Below are long term charts of selected indices, ETF’s, and stocks. Each chart is projected forward about 2 years with a scenario of the “anything” that can happen. The first chart is a plot of the Nasdaq 100 ETF showing our present position as somewhere in the middle of a three wave correction with a proposed terminal drop ending in October of this year. In October starts a 5 wave apparent resumption of the “bull market.” In early 2007 the Nasdaq 100 forms an expanding triangular correction followed by a rally in the summer spurred on by those anticipating the next October year end rally. Starting New Year's 2008, everyone then expects a market crash, but these folks are fooled when the market rallies in the first quarter of 2008. By that time, it will appear as if the bull market is going to resume – but it won’t. The market turns around and drops fast and the Nasdaq 100 ETF sits at 32 in the early summer of 2008. Anything can happen.
It seems as if it is almost an invincible stock, but Google is just a company, and anything can happen to a stock. At my job, my team was expecting to do some work with Google Maps today. However, last night almost by accident, we identified a similar service available for free from Microsoft’s MSN. After 10-minutes, it was quite apparent that Microsoft’s service was superior to the similar free product from Google. Our work was produced with the Microsoft product without ever going to Google. While using Microsoft, advertisers on the Google network didn’t get any exposure. Things can change quickly in the internet space and no company is safe. Similarly, no high flying P/E internet stock is necessarily safe in the long run.
A possible future for Google stock is depicted below. Google is currently forming a triangular pattern, typically a continuation pattern. The stock can rally and appear to break out of the triangular pattern upside. This could fool a lot of technicians all seeing the same triangle breakout. But at the very moment when it appears that the triangle has been broken upside, Google breaks downward hard and fast. It’s just a stock and there is reason to believe that Google can be a double digit stock in 2008. As you already know, anything can happen.
Crude oil is in a bull market as indicated by the in-force trendline. However, a lot of bearish activity can occur from here without breaking the long term upward trendline. If 60 turns out to be a critical intermediate term support line, then it could break this support and still be in a long term up trendline. If oil sees $42/barrel, then they may tar and feather commodity bulls. Yet the bull market will still be intact. As depicted in the chart below, oil can be about $60/barrel in mid-2008 and the bull market will still be intact.
The next chart depicts the commodity ($CRB) to Gold ratio. There is clear support in the ratio at the level of about 6.25. In late 2005, the support line was broken and the chart below depicts this ratio climbing to the previous support that may serve as resistance in the future.
Anything can happen. The following chart depicts the S&P 500. The current intact pattern is a wedge. The following is not wishful (bearish) thinking on my part. When wedges are broken, the drop-off from the wedge tends to be dramatic. We can get some basing in late 2006 through spring of 2007 at about 1100. But if a weak attempted rally fails then a lot of hope will be lost in 2007. The S&P may fall to its 2002 low. A sharp rally can ensue as all the technicians scream “SUPPORT.” But when this rally fails, all hope will be lost. Baby boomers that are now bullish will instead fear the worst – an evaporation of their collective 401K. Your hands need to remain strong because anything can happen.
Here’s a different scenario that many people expect. This depicts a “three yards and a cloud of dust” market for technicians. Anything can happen.
The US dollar is in a technical corrective pattern. There’s no reason why this cannot continue for a couple of years since anything can happen.
So, what may be up with gold? A lot can happen within the context of a bull market in gold. At the onset of this exercise it was suggested that if you are so set in your views that they will not change, then your position sizes must be amounts where your hands will remain strong. This is because, in the markets, anything can happen.
Anything can and did happen today. The market rallied strongly while the stocks and sectors that took the biggest drops in the recent correction made the most decisive gains today. Precious metals, oil, homebuilders, and transportation stocks were up strongly. But again, with stocks and sectors that normally head in opposite directions going in the same direction, it leads one to suspect that something out of the usual is going on. It appears as if there is liquidity coming and going from the market and all asset classes are following the trail of liquidity. The positive action that occurred over the last few days makes one think that it is time to keep the technical oscillating tools handy, while keeping the trend following tools in the shed for a few more weeks. The tendency has been for rallies to be sharp and it is for this reason that fund managers want to pile in on the long side at the first sign of a rally. With today’s volume strong, there will be ample opportunity to pile in tomorrow. We’ll see how that trend works out.
Yet, there are some sectors that are technically damaged and this rally is presenting what appear to be excellent entry points for bearish positions. Being repetitious, the sector that is referred to as capital consumer goods seems ripe for bearish entry points. As mentioned a couple of weeks ago, Winnebago, Harley Davidson, Brunswick Corp., and Polaris fit this bill. Their technical charts appear to be in long term downtrends, and there is a high possibility for high reward to risk ratio entry points. Another chart that can be used to determine market sentiment is Google.
If the rally continues, then Google is likely break the trend of lower highs in the triangle, thereby fooling a lot of technicians before it heads to its ultimate fate. But as stated above, anything can happen.
Bonds had a tough day, but this didn’t stop the oversold homebuilders from rallying. After this week’s action, the ten year note’s yield is above its 10 and 40 week moving averages. Interest rates are heading up. Let’s buy a snow mobile!
Bill Gates is leaving his “daily role” at Microsoft to reorder his priorities. To my knowledge, Donald Rumsfeld, is not.
Have a great evening.
James J. Puplava Financial Sense™ is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939