The HUI broke into new high ground and as I write this, the spot price of gold is north of $595, and silver is over $12.11 an ounce. This is Wave 3 behavior as I discussed here before. Corrections against the main trend have been relatively short and shallow. The crowd is hopping on board, and baffling those practicing “contrarianism.” It's times like these that you don’t want to try to out guess a bull market. You have your position. You are playing with the house money. Just leave it at that. Ride out the inevitable corrections. It’s a bull market.
If you want to be a contrarian, then this may be a chart to interest you. The 3-year daily chart of the 7- to 10-year Treasury Bond Fund (IEF) shows a massive topping multiple head and shoulders pattern. More than a few analysts, myself included, have sounded the warning that this is signaling the next bear market in bonds. Yet something in the very short term is making me think that there may be a rally in store for the bond market.
The recent rally action in the Homebuilders has pretty much defied the poor fundamental data. The stock market has failed to drop for even 2 straight days in the face of inflation (evidenced by the precious metals market), and an apparent new bear market in bonds. So in summary, stocks and gold are not confirming the new bear market in bonds. What gold may be telling us is that interest rates will drop, thereby devaluing the dollar, and increasing the price of gold (in devalued dollars), and increasing the price of stocks which will be worth more devalued dollars. None of this short term action makes sense now; but it would all make sense if the bond market rallies.
From a chart pattern perspective, it seems that whatever the market, since October of 2002, the setup has always been the same. It goes like this. A support level appears to have been broken off of a bearish reversal pattern such as a head and shoulders. When the bears (in this case, bond bears, say “Ah Ha!”), the pattern reverses, and produces a sharp and tradable rally. In the case of the IEF, I believe we are just about there now. For this reason, I’m looking for a rally.
Oh, isn’t there economic data (unemployment statistics) being released tomorrow that will likely impact upon the bond market? I’m looking for a sharp and tradable rally.
And speaking on this very topic, remember a few weeks ago, when many (myself included), gave a gigantic, “Ah-Ha!” when Toll Brothers appeared to have broken a downward sloping head and shoulders pattern?
At the very moment that we-all shouted “Ah-Ha!,” Toll produced a bear-killing sharp and tradable rally. But since we are on this topic, it has been said that when many people think they have found the keys to Wall Street, someone comes and changes all of the locks. Well you can be sure that as soon as a few loved stocks see their bearish reversal patterns completed, the character of the market will change, and then buying these formerly dependable patterns will be a sure fire way of losing lots of money. Until that happens, “it’s a Bull Market,” and all trends must be respected, no matter how fundamentally wrong they are.
Early on in this short piece, I mentioned the Wave 3 in precious metals stocks. And it prompted me to go back to the other Elliott pattern I referenced here. And that is of the Terminal Diagonal. This proposed pattern is shown in the multi-year weekly chart below. If we have a throw over, it is an extended one. The rally off of the October low has barely even produced even a weekly drop that was technically meaningful. Overbought as it is, it would not be intelligent to take any meaningful position against the up trend in my view. Yet chasing the rally into new positions would not seem to be prudent either.
There’s a lot of scared money needing to catch a rally on this and many other charts. Yet, when the prime reason for buying is that they’re going up, when they stop going up, there is no reason to buy, only a reason to sell.
Finally, are there surprises to be had this earnings season? Preannouncement warnings have been few, relatively speaking. Yet warnings generally apply to the current quarter. What will be most important will be the outlooks, which in many cases tend to not be “warned” upon. If outlooks are not positive, then the market’s overbought condition is likely to be relieved pretty fast.
Have a good evening.
James J. Puplava Financial Sense™ is a Registered Trademark
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