown graphic artist to what Hurricane Ivan had in mind when it was bearing down on the east coast of Florida back in September of 2004:

Ivan's Middle Digit

But then, again, chart patterns are not very reliable. They don't really prove anything. They only underline and highlight certain possibilities, or trends in action.

The current trend for the Dow, after having taken over six full years to just barely touch the same 11,700 level again that it hit back in late 1999 to early 2000, is certainly not "up, up and away."

Away, quite possibly - but definitely not "up."

Stephen Chan has made the very astute observation that the HUI is following a similar pattern right now. In his most recent article, he pointed out that there is a palpable threat of the HUI's turning us the cold right shoulder, as well.

But the fundamentals are different in that case.

The HUI is an index of the stock prices of producers of a commodity that constitutes the world's most suitable and stable form of money, even of wealth itself

The Dow, on the other hand, is an index of stock prices of a commodity that many left-leaning scientists and weathermen of today are blaming for causing global warming:

Hot air.

When the HUI's underlying commodity meets the reality of modern global finance and speculation (or rather, when modern finance and global speculation are confronted with the reality of this underlying commodity, as they must), it tends to rise.

When the Dow's underlying commodity (hot air) rises too high, it meets the realities of upper-level atmospheric temperature conditions - and cools down, rather rapidly. So, at least when it comes down to long term fundamentals, we are talking apples and oranges, here.

Charts only illustrate. They never "cause" anything. The same chart pattern of different instruments can come to very different results. So, gold stock investors shouldn't be overly spooked, right now. Even though recent times have seen an astonishing alignment between the Dow and gold for much of the last three years, when it comes down to pushing and shoving, the effects of economic conditions on each index are likely to be worlds apart.

Yet, it is important to keep in mind that a stock that is based on an underlying commodity is not the same thing as the commodity itself - and does not necessarily behave in the same way. Gold stocks are still only derivatives of gold. That makes them more valuable in shaky economic times than derivatives of hot air, but both are ultimately still made of paper or computer blips.

There will be a time when gold stocks will stagnate or even fall despite gold itself continuing to rise. That time is not here yet, but it is not too many years off in the future, either.

However, the time for hot-air stocks to fall seems shockingly near, right now.

Bernie is proving his fundamental incompetence in matters economic by zig-zagging around the landscape of Fed-speak mumbo-jumbo, seemingly contradicting himself at every other turn. He has no clue what is going on.

Sometimes he talks about inflation being well contained. Other times he warns of it threatening to get out of hand. Then he says not to worry, a downturn in the economy will keep inflation contained.

Wow! Doesn't that calm your fears as an investor? Just what you wanted to hear, right?

The world still listens, because it is used to regarding his office as the equivalent of the ancient Oracle of Delphi. But traders and investors are beginning to realize that the oracle's new chairman is likely on some form of crack. (Drug addiction was not uncommon in the oracles of antiquity, either. It helped them attain their altered states in which to utter their prognostications. It seems Bernie is carrying that venerable tradition forward.)

Might as well. In this insane world where news of war and mayhem in the middle east lead to a 200-plus point Dow rally, smoking crack might actually lead to a perfect alignment with how the world already thinks. Maybe Bernanke is just "tuning in." But, odds are that the end result won't be leading to a healthy Dow recovery. It will only lead to the completion of a classic cold right-shoulder chart pattern near the 11,000 level.

And, then ...

It may be the Dow's last wave "goodbye" to investors - in Hurricane Ivan fashion.

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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