The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 14th, 2014.
Just a few quick words this week. I am in the middle of a larger theme piece that you will have to enjoy next Tuesday. Much is happening this week, from options expiry, to earnings (they are falling generally) to building divergences of important indicators against stocks, to pattern convergence / divergence, where yesterday's weakness is a shot across the bow a truncation of both count and pattern may be upon us. Obviously we won't know until afterwards, but this is possible, however unlikely.
Why is it unlikely? Because the Dow / Gold Ratio (DGR) needs to extend higher in one more wave - period. This has been covered in detail previously and will be addressed extensively next week as well because the time is now upon us, where a surge to the 233-monthly exponential moving average (EMA) at 14.5 is witnessed. The Fed studies trends, the Internet, and uses psychology to push the markets where it desires. And they know things are stretched right now, where they will need to be 'extra clever' to keep the bubble economy inflated. Yesterday should have been a blow-off to the upside if the 1929 analog was to be maintained. Is this why Lockhart was out babbling about more QE reductions, to unbalance the speculators and get them buying more puts and shorting the market so that another short squeeze can be engineered? Only the shadow knows for sure.
It should be noted short interest in key ETF's is down considerable in the New Year, joining depressed open interest put / call ratios, a precondition to reversal. If this condition set is maintained for any length of time, while another vane attempt at squeezing stocks higher at their next meeting by not tapering may have some success (completing the patterns / counts), still the patterns and counts may be truncated, followed by violent collapse considering stocks have been rising via smoke and mirrors tactics. (i.e. money printing, buy backs, fraudulent data and accounting - the list goes on and on.) Growing divergences in indicators such as the NDX / Dow Ratio, which is sporting a noticeable 'head and shoulder's pattern' is reason to take the risk of pattern / count truncation seriously, especially if stocks do surge one more time soon and these discrepancies are maintained.
Another reason we should see the patterns play out before a return to secular trends (stocks down in real terms and precious metals up) defined by the DGR occurs is reflected in what appear to be obvious bear flags in small stock to large stock ratios (GDXJ / GDX Ratio) and gold stock to gold ratios, meaning lower lows, or at least double bottoms, should be witnessed soon. The opinion this should occur is strengthened in the observation the reason the GDXJ has been outperforming is because of its higher short interest (see above) and open interest put / call ratios against the GDX, causing it to be squeezed higher more aggressively given cessation of tax loss selling, along with increased merger speculation.
The problem with this relative strength is in a sustainable recovery in precious metals; large caps outperform first as seasoned and reasoning speculators return to the sector, respecting risk management principles. This is not happening right now however. Again, the smaller stocks are out-performing due to intensifying speculation and desperation. This needs to be corrected soon if a sustainable recovery in precious metals shares is to be witnessed. This is why we need one more wave lower in precious metals shares and the metals, correcting this condition, and completing the patterns with the DGR at center.
If the shares take off from here they will come crashing down again at some point in the not too distant future in all likelihood. This would be bad because most will lose more money in the sector, leaving them with less capital to work with when conditions improve on a truly sustainable basis.
So let's hope for pattern completion over the next few weeks.
See you next week.
