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Tuesday, May 11, 2010

LETS PUT THIS TO BED


Here is a weekly chart of Cash Gold with a 3 standard deviation band above the pricing. It is my contention that from a big picture stand point this is a bubble. You can see we just recently again hit the deviation band. We did have a little reaction down, but nothing to write home about. Most of these "touches" have resulted in dips which is why I claim this market is extended. Am I shorting this market here? No. My Silver setup I was hoping for this week has been invalidated, so other than Copper, I see no shorting opps in the metals here.

This trend is solidly up so from a trading standpoint especially short term, there are no sell signals here. The point I have been making here for awhile now is that it is just a market from a historical perspective that is completely devoid of it's fundamentals up here. It has accelerated in the face of very low inflation and also with a rising dollar. Historically, those are the 2 correlations that have always deteremined the fate of this market. Since they are ignoring those signals that tells us this is a pure speculative move. These types of situations all end the same way, the only variables are how long it takes for them to peak. My comments are mostly just to get people to have an exit plan. I know when things go up like this you think it will last forever and all the sky high predictions for how far price will go and why they are justified come out. This happened in Real Estate, it happened in stocks in 2000. It was also happening recently in stocks when the 1500 calls for the SP 500 came out. Look at who is making the predictions and their track records. Have they been accurate in the past, or have they missed one major market peak or trough after another?

I will just leave you with this thought on this topic. Does that chart above look sustainable? If you think it does just tune me out. If you do not, develop a protective exit strategy in case I am right. Enough on this I am tired of this topic. I will post any trades I do in either direction here when they are done.

NOW TO MY CURRENT DILEMMA



We have the bounce going on I mentioned this past weekend. I have today's action so far on the screen as a projection. It is currently an inside bar with down close. Looking below we have 2 things that indicate a sell and one showing the extended downmove, and a possible buy. What to do? Based on looking at the VIX it appears to me the top is in, it has a very similar look to the most recent big tops we have seen. It features an explosion up for a few days far beyond any standard deviation bands. The normal gyrations in trends generally do not do that. Next, the extended buy I have labeled at the bottom often also picks major turns and it would indicate a low. Since it also occurred at the 200 day moving average, it is certainly possible that the whole correction has already occurred in that brief period. I normally like to have a divergence in that bottom indicator, which we do not have yet to pick a low but it is not always required.

The middle panel showing a rollover in Momentum tilts this back to the bearish side, these can often be very powerful patterns for big moves, and it is indicating sell entries right here. The top panel shows a momentum downtrend, and now a reaction to it upward. Essentially it is mirroring price. I am watching this momentum line very closely to see how it reacts on this bounce. If it begins to curl back down that will be confirmation of a sell.

Net net here, I am looking to short this rally, but am not "all in" in terms of things I look at mentally. There is an outside chance the whole correction ended already, but I am leaning toward it not being over yet. The next couple of days are critical in my world.

1 comment:

robert said...

re: gold chart with arrows identifying 3 SD events

Chris,

Thank you! To me personally, that's one of the most interesting charts you've ever put up.

Jeremy Grantham did a lot of great research on market bubbles. Looking at 28 different market bubbles, he found that every time a market reached a point of 2 SDs away from the norm, it would eventually revert all the way back to the long-term mean.

I don't know the exact math Grantham and you are using in your equations, but I find this phenomena both valuable and fascinating.

Keep up the good work, Chris. You know your stuff.