Week Ending 4/24/09
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Today's financial crisis is not your ordinary run of the mill business cycle recession. There is more going on than meets the eye. A rare confluence of factors is bearing down.
Not only are debt cycles coming to a head, but the end of paper money is fast approaching. Debt cannot pay off debt, the realization of this truth is starting to hit home. Paper fiat debt-money is nothing but a wealth transference mechanism that distributes wealth from the many to the few.
Excess credit creation is based on illusion; it cannot be used to create wealth for the majority - only for the select few. This is why paper money is dying: it has the seeds of its own destruction lying within. It can do and be nothing more or less. Parts of the confluence include cyclical and secular trends for various markets, assets, and monetary systems; and the constructs they are built upon.
The stock market is in a secular bear market, although recently experiencing a counter trend rally. Gold is in a secular bull market, having just gone through a counter trend correction. Commodities are in a secular bull market, having recently experienced a cyclical bear market that is slowly bottoming out. The same is true for oil.
Gold had a good week closing up $43.90 to $913.00 for a +5.05% gain. The first chart below shows gold's long term secular trend.
Weeks ago I mentioned that a possible inverse head & shoulders pattern might be under construction, which now seems more likely, as the right shoulder is almost complete.
The pattern still needs to fully develop and then break out, but so far so good. If a break out occurs and holds, I look for $1250 as the next upside target.
I'm not thrilled with the fact that many other analysts are now recognizing the formation, or with the negative money flows shown on the daily chart. This leads me to suspect that something will happen to make it more difficult to follow.
The dominant chart feature on the daily chart below is the golden cross - the positive crossover of the 50 day moving average over its 200 day moving average. These do not often occur. When they do, it usually portends a strong move.
It is interesting to note that GLD has overhead resistance marked by its 50 ma and support indicated by its 200 ma. This is true for the dollar as well (see currency section).
It will be fascinating to see which of the two holds and which breaks; or whether their relationship changes once more. I suspect anything can happen in today's volatile trading environment. Expect the unexpected and be prepared.
The only thing I don't like on the chart is the negative money flows. This will have to change if gold is to continue to rally upwards. As of now, CMF is negative, although shrinking ever so slightly.
The GDX index performed well this week, adding almost 12% to close at 34.65. Precious metal stocks have not, however, been keeping up with physical gold and silver.
The historical ratio between stocks and physical is about 3 to 1, so although the GDX had a good week, it did not perform at the normal ratio.
During the first few years of the gold bull the gold stocks kept up with and even surpassed the 3 to 1 performance ratio compared to physical gold, which eventually led to problems.
In 2005 - 2006 gold was making new highs, while the gold stocks were making lower highs. This created negative divergence; and the rest is history. The gold stocks broke down and fell much further than physical gold did.
The chart below shows how the 2008 fall took the GDX out of its 7 year old rising trend channel; below which it remains today.
Focusing in a bit closer we see below the rally out of the Oct-Nov. lows to the March highs. Shown on the chart are the various Fibonacci retracement levels for the recent rally.
A pullback to the 50% level would be quite normal and healthy. Notice the tightness of the 50 and 200 ma's.
Below is the daily chart with Bollinger bands overlaid. Presently, price sits at the middle band and appears to be headed up to test overhead resistance marked by the upper band.
MACD appears to be setting up for a positive crossover, but it wouldn't take much for it to turn down. ROC is moving up into positive territory, as is RSI. Negative money flows still obtain.
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Good luck. Good trading. Good health, and that's a wrap.
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