What are the chances that if the pig in the top panel corrects the POS in the bottom panel might rally? Now, will the pig correct?
We have been anticipating a rally attempt of some kind. There are targets to the upside that can actually extend all the way to the broken neckline of the big fat Head & Shoulders at 375. There are several rally target points lower than that, plotted by daily charts. There are also parameters to the current rally’s viability, which were not eliminated by Friday’s down thrust.
But it is Mr. Fat Head (the monthly chart) who owns the big picture until such time as 375 is taken out. Mr. Fat Head’s target is an unthinkable 100. The problem is that 250 was unthinkable when we began putting it on radar months ago. Just a friendly reminder in the event things get bullish in the short-term as has seemed probable.
This is a battle between scenarios. Was it THE bottom at the washout low a couple weeks ago, as the index came to the 62% bull market Fib retrace? Is the trend line in the low 200′s going to contain it? Or is Mr. Fat Head’s 100 target going to one day prevail?
In my opinion, week to week management by charts on shorter timeframes will work best. They have worked so far. There is a scenario in play here where the precious metals are bouncing with the inflation trade and another bump in the maturing stock bull market. I would not read much more into it just yet.
Another non-technical sign would be the Chest Beating indicator. You know the one. It’s a week to week, take the pulse type of market until real technical damage is negated.
That was the question I asked myself after being 100% cash into the last hour yesterday and seeing the bottom fall out on the gold stocks once again. Classic trading methodology teaches that you do not try to catch a falling knife. ‘Screw classic trading methodology’ thought I, ‘I’m taking some positions’, which ended up being in the gold and silver bullion fund CEF (now selling at a discount), a few individual items I consider to be of relative quality and the leveraged NUGT in a high risk trading account.
The above was noted in an update to NFTRH subscribers in the last hour and certainly was not a call to action. It was just a note from a market manager who had been updating subscribers all along this frustrating journey since the gold stocks lost critical support in November. With that final plunge yesterday afternoon, something bullish welled up inside me.
But as usual, the chart takes out the human element (e.g. “something bullish welled up inside me”), so let’s look at the one for GDX, as it shows an awe inspiring picture of volume.
I won’t recount the whole agonizing history of the breakdown from the September ‘QE’ euphoria. The busy chart does that for me. What is important now is the series of ‘rolling capitulations’ that manifested in Bear Flags, which in turn served to reset over sold status just enough to continue a series of plunges.
Yesterday’s impulsive mega volume drop blew the Bollinger Bands to their widest separation in maybe forever. RSI came to an opposite condition to its very over bought status from September. While on this subject, my stance in September/October was that gold stocks were over bought and in need of a ‘healthy’ correction. That is what TA said. I was wrong about the “healthy” part and was proven so when the red dotted neckline broke down. We are going to be wrong, but it is what we do with that knowledge (deny it or face it?) that is important. When that critical support failed, we labeled the correction “abnormal” and in need of constant risk management.
Which brings us to today. I may be right or I may be wrong in having bought the puke-fest close yesterday. I have plenty of dry powder (too much, if a real rally is forthcoming), but these are the times we wait for people. That chart above has finally woken up with capitulation after a 6 month grind.
A long standing target of HUI 250-260 was hammered yesterday into the close. There are targets lower in the low 200′s (secular trend line by linear chart) and 100 (measurement off a huge topping pattern). So this is all just a trade until it proves otherwise. But look at that chart again. People are being driven out with extreme cruelty and force. This is a picture of massive pain and tumult. Sometimes you just gotta buy that. As noted to subscribers, this will be undone quickly if proven wrong.
How on earth long did I have that target on there? Did I predict it? I don’t do predictions, but I sure did respect it. This thing is hideously over sold but ‘over sold’ itself is not a buy signal. It’s at a target with support a little lower, but a target itself is not a buy signal.
I am going to focus more on the big market bearishness and when I see what I want to see here (other than an over sold index hitting a target) then I’ll plan to manage this sector for a potentially furious rally at least.
It’s incredible how markets work. How DIA-Gold did what it said it was going to do. How HUI did what it said it very well may do. I swear the markets are like some sort of loud, cacophonous orchestra keeping some kind of strange time and making some really grating music.
A little short-term management here folks. Huey gapped up on the ‘jobs’ news and has settled down to fill that gap. Now, if we have finally killed off most of the commodity and inflation bulls that populate the gold “community” maybe we can finally come to phase where the miners get a bid for the right reason – which is economic contraction, fundamentally – as gold out performs the materials of positive economic correlation.
There was bigger picture resistance (which we regularly review in NFTRH) that HUI boinked against this morning. Of course it is just one noisy morning, and the gold stock case will take time to distinguish itself from the broad inflation plays. But taken at face value, the gap fill is not a bad thing.
So what does a geek do when he is in cash and not yet actionably engaged? Well the first thing he does is curse his having been too chicken to hold DUST and ZSL longer. Then the next thing he does is go to the ratio tools to see what’s going on in the indicator world.
One thing that is going on is that the gold miners broke upward in relation to copper miners, with a counter cyclical implication; i.e. yet another potential divergence to the happy economic story.
Incredibly, despite today’s carnage, the ratio is above a support point. It will be interesting to see where this goes over the next few weeks. But leading into today it was a sign similar to gold vs. industrial metals for a counter cycle.
In an earlier post I pulled the old HUI 888 skeleton out of my closet. 888 (AKA the 3 Snowmen) was a target measurement based on how the chart looked in 2010. It can be liberating to take your worst call and publicize it for the world to see. They tell me that you sell a lot of newsletters that way too . All market geniuses should try it once in a while.
Kidding aside, it can be a lesson in learning from mistakes. Can this chart tell us anything of value today?
Well what have we here? Oh yes, it is the Russell 2000, an index I used last summer to help stay on the bull path.
So if HUI was going to 888 I guess that the RUT is going to 1394…
…and the DIA is going to 197…
…and SPY to 216?
Well that sounds all well and good, but if Huey has any sage-like advice to give today’s US stock market bulls, it might be something like ‘targets are just measurements, not directives’. Huey might also say ‘get ready for a year-long grind that mashes up bulls and bears prior to some very bearish events to come’.
Another thought with respect to the gold stocks… I am glad that they are disconnecting from the broad US market. If HUI were to find support here, they could be on their way higher if the regular markets simply grind it out for many months. Alternatively, if the HUI crashes to the worst implications of the big topping pattern from 2009 to 2012 (it measures to 100), then you might extrapolate forward and wave bye bye USA a couple of years down the road.
Hey, why so gloomy? It’s just a gold stock index. Well yes, but the road map looks uncannily good. Best that the gold stocks find support either here or at the next target of 250 and begin to point the way forward.
The gold stocks ended a secular bear and led the way out of the first broad US cyclical bear market early last decade. They were among the downside leaders into the 2008 crash and they absolutely launched ahead of everything else that would eventually recover into what we called ‘Hope 09′ back then. So the above corollary is more than a random jumble of charts with similarities. ‘Hope 09′ is now 4 years on and anyone buying the US stock market as a committed investor now is likely to find disappointment or worse going forward.