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.

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.

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.

But back to reality in sleepy little Seattle. Real estate prices seem to keep dropping. I see people still turning over the keys to the bank, with the bank offering at what seemed like unheard of prices a short time ago, with still few buyers to snap up the bargains. If they do transact at those low prices then comparables in the area will be lowered, thus driving down prices even further. I have no idea if a bottom is at hand. It seems like a good time to buy with low prices and low interest rates, but all I see are for sale signs. A few years ago you’d see a for sale sign and a week or so later there would be a sold sign attached to it. Now all you see is a new price sign (polite way of saying price was too high and now trying a lower price for the third or fourth time) and this seems to go on for a year or more for many properties.

So how does one make a case for inflation. If there are few jobs and housing prices probably not enabling tapping equity, where will pricing power come from? Will conditions improve if Republicans take over part or all of congress? The stock market seems to think so. There seems to be a bullish bias according to some studies when a democrat president has a congress from the other side of the aisle. Gridlock is good when it comes to government it seems. The general stock market seems to like the poll numbers and probably will until earnings start being released soon. But gold is entering what seems to be a vulnerable price area in my opinion. I will point out that I’m always way too early in seeing bubbles. It is very difficult to judge when greed will become overtaken by reality. It is much easier to identify a panic bottom. Tops can give many false divergences as traders are more complacent as they are making money from a rising trend. I think the bullish argument on gold makes sense from the standpoint of currency and fiscal irresponsibility. Perhaps there is hope that a change in congress will create change we can believe in regarding spending. Not sure how long that hope will last even if congress changes hands. If the past is any indication it will probably just turn out to be more broken campaign promises. But whatever happens with the election, the markets, and especially the gold market, still has to deal with the real risk of continued deflation, continued high unemployment, continued near zero interest rates with fear of rising rates at some point accompanied by a rising dollar, and an over crowded bullish trade in gold particularly, and in some other sectors of the market.

When I first started trading gold there was no gold market in the United States. One had to either trade silver, numismatic gold coins, or gold mining stocks. Back in those days there was an understanding of a normal ratio between gold and silver, and a leverage assumed between the price of gold (in London as US prices were fixed) and that of the price of the stocks of companies that mined the stuff. Many of the better trading gold stocks had about a 3 to 1 leverage to the price of gold. Most of the gold bull market letters (there were few serious stock analysts following the stocks of the barbaric relic) would advocate buying the best quality companies. The better companies had the lowest cost per ounce to mine the gold. But during the great gold and silver bull market of the late 1970′s, the best mining stocks had relatively mostest upmoves. The big winners were the crappy stocks that had very high costs per ounce. They were much more sensitive to changes in the gold price. So it is difficult to determine how much a particular stock should move based on a price change in gold, as they all moved at a different rate. But it was assumed that the mining stocks would in general lead the price of gold, both up and down. That relationship, like many inter-market relationships, seems to have fallen apart in the current environment. If relationships and ratios were stable it would be easy to make rules and systems and trade accordingly, but even then the edge would soon be lost.

Some will make the case that now there are many more vehicles to chose from if one wants to participate in the gold market, so mining stocks have less importance now than in previous cycles. One can buy an ETF without the risks of rising labor costs, environmental restrictions, unstable governments, BS from the CEO (the biggest risk imho), etc. But being from the old school of thought, I still like seeing confirmation from the mining stocks. This rally sure seems to be lacking that. The above chart shows the ETF for gold in the upper graph, and the gold stock mining index in the lower part of the chart. The last few weeks have pushed the mining index higher along with gold, but the index is still lower than the peak drawn back in March of 2008. If one were to look at an index of gold mining stock that did not hedge their production, one would getting a little better correlation between the mining stocks and the metal. Some companies sell forward some or all of their output to lock in the price, which would be fine except if the price keeps rising like it has lately, those companies hurt their earnings. But even factoring in the hedging, few mining stocks are showing leverage to the price of gold. Some of the newer mining stocks are doing better than the older blue chips as they are seen to be in their growth phase. It seems unrealistic to think in terms of growth when analysing a gold stock. It is difficult to think of long term growth for a gold mining company, at least in the sense of a Microsoft or Google when they were in their growth phases, when a company just has a hole in the ground and is depleting their limited assets every day. Well, maybe it is not as simple as that, but I think you see my point.

The relationship between the price of gold and the price of the companies that mine gold is only one piece of the puzzle in trying to figure out where prices might be heading. I read in Barron’s this weekend that one analyst now thinks gold won’t be in a bubble until it gets to over $5000 per ounce. I thought I heard people saying $2000 just a short time back. It seems when bubbles get going the numbers keep getting bigger and bigger. When markets go exponential it appear there will never be a reversion to the mean. But the mean market always does, and if it is a bubble popping it can overshoot to the other side by an even greater degree. But that’s just my opinion.

A quick thought on moving averages. I read many opinions on the market and technical analysis. Almost everyone I hear or read uses the 20, 50, and 200 period moving average. When I ask them why, their only response is “that is what everyone uses, so it becomes self fulfilling. I have a problem with that line of thought. First, it is true that any of those three moving averages seem to provide support at certain swing points, and once penetrated they do seem to give a good summary of the trend direction. But one can pick any period moving average at random and also find that it will provide support at certain swing points and provide a good indication of trend. Probably different swing point and trend indication, but any moving average will appear to turn back a swing occasionally, and certainly will define a trend. And most randomly chosen averages will define a trend if it happens to be in sync with the ever changing cycles of the market. In fact a moving average is nothing more than a mechanism to filter out the shorter cycles. The problem is the cycles keep changing. So no single moving average can be perfect. So many traders use a combination of several moving averages in the hopes that one will be in sync with the market. That can be fine as long as the trader understands what the moving average is really doing. Blindly following common moving average lengths because everyone else seems to be using them is not logical in my opinion. There is no edge in what everyone can see. I don’t see how it is logical that a trend will turn around when it hits the 50 period moving average on the assumption that everyone will act in some way at that point. That just doesn’t make sense. If there were an edge in such an approach the market would quickly eliminate that edge.

I find it much more useful to use indicators that attempt to adapt in real time to the ever-changing market cycles. The problem is trying to find a method that extracts the cycle the market is attempting to express as that cycle is being formed. If markets maintained the same cycle over a long period it would be easy to pick the best moving average parameters. But the cycles are a constantly moving target. The best work I’ve seen in extracting cycles as they are forming is the work by John Ehlers. The moving averages I’ve been using on the blog are his Mesa Adaptive Moving Average. I just use the default parameters as he has written the formula, which is widely available on the interent, in one of his books, and on his website, as I recall.

And a quick note on gold. This is one market that has fundamentals supporting the uptrend. But a negative development is the failure occurring this week as the market tried to break-out of the swing high from last December. The trend is still up, but so far that break-out looks like a trap. The daily chart is sitting right on the moving average line, so I’ll be watching to see if it provides support. My guess is that the market needs to clean out the excessive bullish sentiment, which would probably be a healthy thing. I’ll try to update as this develops.

The stock market seems unconcerned about the health care bill, and if passed, the soon to follow and equally insidious cap-and-tax bill. The market seems to resist all attempts at a meaningful correction. But it does seem that the pattern of impulse higher and then pullback to the moving average, followed by another very symmetrical impulse higher has changed. The impulses seem to have dissipated and the market, at least the S&P 500, seems to be marking time by chopping around in a sideways trend, although with a somewhat bullish bias, as pullbacks so far are quickly bought up. The Nasdaq had been displaying similar characteristics, but has broken out to the upside over the last three sessions to make new recent highs. However, there are many divergences starting to develop. The financial index is trending lower. Oil and some commodity names that had been leading look like they are rolling over, but industrial metals are moving higher. And the dollar, which had been moving contrary to the S&P, is now moving higher to fill in the gap from last September. With the divergences and some loss of upward momentum in the S&P, it will be interesting to see if a correction can get started next month. It is overdue. Stocks may be priced ahead of the fundamental backdrop. We’ll see.

I had been warning of a blow-off in the gold market for some time. This market has come down substantially in recent sessions. The trend on the daily chart has turned down, however prices are now sitting on some minor support at the previous peaks of last October. Many chartists put some significance in these levels, so they can become self-fulfilling. These swing points often do create levels for prices to test. There have not been any other pivots or swing point to measure against during the last impulse higher. My fear during that last impulse was that the trend would go exponential, creating a final blow-off to the entire bull market. But the uptrend stopped short of that, and this pullback has been orderly and should be seen as a healthy event for further upside progress in the future. I don’t have a clue, nor does anyone else, if this support will hold. There are several more areas of possible support under this level by viewing the longer term charts. It would take a substantial move lower to put the longer term bull market in jeopardy, in my opinion. But it might be some time before the daily trend puts in another leg to new highs. Of course anything can happen with this reckless government and out of control spending. I think these market are factoring in the falling poll numbers and possibly looking ahead to the 2010 elections. If there is a big change in the makeup of congress it may help to at least create some sort of gridlock that could help block some of Obama’s extreme radical agenda. But congress will still be populated by mental midgets with no ethics or standards. I still say throw all the bums out.

I’ve pointed out how difficult it is to call a top when a market accelerates to the upside with the public driving the trend. I know the perma-bull gold blogs say the buying is being driven by central banks and buying in India, etc, etc. I’m quite confident that the smart money was accumulating quietly well before the uptrend started making the news, and they most likely have been selling to the public all the way up. That is almost always the case with this type of parabolic trend and the hype seen recently.

The chart above shows the daily chart of the gold etf since July of this year. I left the same red lines that were drawn on several GLD charts from past posts that formed a triangle that broke out to the upside on September 2nd. The blue line are an adaptive moving average that shows how well the pullbacks were contained during this uptrend. The indicator in the sub-graph is the adaptive CCI (see articles elsewhereon this blog). This adaptive CCI is what I use to monitor trendiness, as well as to verify divergences from other indicators. Also pullbacks to the zero line often help confirm pullbacks to moving averages. You can see a nice example of this marked on the chart near the end of October. Also worth pointing out is that prior to the breakout of the triangle, the adaptive CCI gave an advance warning of the possible direction of the breakout by forming an inverse head-and-shoulders formation, indicated near the left side of the chart. More recently, I’ve been pointing out divergences between the gold price and gold mining issue, silver, volume, andmany momentum indicators. You can see how the CCI gave a series of divergences as price moved higher. When the CCI stays over the +100 line, as it did for all of the last leg of this impulse up, the trend is usually intact. A crossing back down through the +100 indicates an end to that impulse. In this case the crossing back down through the +100 came on December 4th, the day that gold was down over $60. It was not a timely signal, however the divergences leading up to the drop gave good warning signals. Of course there were many other warning signals along the way. Technical analysis has a difficult time accurately timing emotional markets when they reach extremes. It’s usually a matter of weighing and interpreting the clues.

The big question at this point is if the bull market is over or if this is just a meaningful correction. So far gold hasn’t really entered the type of blow-off that appears to be the final expression of an entire bull market, at least not in my opinion. If this correction can be orderly and doesn’t retrace the entire leg up from the triangle break-out, it would seem the excesses will then be worked out. Then a new accumulation phase can begin, which will most likely be followed by another huge leg up. At least this is what I am looking for, but as always, the market can do whatever it wants to do. Much of the driving force will still be dictated by the dollar and the inexperience and incompetence of this government, which will probably be supportive to the gold bull over the foreseeable future. I still think that the gold market is ignoring the deflation competent. It seems to be betting on the debasing of the US Dollar and the ultimate and inevitable resurgence of inflation. But if the economy worsens, especially if the employment numbers get much worse, there could be more deflation in the interim.