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.

To help get some perspective it is always helpful to look at the next longer time frame. The chart above is an update of the weekly S&P etf that I posted a few weeks ago. The middle red line is the 50% retracement back up of the entire previous downswing. This area has now been slightly surpassed after it turned back price on the first attempt a couple of months ago. The uptrend is clearly intact on this time frame. Also, the adaptive CCI in the lower sub-graph has remained above the plus 100 line (dashed cyan line) so this indicates, not guarantees, but just indicates that the uptrend is still alive and well.

One negative is on the chart above of the financial etf or XLF. The indicator in the lower sub-graph is a version of the Money Flow (there are several formulas for this indicator). You can see a series of negative divergences, with the money flow now almost at the neutral, or zero line. I see the Money Flow indicator weakening on many stocks and other indexes as prices remain near highs. Also, the Standard Error Band indicator over prices is rolling over. (Click here for article on that indicator.) The red horizontal line under prices would be the line in the sand for bulls. If support doesn’t hold there could be a greater impulse down that would most likely drag the broader stock indexes down. I know it sounds like I’m suggesting the market can both go up and down. It is rare that conditions are 100% on one side or the other. There are always cases to be made for both sides. Making a decision on direction is usually weighing all the evidence at hand. When all the evidence points to one clear conclusion, most likely all traders are loaded up on that side of the trade and prices will most likely soon reverse direction.

There seems to be no stopping gold. It is clearly entering bubble territory. The dollar carry trade is predictably creating bubbles. Most likely much of the money going into the general stock market is a result of near zero interest rates. The money needs to go somewhere. But the perception of an ever lower dollar will create bubbles in other assets, which seems to be the case now with gold. If the dollar were to rally at all, and interest rates bumping up a bit could case this and cause the carry trade to unwind, there could be an exodus out of gold. It is difficult and unwise to fight the trend, but just beware that the bandwagon is fully loaded. Of course all the reasons why gold will keep climbing higher are well known and discussed at length on gold related sites such as 321gold. Fundamentals usually come into line as prices peak and stay bullish long past the peak so traders often don’t understand the beginning of a turnaround. I have no clue how high this can go, but it might be a good idea to hedge the downside as this market can unwind quickly and without warning. I remain a long term bull on gold, but I think currently gold has gotten way out of line with reality. It may very well go much higher, but just don’t assume it will be a straight ride up to the moon.

However, there is a much less advertised bullish inverse head and shoulders pattern on the weekly S&P chart, with a break of the neckline occurring as of the close last week. You can see how nicely the double stochastic in the lower sub-graph indicated the reversal points. The daily action on the indexes seem quite bullish, as every attempt at a sell-off is met with buying. And every down day seems to reverse in the last part of the day with a close near the highs. Although it does seem like the daily chart is a bit extended short term. Since that pattern of late buying is starting to get a lot of attention, it might be that we’ll get a day of the opposite happening soon. And a little hesitation around the neckline break would be fine and could relieve the daily overextended condition. I say overextended rather than overbought. It doesn’t appear that the market is really overbought as it is still at depressed levels. It just seems that the persistent number of up candles is not sustainable. Markets need a little more back and forth action. They have to breath.

The market does seem to be following an inverse relationship to the Obama poll numbers. The lower they go the less likely many of the socialist ideas this administration has planned for the country will materialize. If cap ‘n tax and socialized health care get rammed through congress, then all bets are off on the upside. A major fundamental shift in the direction of the country will overrule any and all technical patterns or indicators. However then can help detect those changes. Technical patterns and indicators don’t drive the markets. Fundamentals do. The technicals just help measure and interpret.

I’m glad to see CIT Group not have to rely on government help, at least at this point. They wanted a hand-out. They apparently didn’t give enough money to the campaign. More likely, the present government doesn’t see much use in small business and didn’t think company that is involved in small business finance as being essential to the economy. On the other hand CIT didn’t have a clear plan when asking for the money. It is good they didn’t get it. Hopefully this will shake them up enough to make an effort to solve their own problems.

I am becoming somewhat optimistic that the public is waking up, that the Kool-Aid is wearing off, and that just maybe Obamunism will fail. It looks like socialized health care is in more trouble with each passing day. And hopefully the cap-and-tax bill, which is perhaps the largest fraud in the entire history of the country, will die in the senate. If so, there is hope for the markets going forward. Perhaps this rally is what the market is beginning to realize.

Sorry for the lack of posts and charts. I’ve been very busy with the Dan Sheridan mentoring program. I’m worn out by the end of the day. I am learning, more accurately re-learning, spreading and income strategies.

Taking some time off to rest in Napa and Sonoma. Will not be posting the daily update until June 23rd. I’ll try to answer emails, but I will not spend much time at a computer.

I just returned but have not looked at the markets yet, so will try to update on Tuesday the 24th.