Order Over Chaos: Profit from the Big Picture!
We are closing in on the end of this year, and what a year it has been.
Currently there seems to be a lot of confusion among investors about what to expect in the days, weeks, and years ahead. The housing bubble is still here, and will likely take a whole lot of time to unwind. Meanwhile, the sub prime debacle is slowly spreading, with one bank after another making adjustments to their write-offs, which continue to grow ever larger. Mind you, this doesn't only concern US banks. The spillover to other continents is becoming increasingly noticeable, and it seems that the authorities are becoming more scared every day.
Just last week a joint effort was announced by a couple of Central Banks to deal with the crises by coming to the aid of troubled banks by flooding them with cheap money. It still surprises me that the regulators continue to deal with the problem by pumping more and more money into the system. I'm not an economist, nor do I have the ability to perceive all the particular troubles they face managing the economy, but I do have some common sense.
This sense is telling me that pumping cheap money into the system can never be a solution. I will only create an even bigger problem, inflation, putting the Central Banks between a rock and a hard place. They can't lower interest rates any more due to the higher inflation rates, and they can't raise them either because they will kill the economy all together. What a mess they have built!
Because I'm mainly a chartist (but one that tries to keep the overall signals in mind), I look upon my charts and try to figure out what the coming years could bring us. What I see is that there could be very big trouble ahead for the major markets in the coming years. If the signs aren't deceiving me, we could be heading into a very long correction that could take years to reach any sort of bottom. Such a correction would fit in perfectly with the big financial mess we are currently facing, a mess so convoluted that no one really seems to know how big or far reaching it really is.
Will we see a period marked by skyrocketing interest rates, declining housing markets, declining stock markets, and booming resource markets? Only time will tell, but it can never hurt to be prepared. There is still time to get your things in order and divert away from the 'old fashioned' stock markets and take a position in the resource sector. While at first resource stocks are likely to suffer along with the overall markets, such as they are at the moment, they should eventually turn tail and bring investors returns they never thought possible.
Below you'll find a number of charts that will hopefully help you see the bigger picture for what it really is.
We Gold and Silver bugs have faced difficult times this last month, or so I read in various articles written mostly by bank and brokerage analysts that, in my book, try to keep the confidence alive in the major stock markets and not Gold or Silver.
When we look at the Gold chart we can clearly see that the uptrend isn't in serious danger at all, as all those various analysts might have us believe, at least not at this stage. In fact, the picture is rather bullish, with a pennant pattern forming itself in the chart and the 50 d. MA still rising into a nice 45 degree angle.
The pennant is a continuation pattern that can usually be found halfway up a move. Because the prior move was upward, we should see a breakout to the upside once again, triggering a price target of somewhere around the $1,000 mark.
Should the pennant break down, all isn't entirely lost since several support levels remain that can hold the price. There's also the possibility that the pennant will change shape into a flag pattern, which is also a continuation pattern with a similar price target of around $1,000.
So overall, things still look very solid at this stage.
Unlike Gold, the chart for Silver is a bit troublesome at this stage with a couple of very negative implications that can be derived from the chart.
Silver is bouncing up and down between the resistance at $15 and the support at $14, leading to negative signals in the RSI, DMI (Selling power) and the MACD. Last Friday, Silver closed well below the 50 d. MA for the first time since September. For now the support zone is holding firm, but the question is whether or not it will be able to do so for very much longer.
The RSI, DMI and MACD are all triggering sell signals, which usually can be seen as a prelude for a bigger fall. The bulls have to come to the rescue here to prevent a major sell signal and a possible fall towards the next support level at $13.50-$13.25.
Should Gold produce a positive breakout of the pennant, Silver will get an extra boost to help defend this critical support zone.
In the last update, I mentioned that Oil might test the red channel for support, and that is precisely what happened. The double-cross support of the red channel and the first blue line stopped the fall of Oil, and Oil quickly bounced back to higher levels.
The current setup in the chart is similar to the one that can be seen back in August, which was the start of a long and major move higher. Currently the 14 d. MA is dipping just below the 50 d. MA, but the price of oil is above them both so this sell signal could be very short lived.
The RSI, DMI (buying power, green) and the MACD seem to preparing for a major move higher. If this materializes, we should see an Oil price breaking through the $100 mark very soon, ending the year with a bang.
The downside to this expectation is a break of Oil below the 50 d. MA and the double support (blue and red line). This would most likely trigger a fall towards the lower end of the red channel, or a price target in the low eighties.
In my last update, I expected a bigger bounce in the dollar, and this is exactly what happened. The dollar is (finally) bouncing back as a reaction to the fall through the important 80 level earlier this year.
The bounce could take some time but should eventually take us back to the important 80 level. This level represents the neckline of the huge Head and Shoulders pattern we mentioned in prior updates. A successful test (no breakthrough) of this level would confirm the completed H/S pattern and will give investors their last chance to bail out of the dollar.
But let's take it one step at a time. The RSI, DMI and MACD are leading the way for a bigger bounce, all triggering buy signals, and the 14 d. MA seems to be on its way for a cross above the 50 d. MA. With all the signals positive, a rising dollar seems to be in the cards for the time being. A test of the magenta channel is the very least we can expect, with a test of the 80 level very likely.
In contrast to the Gold price, mining stocks are suffering along with the rest of the markets, having lagged the advance of Gold and Silver for several months now.
The chart for the XAU is showing that there could be a lot of trouble coming up on the horizon. Specifically, we can identify a clear Head and Shoulders pattern in the chart with the XAU closing in on the neckline.
The XAU is in bad shape. We are in a downtrend with a descending 14 d. MA and 50 d. MA that seems to be rolling over. The next days/weeks will be crucial for the XAU. If the neckline is broken, a price target of 135 will be triggered, a level near the support zone that has marked the bottom for all of 2007.
The bulls have to get their act together very soon and start supporting the XAU in order to prevent the neckline from being broken or, if this is too much to ask, at least give strength to the support at 150 in order to prevent the 135 price target being reached. For now, the outlook is very grim.
As mentioned in the introduction, world markets at large could be heading into some very troubled waters. After a long rise in the 1990s, we saw a first warning shot across the bow, when prices tumbled due to 9/11 and several financial scandals surfacing in the US.
These declines where just a trigger for investors to shape up and step in again, bringing the US markets back to their old highs and even beyond. However, the current ongoing financial crises may be the trigger for a fall that could dwarf the one we saw a few years back. Nobody knows where, when, or by how much, but it isn't likely to be pleasant for anyone except the shorts. It's just like an iceberg. We have only seen the top of it.
The chart for the DOW is telling us that the high has already been made or is at least not very far off from being reached. Because this is a monthly chart, even if I am absolutely correct, it will take time for the predicted scenario to materialize. But the weekly chart is still very useful in that it is able to tell us what we can expect for the coming years.
Remember that the current levels have been reached only after more then 25 years of rising prices. Therefore, it only seems logical that if this decline hits it will also take many years before a bottom is reached. Years marked by billions upon billions being washed away, a true clean up of the financial system to get rid of all the excesses we are facing today.
The broader SP500 index shows that it is in a heap of trouble if the resistance isn't taken out very quickly.
There's a possible double top formation showing with a failure in the EW count, which means that the broader market is in bad shape. Where the DOW managed to produce new highs, the broader market has failed to do so, telling us that only the big corporations were able to keep things under control with the falling dollar. Meanwhile, the smaller companies are feeling more and more pain.
The declining dollar value (loosing more than 50% against the Euro) hasn't brought the SP500 companies the same edge it gave the DOW components, probably because they are more focused on the domestic markets than the big names. With the domestic markets also feeling the pain of the housing bubble, the trouble for the SP500 has likely only just begun.
The SP500 seems ready for a big tumble. There's negative divergence in the RSI, DMI (Buying power) and the MACD, with the latter already triggering a sell signal.