GOLDReport
April 4, 2008
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We're in a Recession...
Academic terms to me are just that, academic terms. We've now seen three consecutive months of job loss along with loss of growth in our economy. The revisions in January and February tell the story. The USA has now seen 3 consecutive months of job loss which is part of the definition of what make up a recession.
The function of the marketplace is to discount and factor these events, as it does on a daily basis.
Inflation...
As I wrote last week, inflation is alive and doing well around the world.
Yes there have been bumps in the road, in large part because "Hot Money" is at work. I term "Hot Money" as money that moves quickly around the financial arena. We saw this occur when funds and speculators in a frenzy drove gold up to $1000 an ounce, silver up and over $21 an ounce, copper up to $4.00 a pound and so on.
Nothing goes straight up without eventually correcting a bit. Corrections occur, as they are part of the process of pricing. This is what we are now witnessing. How deep the correction is the question as the result of the correction determines whether the longer-term trend has changed or not. Short-term trends by their own definition will, for short periods of time, change market direction back and forth.
What if Mr. Bernanke saves the day?...
As I see it, there is but one likely outcome. We get through this whole subprime mess and things get better. However, yes, there's that word "However", the speed and manner in which we come out of this recession is what makes trading so interesting.
Mr. Bernanke has shown creativity that I never expected. His has shown why he was chosen as Fed Chairman. Don’t get wrong, he’s no messiah. He has to work his way out of the mess he predecessor left him. While many hold Mr. Greenspan in reverence, lets not forget that it was under his watch that this subprime mess took root and grew. Mr. Bernanke came into office just in time to inherit this mess, the mess that took place under Mr. Greenspan, a fact I rarely see mentioned and one which Mr. Greenspan doesn't make mention of.
Is anyone really to blame? Depends on your perspective. The banks made loans to people who knowingly shouldn’t have gotten them. The borrowers asked for loans they new would be problematic. Both rolled the dice, the dice the banks provided with financial institution help. Contractors, land developers and real estate brokers all took part in this and all prospered. Now we're, that's you and me partner, the innocent parties who are left to deal with their mess and feel the pain.
June Gold
I'm not sure if the correction in gold is over or not. Technically speaking, we're at a crossroad.
One of the most powerful Technical Studies I believe in and use is Stochastics. Stochastics display a momentum signal that displays: Overbought, Oversold, Getting Stronger and Getting Weaker signals.
Stochastics are made up of two lines that criss-cross each other. One line is called "K" and the other "D". The "K" line moves around the "D" line.
When both are under a reading of 20 or lower for 3 or more days, I interpret this to mean that innately, the market is getting stronger as is breaks down. The Downtrend is getting stronger. Embedded Stochastics feed the downtrend. In order to embed, a market must have a Stochastic reading under 80 for 3 consecutive days, which will result in a downtrend. These go hand in hand with each other.
Once Stochastics embed, they stay that way until the "D" line, the line that moves quicker, lifts back over 20. Once that occurs, a short covering rally begins that can either turn into a full-blown Bull Trend or become just a short covering rally. Typically, it first turns out to be short covering rally.
What is important to keep in mind is that Stochastics typically produced sustained or shot lived trends. As they leave their embedded status, they often produce sharp corrections in the opposite direction the market was moving, while Stochastics were embedded.
I teach all of this in my course called "The Futures Academy", of which there is a small ad below that contains a short video. If you play that video, you'll see how I explain what I teach.
Let's look at a current chart of June Gold.
As I write this report, gold is up nearly $8. However, I don't know what the final close will be. Let's assume Stochastics close similar to the numbers on the chart above. If so, the market averted developing an embedded Stochastic, which means more short covering is likely. The logical resistance area is the 18-Day Moving Average of Closes, shown in red as 950.2.
Conclusion and Recommendation
If Stochastics did not embed, I will be encouraged.
It may well mean that worse of the price correction is behind us and that some base building is likely. No matter how Stochastics turn out today, gold is still in a Downtrend. A weakening one if Stochastics did not embed, but nonetheless still in a Downtrend.
Under the current chart formation, it will take a move over 960.3 to begin a pattern of higher highs, which means the beginning of an Uptrend. Until this pattern develops, all we have at hand is a corrective rally in a Downtrend.
Longer-Term Traders should temporarily hold onto their 970-1000 June Call Spread. You should have taken half of your position or more off near the last rally high of 12, which means those who did so have enough banked profit cushion to see what develops early this coming week.
I am not yet recommending doing anything new. I will do so if warranted in my twice daily updates.
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Silver
Silver acts and looks much better on the charts than gold does. However, like gold, it is not in an uptrend. Rather, I term this week's action as a bounce in an overall short-term downtrend.
I say this because silver still has a pattern of lower lows and lower highs.
Let's look at a chart of May Silver.
Prices are rallying nicely off their lows. Stochastics are oversold and beginning to turn up, which often leads to short covering.
The issue is that this is not a Bull Chart Formation. It is a bearish one that is in a corrective mode. Trying to read anything more out of this is simply not wise.
I expect to see resistance at the 18-Day Moving Average of Closes, if it is hit, which sooner rather than later should occur.
Recommendation
As you know from last week's letter, I don’t suddenly expect that silver or gold will quickly turn as bullish as was seen in February into mid March. However, I do think that another up leg to new highs will be seen because I believe that what the Fed does will work.
Assuming, which is a not that big assumption that the Fed gets it right, our economy will grow. The Fed cannot turn off low interest rates just as things get going. They will have to be sure the economy has "traction". Therefore the Fed has to let inflation do its thing at first.
Once we begin to grow, our trade partners will grow. That means both they and we will be chasing raw materials and money to grow our economies. Yes, later down the cycle interest rates have to rise. But not know and probably not this year.
Therefore, given the strong growth abroad and my theory that the Fed will pull us through this mess means that inflation has an open window to run... and run hard again carrying precious metals and industrial metals with in while that window is open.
I have a hard time wanting to sell a 20% price break in a metal that is a tool traders use to ride an inflation wave. Given the chart pattern, I am on the sidelines, looking to get long.
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