Mirror Markets Looking Gassed

by JDH on November 21, 2009

This week am I a bit out of sorts. Mrs. JDH is off to Toronto for a weekend of Christmas shopping, and I am left in charge of my two boys, JDH1 and JDH2. (No, they don’t have the same name as me; I have the same name as my father, so I decided to give my boys completely different names, but that’s not really relevant to the story this week). I’m completely clueless in all domestic matters (like cooking); my only two skills are ironing, and making coffee for Mrs. JDH. My boys are quite concerned that we will starve to death this weekend, but Mrs. JDH has left us well stocked with food, and I am pleased to report that the boys managed to microwave their mini pizzas last night, and I managed to microwave my frozen, store bought lasagna, so so far, so good. So, if my thoughts seem even more disjointed than usual, that’s my excuse.

Let me start with a quote from punter from the Buy High Sell Higher Forum on Wednesday. You can read his full post on gold here, where he talks about the continued excellent chance for an increase in the price of gold, but suggests gold stocks as a superior alternative to gold bullion:

So why not bullion? It doesn’t have the ability to produce income in the way that gold companies can and there are all the ancillary troubles and roadblocks the government has set up. I say juniors that are on the sideline now have tremendous growth potential. I have been saying this for two years and haven’t been right yet, but the nasty reality of macro economic calls are that sometimes it moves at glacial speed. But it is always the right call to follow the mega trends instead of reading the newspapers day to day.

Exactly. I too have been warning about down markets and a bad economy for a long time, and I haven’t been right yet either. But yes, to be successful in the long term you must decide on the long term trend and follow it, and don’t worry about occasional hiccups along the way.

Has the market upturn since March just been a hiccup? Perhaps. Ask me next year and with the benefit of hindsight I’ll be able to give you an exact answer. Let’s look at some charts.


Since the peak in 2007 the S&P 500 Index has crashed, and started to recover. Of course it depends on how you draw the lines, but it looks to me like we are now approaching the down trend line. A decisive break above the line may indicate that indeed the crash is over, but until I see it, I’m not betting on it.

Here’s the Dow over the last few months:


Sorry, I went a little crazy with the line drawing tool, but here’s what I see: I see an obvious up channel since September. The market hits the top of the channel, goes back to the bottom, and then continues upward again to a new interim high, and then it goes back down again. The symmetry is almost perfect, almost as though someone was doing it deliberately. The green lines show that as the RSI gets up to around 70, the market runs out of gas, and down it goes.

If one assumes that this pattern will repeat itself, I would assume that the market won’t move much this week (and it’s a shortened week for the American Thanksgiving holiday on Thursday, with not much action expected on Friday), before the market fades to around the 10,000 level. If that level doesn’t hold, really bad things could happen. Either way, I wouldn’t be opening a new short term long position now.


What about gold? It looks the same. The up trend channel is a bit narrower, and the swings are more modulated, but the pattern is similar.

However, the RSI on gold is now very high at 76, and as the green vertical lines show, over the last few months levels that high are generally a near term top. So, if you want a prediction, I would predict that the $1,150 level for gold is a near term top, and a retreat as low as $1,060 would not be surprising. In fact, it would be healthy.

Does every market look the same? Nope. Here’s the mirror image of the stock and gold markets:


As the US dollar goes down, the markets go up, and vice versa. I’m not smart enough to understand why. I assume that money gets removed from the US dollar and invested in gold, which drives gold up and US Dollar down. I’m not sure why the US dollar going down makes the stock market go up, but I guess the reasoning is the same: money transferred from the currency to a “hard” asset.

The last few weeks have been very difficult for me. I see the markets going up, and I have this almost irresistible urge to jump back in to the market (I’m 85% in cash now, with the balance invested in gold and silver stocks). That’s normally the sign of a top: everyone wants in. So, I am doing everything in my power to resist the urge. I stare at the charts you see above and I tell myself that now is not the time to buy. Be patient. The markets are looking a bit gassed; there will be better opportunities ahead.

December is traditionally a relatively flat month for gold and stocks. The first quarter is generally very good for gold.

The plan, therefore, is to watch for market weakness, and to begin to accumulate on that weakness. I will be paying extra special attention to gold and silver juniors, because I assume the take over wave will be starting soon (Canplats was the first to fall), and that’s where some real serious money can be made.

That’s the plan, so have a Happy Thanksgiving, and see you next week.

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