The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Friday, February 12th, 2010.
Just as I begin writing this we get the headline China is raising reserve requirements at its banks and equity futures, including gold, fall out of bed. Why is this? Well, for one thing, and besides the fact it appears Chinese officials intend to manage monetary policy in a vacuum, Bloomberg headlines also read 50% of commercial space in Beijing is vacant, with more of the same expected for additional buildings still under construction. How Chinese monetary officials decided to continue tightening monetary policy in light of such data is not clear. Perhaps they feel there is such an overhang already it won't matter, and they just want speculators to stop building. This can't be it though, as it would be simpler to not issue building permits.
No, it appears they are reacting to increasing prices at both the consumer and producer levels in China, completely oblivious to the fiat currency Ponzi Scheme called inflation that is causing these price gains irrespective of a slowing economy. The scuttlebutt of all this will likely be what James Chanos is predicting, a crashing Chinese economy a la 1930's style in the States, when a then young Fed tightened at the top of the stock market bubble as well. So, as for the question raised in our last commentary as to whether the topping pattern in stocks would be rounded or a fractal, it appears we are still in the process of deciding, with next week, an options expiry week (normally strong), pivotal in this regard.
That is to say options expiry weeks are normally strong, and have been increasingly since the March 2009 lows. So despite today's setback in the equity complex, on a probability basis, one should still be betting on strength next week, which would help shape a rounding top in stock indices. Of course a goodly number of speculators know this, and have already been gaming this trading pattern in previous months, so it will be interesting to see how things turn out next week with put / call ratios already declining in earnest. Could it be will have a surprise, and stocks fall impulsively as they load up on calls here, bringing the fractal possibility back into the equation. As also pointed out in our last commentary, the CBOE Volatility Index (VIX) will be in a position to rally again after Fibonacci time and price retracements this week, so, be careful.
And this sentiment is furthered in this next observation as well, where as pointed out on the chart, while it's true from an Elliot Wave perspective one more minor degree wave higher might be in the cards, at the same time the more profound point Ford's trade pattern is making is, either way, whether more strength is in the cards or not, we are very close to an important top, one that will demand a meaningful retracement even if prices go higher temporarily. Traders believe both Goldman Sachs and Apple are bellwether stocks, and should be followed as indicators of the future direction of the broad markets, one the lead financial and the other technology, with both looking precarious from a technical perspective. (i.e. one should note GS was flat yesterday when other financials were strong.) (See Figure 1)
As far as bellwethers go however, while I am sure keeping tabs on GS and Apple is a prudent idea, it appears to me doing the same for Ford might not be a bad idea either, where based on the fact its still in a technically bullish configuration, when this changes, we will have our signal a profound turn lower in stocks is finally upon us. This will mean the Toyota related jam job has run its course, and the realities of economies and exhausted speculators have gripped the macro.
Hence, from now on then, we will be able to say (as was said about GM for years), 'as Ford goes, so goes the economy.' Too bad Ford is so heavily indebted, no?
Good and safe investing in gold all.