Of course these very low yields are for the perceived safety of government dept. There’s little intrinsically safe in any government dept other than the fact that they can print their own money when they run out of revenues, unlike everyone else. But there is a wide spread between government dept and various levels of corporate dept, especially in the lower rated issues. Investors are being paid high yields relative to the risk on the lower rated corporate side. These are unusual times, and they may be around a bit longer than most traders think.

It would seem obvious that with governments running up dept like crazy, with the eventual need to monetize that debt, that inflation would be starting to get priced into these markets, with yields starting to rise and bond prices dropping. Yet just the opposite is happening, so far. Bernanke has said that interest rates will stay at these low levels for at least another year or more. But markets tend to discount the future and so far they aren’t discounting much inflation.

Perhaps deflation is the larger fear. Perhaps the analogy of pushing on a string is still relevant. Until jobs and spending resume it will be difficult to have any pricing power no matter how much the governments around the world try to destroy their currencies. The resumption of more normal times may be a long way off.

Most traders I know, and some very smart traders, are heavily short bonds with very large and mounting losses. They all seem to have thrown their money management out the window. It seem so obvious that this bubble will soon burst, but what seems so obvious is usually wrong. The weekly chart above shows that the trend is still up. The momentum indicator in the middle sub-graph got a bit overbought and has kinked down, but the trend indicator is still up and the adaptive CCI in the lowest sub-graph is still hovering around the +100 line, indicating the trend is still alive. Meanwhile, I’m leaving the short side of this market alone from a trading point of view until these indicators indicate that the trend has changed direction. And I’m parking some money in the high yield end, as those spreads seem to be well compensating investors for the risk, especially in diversified bond funds (as boring as that sounds).

But what about technicals? The above chart is of the weekly etf of gold. I like to use the GLD etf to avoid having to create a continous contract of the futures. The GLD is close enough. You can see blue moving averages have remained bullish through the entire chart, and that whenever prices approached the blue line that a good entry point on the long side presented itself. We are once again sitting on that blue line. However, the last weekly candle is perhaps too large to expect support to hold. The middle indicator is the double stochastic and it defines cycles fairly well. Upturns from oversold, or the lower dashed line, represented good long entries. I use this only to enter in the direction of the trend. However, sometimes will use the overbought readings above the upper dashed line to exit, especially after a break of the upper dashed line. The lower indicator is the adaptive CCI. It has stayed above the zero line for the entire chart. When it is above the plus 100 line, which is the line that the indicator is still holding above, this suggests that the trend is strong. However, when the indicator crosses above the plus 200 line, which is the upper dark cyan line, prices are usually extended and ripe for either a pullback or a pause in the uptrend.

It would be very bullish in my interpretation of the gold market if that blue support line were to hold and then the cycle (middle indicator) were to turn up along with the CCI remaining positive. I really don’t expect this to happen because of the severity of the decline. It seems that the bubble still has more air to let out, but that’s just a feeling. Until the uptrend as been structurally broken on this chart, I’ll still trade from the long side, even though I would rather from gut feel be on the short side. I’ve learned not to trade against the trend, and that is still up according to the weekly chart, despite the huge drop last week.

There are times when technical analysis can help to make trading decisions, and then there are times when market uncertainty along with multiple standard deviation moves makes even the best analysis extremely challenging. We are in a period now that makes trading, at least for swing and position trading, very difficult. It could last a while longer. I plan to sit this out until I see more normal markets return. Whatever comment I could make on the market would probably be invalidated by the market action the next day, as these triple digit swings continue to knock traders off both sides. Perhaps day-traders are having fun with this.

Regarding gold, that asset bubble became much larger than I thought possible. Nothing much has changed my opinion. I good washout was not a surprise. A clue, as I’ve mentioned many times, was the huge divergence between the price of gold and the price of the gold miners. Many believe that relationship no longer is valid, but I think they we justifying the divergence, thinking, as always happens at tops, that “this time is different.” I’m still a bull long term. When the radio ads disappear I’ll jump back in.

Just a side note for any bloggers out there, I had a terrible run-in with Getty Images. I helped a nursing organization put up a small website. The site was for about 30 nurses in the Northwest to announce meetings and collect via PayPal their $12 membership fee. Nothing was being sold on this site, and the organization is non-profit. On the home page we put up a generic photo of the Seattle skyline copied from Google images, with no reference to a photographer, photo bank, copyright, or anything. The organization received a very nasty letter from Getty Images demanding that the photo be taken down and also demanded a settlement amount of about $1200 for the past usage of the image, and the threat that if payment wasn’t received within 14 days that the matter would escalate and the organization would face a lawsuit. Now I can understand that if someone were profiting from the use of one of their copyrighted photos that a demand for settlement would be in order. But if a small non-profit website accidentally put up a photo, I would think that a cease and desists letter would be in order. But a threat and demand for $1200 is more like extortion. The photo was immediately taken down, of course, but Getty Images would not remove the demand for the money. After many back and forth emails, they asked for proof of their non-profit status, which was supplied. Getty then cut the demand settlement in half. Then I got involved and went through the entire Getty archive of Seattle skyline photos, and could not find an exact match between the image they accused the nurses of using and any of the images in their catalogue. I sent them an email with my findings and said the nurses would settle if they could explain the discrepancy between the image they used and the one they accused them of using. As it turns out the image the nurses used was shot at a different time of day, had a different cloud pattern in the sky, had more of the skyline than the Getty image. It was obviously a completely different image. So they eventually acknowledged their error and said they would drop the case. But it left a really bad impression of Getty Images. As a result I took down all the images on my website, just in case one happens to be something that is in the Getty Images data bank. I did a Google search and found horror stories of people using a simple little image on multiple pages and then were handed a bill for tens of thousands of dollars. One was even a student project with no commercial intent, and Getty Images wouldn’t budge on their demand. They are really bastards. So if anyone is reading this, make certain you have no images that can in any way be linked to Getty Images. They’ll find the images eventually. They apparently have some way they scan the entire internet looking for matches. I suppose that method isn’t so perfect, as in the case of the nursing site where they made an error. But it was a real pain to sort it out with them.

This is a specific type of trade to do during a specific type of market action. Just to be clear, I’m not in any way suggesting this type of trade after a bubble bursts or during more normal or range bound markets. It is only a tool to keep in mind when a market has a speculative bubble such as was the case in silver recently, or another type of unusual movement. This information is for educational purposes only and no trade recommendation is implied or should be inferred.

Now that the uptrend in silver has been broken it would be normal to expect rallies up to resistance. But where is resistance? It is difficult to find logical reference points when the previous uptrend was of a parabolic nature. I will be watching the moving average (darker blue line in SLV chart above) for a clue. There is no magic in the formula for this moving average, but it does attempt to adapt to the current cycle of the market and offers a good reference point when there are few other clues.

One thing I noticed is the symmetry of the two impulse moves defined by the two red lines over the price bars in the above chart of the silver ETF. These lines have been drawn both as regression lines and are of the same length. The little pullback in between these lines is subtle, but I think it is enough to suggest that these two impulse up-moves should be counted separately. If so, the current impulse may be at or approaching an end, not necessarily the end of the bull market, just the end of the current impulse. Before reading too much into this, I’d caution that these symmetrical impulse moves do seem to jump out of the charts when they succeed, but the failure rate is high, and all patterns seem to disappear from notice when they fail. It is easy to become fooled by randomness. But these symmetrical impulses, like other chart patterns do get my attention and often they do become a piece of the puzzle in reading market clues.

The above chart looks at a similar situation from a longer term perspective. This is the weekly chart also with two longer-term impulse uptrends described by the red regression lines. In this case there is a larger pullback that occured for most of the month of January. This time the first impulse to the left is of a longer duration than has occured so far on the current impulse to the right, suggesting this impulse has more to run if symmetrical impulses are in the works. On the other hand, the angle is quite steep, which could suggest this impulse could become unsustainable. There’s always an “on the other hand” when analysing charts. Again, the adaptive CCI is strongly bullish, as it would be with this strong of a move, and may not give much of a warning of a turnaround .

Another thing I always look when trying to figure out the precious metals market is divergence between the metal and the companies that mine it. The above chart shows Silver Wheaton in the lower part of the graph, which is a popular silver miner. You can see how this mining stock has failed to participate in the current uptrend in the underlying metal. Pan American Silver has even shown more weakness, and was down 93 cents today with silver being up by as much. Of course, many company specific issues can cause these divergences, but this seems to be occuring in many of the silver miners. However, (on the other hand) these divergences seem to be less reliable than in years past, probably largely due to the effect of the ETF market.

As I’ve said many times on this blog, it is dangerous to try to pick tops and bottoms. It is much safer to trade pullbacks once a trend is established, and clearly the trend is up in the precious metals. But it is also dangerous to overstay a position in an extremely crowded market. I’ve know many people who have been burned by the silver market over the years in previous bull runs. Almost as many as those burned during the great bubble dot com bust of a little over a decade ago. At least the precious metals market is based on something other than hot air, as was the case with most of the dot com stocks. This is most likely a very long term bull market, that will persists as long as politicians do what they do best. Maybe it will end when we get change that we can really believe in. But don’t hold your breath.

The chart above is the weekly silver ETF. After an extended period of consolidation this market broke out to the upside, and has more than doubled in a few months. And that launch was a couple of months prior to the announcement of QE2 (not the boat). You can see how the adaptive CCI (middle sub-graph) quickly went above the bullish plus 100 line and has stayed there. Also, there was an oversold inverse head-and-shoulders in the double stochastic indicator in the lowest sub-graph at the start of the big move. There was one consolidation, forming a bull flag at about the mid-point of this trend. Now the stochastic is in over-bought territory and turning down a bit, along with a still bullish and trending CCI. The daily chart (not shown) shows a very similar interaction with these indicators, however the daily bar show an outside reversal day to the downside, which has a bearish implication if one believes in these patterns. Like all patterns they work about the same as a flip of the coin, but they are interesting to watch as they do sometimes precede spectacular reversals.

So what does all this mean, if anything. For me, as much as I think this market is long overdue for a correction, I don’t want to try to pick a top and go short, at least not yet. I prefer to let someone else pick the top, and to wait for the trend to turn down and then sell the rallies back up to the moving averages. Of course the downside of this thinking is that sometimes the market just collapses and good entry points just don’t materialize. If one were to look at the great silver bull market of the late ’70s to early 1980, one would see a run from $5 an ounce all the way past $50, at least in the futures market, and then a straight drop all the way back down. Of course this was a different time. The market was being cornered, and then regulators changed the rules at the peak, with the peak only lasting a short time, and then limit moves for many days to the downside. Now we don’t have anyone cornering the market, but we do have a fed chief who is engineering inflation and destroying the currency, and money is pouring into just about everything solid, well, maybe with the exception of real estate. But what about supply and demand? Is there a silver shortage as there seems to be in some commodities? There may be a shortage due to the demand to have physical silver back each share of the ETF. But keep in mind that this shortage can quickly turn into a surplus if holders of the ETF reverse their trade. So things are different this time. But they are also the same.

As bullish as I am on the long term fundamentals of both gold and silver, I try to keep an eye on how crowded the trade is, and know from lots of painful experience how quickly greed can turn into fear. I don’t know, and nobody else knows, if this market is putting in a top. This market was under $10 near the end of 2008 and went past $40 last Friday. That was enough for me to take half my silver eagles to the coin shop Friday after the close to lock in some profits. There were many people there buying. I asked the coin shop guy if there were more people buying or more selling, and how high they think silver will go. He said everyone was buying and that silver should go past $50 by next week. After hearing that I felt like getting the rest of the silver out and selling it.

I hear many justifications for higher prices, and of course the destruction of our currency is a legitimate and sensible reason for a continued bull market, but markets can and do become overheated and test prices beyond what the fundamentals can support. The idea of buying high and selling higher works for a while, but buying low when nobody want it, and then selling when they are all waiting in line to buy seems like a more sustainable strategy. And one more point: I’ve been hearing on the radio nearly double the number of ads for silver than for gold. One common justification I hear is that gold historically sells for 16 times that of silver, therefore silver has to climb to way over $100 an ouce just to get back to that ratio. That is utter nonsense. Each market trades on its own fundamentals. Inter-market relationships, even in so-called highly correlated markets, tend to fall apart as differences in supply and demand shift and change in each market. And of course that 16 times ratio theory doesn’t take into account what would happen if gold fell rather than silver climb to achieve that ratio.

And one final point is that the fed has nowhere to go regarding any further lowering of interest rates, and it’s unlikely there will be more QEs. If there is not to be a QE3 and QE4 and QE5, and if the inevitable interest rate uptick happens, especially if unemployment is still high, these asset bubbles could all pop very quickly and be followed by deflation. Uncle Ben surely understands this, but what can be done to prevent it? I sure don’t have the answers. But I do know it’s easier to get out of bubbles as they are inflating rather than waiting until they pop.

There are many indicators that work very well at certain times in certain market conditions. But there are no indicators that work well all the time. And at a time like this when news is driving the markets, it is best to not rely too heavily on technical analysis to guide trading decisions. The current market is especially difficult. The fundamentals are not supportive, in my opinion, of the kind of bull market we’ve seen over the last couple of years. But the reality is that the market has gone up a great deal and part of trading is to not fight a trend however illogical it may seem. It seems the buying is partly inspired by near zero interest rates resulting in a situation where there are few alternatives to earn a return, most likely with much of the money feeding the trend that would normally be going into safer investments. Then there are the momentum traders who en masse can keep a trend going just for the sake of the trend. Both these conditions almost always end poorly. Now add an increase in oil prices to an already high unemployment rates and mix that in with an administration that is becoming more inept by the day, and that all makes me wonder why anyone would pile onto this bull bandwagon. Yet people are. On almost every dip in the market the buyers come rushing back in. Lately all it seems to take is a few pennies dip in the price of oil to encourage the buyers. When you watch the market tick by tick all day you can sense the urgency of the buying. In markets of the past the buying would seem labored like an uphill climb, and then the sell offs would be characterized by a sense of urgency. This market seems to be just the opposite. It’s eerie. Is this an aberration or something to get used to? I don’t know. Many analysts think it is an artificial condition engineered by the fed, and I’d have to agree. Be careful of the downside. It could emerge in a more serious way. One of these days a down candle might not attract buyers.

The above chart shows one of the big momentum stocks of this bull market. In 2008 (off the scale of this chart) the stock was trading under 20, and on Valentine’s Day of this year the stock almost hit 250. So it’s over a ten bagger. Today the stock just filled that big gap up from January 27th. The trend appears to be reversing, even on a big up day in the overall market. For a long time one could just buy all the pullbacks to the moving average lines and many would have worked out profitably. You can see the last couple of days the stock moved up to the declining moving average lines and has since fallen back. I’m only showing this stock as this pattern seems to be showing up in many of the favorites of the momentum crowd. And many of these stocks were very crowded with bulls. And of course when that’s the situation, something’s gotta give.

It’s really hard to believe that CNN had to apologize for a guest using the word “cross-hairs.” Didn’t they have a show called “Crossfire?” I wonder how many shootings were caused by people becoming violent when they saw the listing for that show in their TV Guide? Don’t both parties use the term “battleground states?” And John Boehner won’t refer to the health care bill as “job killing” and changed it to something a bit tamer. I think the latest version is “job crushing,” but maybe that’s even too harsh. Maybe not. I didn’t see him cry when he said it. The politically correct thought police really must think we’re a bunch of morons. Because one crazy person decided to go on a shooting rampage we now have to change our language, just like millions of us now have to take off our shoes at airports because of one crazy passenger. I suppose Microsoft will have to take out the bullet points feature from their Word software. Some mild secretary might become crazed and violent when she’s typing a letter and asked to put in bullet points.

Back to the markets. The above chart of F5 Networks is not a stock I trade, but thought it was interesting to show how quickly a bubble can pop. This stock was around $18 a couple of years ago, and recently went as high as $145. When a story is well known and all investors pile on an overcrowded bandwagon, the rush for the exit can become a stampede. Certainly a lot of money can be made riding the trend. It is difficult to know when the trend starts to accelerate only for the sake of itself, rather than future prospects based on fundamentals. There are many stocks that seem to be in this situation. It’s amazing to watch talking heads on the financial news shows that suggest these bubbles still have a long way to go, and try to justify their valuations, even calling them fairly priced as their price charts have gone parabolic. When the stock inevitably breaks down the talking heads, along with chat rooms, bulletin boards, and other market commentators suddenly stop talking about yesterday’s stock and are off chasing the next bubble. I’ve felt gold and silver have been in that bubble territory for some time, and there are finally signs that the trend, at least this phase of it, is tiring. I do feel the fundamentals in gold are sound and that the long term bull market is still intact. It just needs to shake off the momentum traders and build a new base for the next leg of bull market.

But how to determine when to get off the bandwagon prior to the bubble bursting is the difficult question with no clear answer. I think technical analysis can be a great help. In the case of the above chart there is clearly an over-bought condition from the double stochastic indicator in the sub-graph. It turned down from over-bought territory prior to the big gap down. However, looking back at the chart over the past couple of years would reveal similar over-bought reading, even with divergences, that did not call a top, with the indicator turning back up and the market going ever higher. But when a market or stock accelerates in a parabolic fashion it is best to not get greedy and to let someone else get the last bit of the move. The above chart even had a double top that would suggest that the parabolic move might be ending. Another thing to gauge is sentiment, which of course is quite subjective. When sentiment is all of one opinion, the opposite opinion is probably the side to start thinking about, especially if the trend is just feeding on itself.

I read an interesting article in the Wall Street Journal last week. I know it is now this week. I’m a little behind in my reading. Anyway, the article talks about how the U.S. is losing ground on economic freedom. You coulda fooled me. According to this article the U.S. is now ranked number 9, right behind Denmark, if you can believe that. I’m surprised it is not ranked lower. With the desires of many on the progressive left who view France as the model we should follow it would seem we would be much lower on the list. France actually came in at number 64. I suppose if the Hollywood left had their way, with their love of Castro and Chavez, we would be much nearer the bottom. In fact Venezuela came in at number 175, with Cuba a close second at number 177. Only Zimbabwe and North Korea were below that, at number 178 and 179 respectively. I wonder if Michael Moore and Sean Penn would give up their millions, their careers, and all their possessions if the U.S. would adopt the kind of government they seem to want for the rest of us. It’s a dumb question. The answer is obvious.

One thing that seems obvious is that this market needs some sort of pullback, or at least a rest. Many are starting to call for this and say they are ready to buy after a decent pullback. As long as the trend remains up that would be the logical thing to do. But one would probably be better off not reading the news. As bullish as everything looks I still must look for signs that the crowd might be wrong and the correct trade might be in the other direction. That’s probably the curse of being a contrarian. Much has been made of the declining volume during the December rally. But December always has a drop off in volume for obvious reasons. I place more weight on divergences between correlated markets. Small caps have been quite strong and seem to have a mind of their own, but I think a more important correlation exists between the S&P and Nasdaq. Many market turning points in the past have been accompanied by divergences between these indeses. You can see the nice positive divergence between the S&P and Nasdaq that occurred leading up to the December rally. I have little red lines drawn on the above chart to show that. This divergence indicated a continuation rather than reversal. Momentum had been stronger on the Nasdaq from the lows last August, but did start to slow down a bit relative to the S&P during the December rally. It did appear almost to be rolling over prior to the gap up today. Now they both seem to be in gear to the upside, but I’ll be watching closely to see if any divergences show up between these markets in the days ahead. A broader divergence could develop despite the action today, especially if the Nasdaq should fall below the moving averages, which are closer together than those on the S&P. So far there are few clues that this market will ever go down, but that could change quickly.

The gold market has also been quite strong lately and has still been grabbing lots of attention and is being well advertised. It has carved out a very well defined three-drives-to-a-high pattern, and is now trying to negate that by driving to a fourth high. Although this time there is some weakness between the price of gold and the price of some of the gold miners. I know there are many who claim that gold mining stocks no longer correlate to the price of gold because of rising mining costs, environmental wackos, new etfs, etc. I still look at divergences between gold and companies that mine the stuff. The chart of Agnico-Eagle (AEM) shows a striking example of such a divergence. This particular stock has diverged more than most. The broader indexes of miners and many other gold stocks are more subtle in this divergence. But it is interesting at a time when almost everyone, including establishment analysts who never followed gold, are now universally forecasting gold to be much higher in the months ahead, at the same time many of the shares of companies that mine gold are not following the price higher, and some like AEM seem to be entering downtrends. I’m still bullish long term and am still holding most of my core position in ABX and a few others, but the relentless bullishness is worrisome, and I think more of a worry than what would be considered a normal wall of worry.

I do hope to be posting on the blog on a more regular basis. I’ve said this before. It’s difficult to find time. Part of the problem is that most of my analysis is geared toward Market Profile and option spreads, and I’m not sure if enough people are interested. Maybe that doesn’t matter. I should just write as if keeping a trading diary, which is what the idea was when I started this. I may move this blog more in that direction in the coming year.

Then the markets got a further boost from QE2, which is more appropriately being called Titanic 2 by many commentators. I guess the market thinks by destroying what’s left of the US Dollar that stocks should be valued, or at least priced, at higher levels. Those in power will do everything they can to inject a little adrenaline into the system rather than to cure the underlying problem. Cure would be more painful short-term, and nobody wants to take the blame. There seems to be no end to the cycle of monetizing debt. But there will be an end at some point, and that end will be much more painful when it arrives. It will be interesting to see if this new crop of Republicans can make a real attempt to get spending under control. If so their might be hope. Although they’ll likely suffer in public opinion for doing so. All I know is they can’t keep printing money. Bernanke seems too obsessed with the threat of deflation. It seems like we are already in the midst of deflation. The common wisdom (there’s an oxymoron) is that all this stimulation will cause inflation, and that gold and other commodities will keep on climbing. It seems logical. The dollar isn’t the only currency falling. It seems logical that gold can only keep going up. That trade has about as close to a 100% bullish opinion by traders as I’ve ever seen. Also bullish are of course copper and other industrial metals fueled by China demand in addition to the falling dollar. I have to think that everything just said, and everything being said in the financial press, is already priced into these markets. With the trade so one-sided I have to think that there must be something wrong with the common wisdom. It is possible that all the stimulation in the world might not be enough to fend off deflation. If the job market fails to improve and if housing prices keep sliding it would be difficult to make a case for inflation any time soon, even with the concerted effort to destroy the currency. Maybe I’m just indulging in my contrarian nature. Maybe inflation is just around the corner and all the traders buying into that concept are correct. Maybe it will be different this time in that all the traders crowding out the same side of the trade will all be correct and all make money. I’ve never seen that happen. But there’s always a first time.

Regarding the stock indexes, way up at the top of this post is the chart of the S&P 500 ETF. It shows the clear uptrend via the blue adaptive moving average lines. In the middle sub-graph is the adaptive CCI, this time with a slight smoothing to smooth out the bumps a bit. It shows that the CCI went above the plus 100 line just as this uptrend got started, and mostly stayed there, with the exception of a couple of brief dips, until just a couple of sessions ago. The double stochastic in the bottom sub-graph shows some nice entry points when it dipped below the lower reference line while the CCI showed a trending condition. The stochastic is once again below the lower reference line, however this time the CCI is nearing its zero line, and price is about to test the uptrending moving averages, as well as a swing point high from about three weeks ago. It will be interesting to see if this uptrend starts to roll over. If it does there will most likely be more rally attempts, and perhaps more two-sided and overlapping price action. I hear many analysts talking about a year end rally, but those usually follow weak September of October markets. This time the market has been straight up during those two months. There might not be enough left for a further rally into the end of the year. It will likely try, so I’ll be keeping an eye on a bounce off the moving averages to see if it stalls out on a potential re-test of the highs. If that re-test, should it occur, doesn’t attract volume then it is likely to re-test back down with perhaps a more meaningful decline to follow.

I will try to update as this unfolds. No promises though. It seems the S&P comments are also applicable to the gold market.