Tucker Report

This blog has been warning for some time of a meaningful pullback in the gold market. I’m not claiming to have called a top, or that a top has even been made. My worry was that this last impulse would turn into a vertical parabolic ascent that would be a final blow-offto this multi-year bull trend that has seen prices more than quadruple. My hope was that there would be a meaningful correction to cure some of the excess bullishness in this market.

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.

The gold market has been getting much attention lately as it is pushing almost daily to new all-time highs, at least in relation to the collapsing US Dollar. There are few voices that suggest this powerful trend could end anytime soon. However, when a trade gets as one sided as is the gold market presently, the time may be ripe for a significant correction. I have been giving warnings of this recently on this blog.

In my previous post I tried to give some insight to the question of whether a downmove would be a temporary pullback with a subsequent return to the primary trend, or if this market is blowing off and the entire uptrend will reverse. There is not a definitive answer to this question yet. I’m sure many analysts will have a correct answer well after the fact, but we have to deal in the real world in real time. Nobody can answer with certainty what any market will do in the next five minutes, let alone the next month or two.

Technical analysis can only go so far in trying to gauge the possibility of a top or bottom of a market. Tops are even more treacherous to try to time in a market such as gold with a high degree of long oriented public participation. If a bubble is forming, that bubble can get larger than anyone thinks is possible. And it can end abruptly and without warning. It can be difficult exiting a profitable long position if the market collapses quickly and blasts through all the stops on a gap. Hedging a long position can be extremely expensive using put options as supply and demand can force up the premiums. Trying to speculate on a trade to capture the potential for a downside break can be even more difficult than simply finding a place to exit a profitable long position. I’ll try to provide some ideas to explore. These ideas are meant for further research and are not intended as trade recommendations.

In designing a trading strategy one has to define what is expected in the market and then deal with a contingency plan in case that expectation is wrong. As I’ve stated many times on this blog, the market can and will do whatever it wants to do. The gold market presently seems to be quite overbought when viewed by sentiment. However, the uptrend seems to be gaining in momentum. In other words, the market can keep going up, which seems to be the path of least resistance, or the market can correct some or all of the previous uptrend since it is so technically overbought and sentiment is so one-sided. Well that’s not too helpful saying the market will go up or down. Trying to determine an answer is to weigh the odds of both scenarios. It is rare that all technical and fundamental factors line up 100% in one direction of the market. If that should occur the market is probably fully priced, with all traders positioned in that direction and a reversal would most likely be at hand. Usually there can be some debate on which direction is the most probable, but it is never certain. One probability that is most likely is that after a near parabolic move in price the parabolic move will either continue or price will blow-off and come back down. From looking at many sharply trending charts over past years it is easy to conclude that odds are lower that a market will have a parabolic move and then just trade in a quiet, extended sideways trend. That can happen, but it seems to be the least likely outcome.

So what strategies could be employed to take advantage of the possibility that the market could make a significant correction, but it might still continue higher, and that it probably won’t start trending sideways, although it could? Before answering that a quick word is in order about some less desirable strategies. If one think a market will come down the easiest and most obvious strategy is simply to short the market. Of course shorting the market can have unlimited upside risk. Nobody knows with certainty when a top is at hand. No technical indicators can time a top with any degree of precision. If the parabolic uptrend continues, a short position could result in tremendous losses. A stop loss can be employed, but if the market starts gapping up, as it has lately in the gold market, the stops would result in losses larger than intended.

Another obvious strategy is simply to by puts. Puts will eliminate the fear of an unlimited loss on the upside since that loss on the trade is limited to what is paid for the put. However, puts can get very expensive when a market heats up. Often times it is very difficult to overcome the cost of the put within the time frame of the put. The market can pull back but maybe not enough to cover the cost of the put or maybe not within the expiration time frame. Longer terms puts can be purchased, but the costs go even higher. But what if the market keeps going higher? A straddle could be purchased, that is buying both the puts and the calls. But this would raise the cost even higher and result in a trade that would be well outside the probability of price movement within the time frame of the options. A very large move on the downside could still be profitable, but any lesser move would most likely result in a large loss, especially on the upside. The other big problem with long option positions is the large amount of time decay, especially as options get closer to expiration.

One strategy using option contracts overcoming many of these objections is to do a ratio spread. This spread will make money if the market does move lower as anticipated, but will also make some money if the analysis is completely wrong and the market moves higher. It will lose money if the market stays in the middle. The above chart is an expiration graph of this option spread. The horizontal axis is the prices of the underlying in this case GLD, which is the gold etf that trades with active option contracts. The vertical axis is the dollar profit and loss. The heavier dashed white line is the zero dollar line. The vertical reddish dashed line is the current price of GLD. The green line is the value of the spread at option expiration, which in this case is December 19th. The white line is the value of the spread the next day, in this case November 28th. The white line will increment each day slightly until it coincides with the green expiration line on option expiration day. The screen shots of these graphs were made on November 27th which is a Friday, so the next day is a Saturday with no trading. The option analysis software treats each calendar day the same, but obviously when there is no trading the market makers need to price in time decay during the week. This is an area of discussion beyond the scope of this article. But for the sake of describing these spreads it is accurate enough. Also, these graphs were produced on a shortened holiday session with some unusual news driving the market in thinly traded conditions, so the actual fill prices on these spreads will be somewhat different when normal trading resumes. Again, the graphs are accurate enough to illustrate the concepts.

This trade is constructed by selling 10 GLD December 115 puts, and at the same time buying 20 December 110 puts. The margin required on the trade is a little under $4300. I’m showing a 10 by 20 trade just for illustration. This could be done 1 by 2 or 100 by 200 or any other amount based on what margin is available and what one wants to risk. In this case the entire $4,300 dollars is at risk and that loss would be realized if GLD were to close at the long strike on expiration day, which would be 110 per share on the GLD. As you can see on the white line that there is only a loss at the 110 price as time progresses. If price were to head down to 110 right after trade is put on there would actually be a small profit. If price were to continue to fall the profit potential would be rise continually. The theoretical profits at expiration would be nearly $5,000 at 100, over $15,000 at 90, and over $25,000 at 80. If the analysis was incorrect and the market continues higher there would be a maximum profit of $740 no matter how high the price would go. There is some time decay on this spread, but it is far less than an outright position because the short puts will decay favorably to partially offset the time decay of the long puts. Of course these prices are based on theoretical option pricing at the mid-point between bid and ask, so actual fill prices would be different, and commissions have not been added. This example is just an illustration of a spread that can make money if the market goes up or down, will lose only in the middle as time nears expiration, and has less time decay than an outright long put position. This spread could also be considered using the January options to give it more time to work, although profit and loss parameters will be different. Also, the strike prices can be adjusted to better fit the trader’s expectations and breakeven points.

Another spread worth a look is the broken-wing butterfly, as illustrated above. This spread is again constructed using put option in the December expiration cycle, although January could be used to allow more time to work. This spread will not make money if the uptrend continues, but the amount at risk is strictly limited to the price paid for the spread. In this case the cost and risk a little over $2,000 plus commissions. This is constructed by selling 20 December 105 puts, and then buying wings of 10 each of the December 115 and 100 puts. This spread is unbalanced, hence the name broken wing. The unbalanced nature creates a slightly greater cost and risk, but allows profit potential no matter how low the price goes. Everything in option trading has a trade-off. The trade-off here is that the profit potential is limited if the price goes too far to the downside. In this case the maximum profit potential is almost $8,000 if price were to be at the short strike of 105 at expiration. However, if price overshoots that level and was to be under the long wing of 100 at expiration the profit would be limited to about $2,900, no matter how low price goes. Time decay is minimal because of the 20 short options, and time decay can actually work in favor of the trade as price moves into and under the tent on the graph.

Compare the chart above to the previous chart. The chart above is the regular butterfly. It is constructed in a similar way to the broken wing, however it is symmetrical using wings of 115 and 95 surrounding the 105 short strike rather than being unbalanced. It is a bit cheaper to put on, but the trader has to be careful if price overshoots on the downside as the trade can turn from profit to loss on a very large downward move. The loss is strictly limited to the cost of the trade. This trade is still viable if a trader had a downside bias. The wings can be brought in to substantially lower the cost of the trade. Although it is easier to overshoot on the downside if the width of the breakeven points are closer together, it can still be managed if watched carefully. As with all spreads, there is no requirement to hold these positions until expiration. If a decent percentage gain is available prior to expiration it is easy to simply exit the trade and not risk adverse price movement, especially in the week prior to option expiration. If the trader is very bearish the butterfly can be positioned even further away from the money and the cost of the trade can be very low. The expiration graph can often look too far away to be profitable, but the trade can often be taken off for a profit if the price moves quickly just part way in the desired direction even without reaching the expiration breakeven points. The longer the trade is held the closer it should be to the short strike, so if the move happens early and the trade is profitable it is make to lock in those profits while available.

Another trade to consider for a downside break is the calendar spread. The example above is constructed by selling the December 105 puts and then going long the January 105 puts. The theory is that the time decay of the December puts will be faster than that of the January puts. One advantage of this trade is that it has time decay favorable to the trade right from the start. Also, if a market starts to drop quickly volatility can rise. This trade can take advantage of a rising volatility environment, but can be hurt if volatility declines. This trade is much cheaper in margin to put on, and has fewer commissions. The example above costs about $550 for the same 10 lot size, and has a maximum profit of about $2,300 if price is at the strike price of 105 at expiration. The maximum loss is close to the cost of the trade, although changes in volatility can influence that a bit as the actual price of the long January options is not certain. Also, as with the regular butterfly, the downside must be watched because any overshoot in price can turn this back into a losing trade. There are easy adjustments to make if the price begins to overshoot, as this single calendar can easily be turned into a double or triple calendar to extend the range of the expiration breakeven point. Adjustments are beyond the scope of this article.

You might want to refer to the excellent Dan Sheridan webinars on the CBOE website for further information on these and other spreads. If you access through the CBOE you have to create a user name and password to logon to the webcasts. Once that is done click the middle link where it says “Educational Webcasts” and then find the Dan Sheridan group on the left. There are many free presentations. They are each about an hour long. These webcasts are some of the best free educational material available on the internet in my opinion.

The gold market has been making a powerful move to the upside lately. In fact over the last three weeks it has been up almost every day, with prices now turning nearly vertical with many gaps on the daily and weekly charts. Is this move sustainable? Are the fundamentals or the perception of future fundamentals sufficient to justify the prices this market has achieved? Before attempting to shed some light on those questions I need to discuss that character and structure of a fast trending market.

When analyzing accelerating trends on numerous charts from the past a few observations can be made. First, in markets with large public participation the character of uptrends and downtrends are substantially different. In commodity markets where the participants are mostly professional traders and commercial interests the difference is not as great. But in popular markets the public is oriented toward the long side, and will react one way to greed, and react in quite another way to fear. Despite what you might read on gold oriented web sites that are always bullish, the gold markets that are traded on exchanges have mostly public participation on the long side. When markets accelerate to the upside greed can take over and the bandwagon effect is in full force. At some point the bandwagon will knock off most of the speculators who are not strong hands. But the character of the bandwagon effect can take two different forms.

Consider scenario #1. A healthy uptrend will occur after a period of accumulation. This can be characterized by a sideways trending market where the smart money is quietly accumulating their position. Usually there is little chatter or mention in the popular media or on many of the trading blogs. The general public is often looking the other way. There is little momentum to chase. The market is not bearish, but it is also not in favor at the moment. Such a condition occurred in the gold market while it was building that large triangle that I pointed out in a previous post on this blog that started in February, after a large run-up, until the breakout on the 2nd day of September. Once the breakout occurs the momentum chasers and eventually the public gets on board the bandwagon as the smart money starts to sell to those now entering the trend. This can last for some time as the public and late money pours in. By this time the smart money is usually gone. As usual the dumb money gets left holding the bag. The bandwagon tips over as the market enters a correction. If the longer-term uptrend is not violated there will most likely be a new area of accumulation where the smart money re-enters the market and picks up bargains from the public that sells out near the bottom. The whole process of accumulation repeats. And then on the next breakout the momentum chasers and public re-enter, and the whole process repeats. On each of these impulse moves prices most likely will accelerate a bit into the cycle high, but then get pulled back by the inevitable correction. As long as this process occurs in a somewhat orderly fashion the trend is probably still alive and well. The impulses up followed by reactions back down are healthy for the trend and suggest continuation of the primary trend.

Consider scenario #2. The same accumulation occurs as in scenario #1 above. However this time the bandwagon keeps getting more and more crowded. Instead of prices backing and filling, prices accelerate at an even faster pace and become parabolic. There is little downside. Maybe there is a down day here and there, but almost every day is up. The media gets on board and discusses the uptrend at faster intervals the higher prices go. All the news is bullish. Dissenting voices are mostly absent. Gaps start occurring on the chart. It looks like a straight moonshot where there will never again be a downside to consider. At some point, without warning, the market makes a quick reversal down. I’ve seen this occur numerous times in commodities where there would be limit up day followed by limit up day, and then on one of the limit up days the market would suddenly be limit down. At first this looks like a bad print. But after being locked limit down it is obvious that the market has quickly reversed. Often this is followed my numerous limit down days. In stocks and many commodities a limit move is not a consideration, but the same effect can be experience by a huge gap down on an opening, when stop loss order are useless. Usually following such price destruction there is disbelief because all the news is still so bullish. Most traders think the drop is temporary, but if the market retraces most of the last impulse move up, it is most likely that the bull is dead. Usually there will be some small bounce or even a retracement a third to a half of the way back up. But in most cases these markets enter serious bear markets that can last for a very long time and it will take a brand new bull market to get any kind of meaningful uptrend to start. We have seen many examples of this type of blow-off move in many popular stocks and futures markets in the last several years. Silver is a good example. It went to $50 in 1980 and it quickly went all the way back down to $5 after a series of limit down moves. It has never returned to the $50 level, and has taken nearly 30 years to regain about a third of the previous high price. Dry Ships is a more recent example of a stock that went parabolic all the way up to $131 two years ago, and is now priced at about $6 and trading flat.

So the question now is which scenario does the gold market belong to. Is it in the exponential, parabolic blow-off stage, or is it just make a nice impulse move higher that will correct at some point and eventually continue on its way within a secular bull market? At the risk of sounding indecisive, I would say we are somewhere in between the two scenarios. There are various forces economically and politically at work in the gold market.

Gold can move up temporarily in time of uncertainly or disaster, but for a long term bull market gold really needs inflation. As I see it, right now we have a government that is devaluing the currency at an unprecedented pace. The printing presses are running overtime. Interest rates are down to zero. Conventional wisdom would suggest that inflation should start picking up at any moment. But how can inflation pick up when there is oversupply of just about everything and at the same time demand is shrinking. Of course this is a result of rising and persistent unemployment and falling housing prices. Until the employment situation improves on a sustained basis there is little hope that the supply and demand situation will turn around. There is just too much supply of just about everything you can think off. Obviously there is a huge supply of real estate and autos and just about every other piece of merchandise. Prices are falling on nearly everything. If the sticker price doesn’t fall, then there are sales and then sales on top of the sales. Even oil is in excess supply, although prices don’t always come down based on supply demand in that market. And of course gold has a huge amount of supply. How can that be when 321gold and other bullish gold sites claim there is a shortage because they don’t have enough to mint coins? Nearly every ounce of gold ever mined is potential supply. Very little is used up or consumed in the sense of a pork belly or barrel of oil. It simply transfers from the ground into a vault somewhere. It is all potential supply at some price, or at the perception that future prices will fall. Remember when central banks were dumping gold, thus depressing prices? They kept selling regardless of how low prices went. Every ounce of gold that was available for supply back then is still available as supply now, at least at some price.

So at the moment there is an overactive printing press and deflationary forces at work. There is a huge amount of debt that will obviously have to be monetized at some point. The destruction of the currency will have to eventually result in inflation, but at the moment the deflationary forces are a counteracting factor. This does not mean the situation is stable. Far from it. Once employment turns around, and it will, prices are certain to rise. Is it possible gold is seeing that far ahead to justify the current price? That’s a difficult question to answer. I think it is obvious that gold is looking at the inflation component, but I think it has gotten way ahead of the fundamentals by not taking into consideration the deflation component.

My feeling is that we are still in a primary bull market in gold. I say that because of politics. We have a two-year election cycle that can change the landscape dramatically. Of course it is a four-year cycle for president, but there are also mid-term elections that can change congress. And hopefully it will next year. But it may not help much. The current crop of republicans aren’t much better than the democrats. If we could elect people that understand the economy and would treat the economy and spending in a responsible way, then the currency would be strong and gold would have less interest as a store of value. But with a short-term election cycle politicians would rather have a quick fix to try to boost up the perception of a good economy so they can get re-elected. To do the right thing would probably cause serious dislocations that they would be blamed for. I’m not optimistic that this will change anytime soon. Therefore the long-term irresponsible nature of politicians that don’t understand economics and don’t really care about fixing it for the long term will insure that gold should enjoy many more years of a secular bull market.

But what about the short term? It looks parabolic. And gold has had a multi-year run. It started the bull market from under $300 and it almost hit $1200 today. Markets can obviously go much further than seems logical. I still think that is the case short term for gold. It appears to be in a bubble, in that it has gotten way ahead of its fundamentals and appears to only be discounting potential inflation. Also, it is mostly just moving inversely to the US Dollar, at least in this last part of the impulse. Interest rates will likely stay down as long as the employment situation stays bad, but any uptick in interest rates that would also cause an uptick in the dollar could tip over the gold bandwagon. The dollar is only low in relation to currencies of other countries that are perceived to have a more responsible government. That is another factor that could change. It is difficult to imagine any government more reckless or irresponsible that the current one, but anything is possible.

This market seems ripe for a major correction, in my opinion, but not a new bear market. You can see on the chart three red linear regression lines drawn on the last three impulse moves. They are fairly even in length. Line #3 is a bit less steep, but has already achieved the duration of lines #1 and #2. Prices over the last three weeks (this is a weekly chart so the three candles on the right) have moved parabolic, with gaps, and have moved far away from the regression line. It would seem logical for there to be some reversion to the regression line, although that line will become steeper if prices stay up here. A re-test of the March high at the end of impulse #2 is not out of the question. If prices continue higher from here I would view it as a negative sign, as it would suggest we are entering scenario #2 described above. But my gut says we’ll have a healthy correction, a new accumulation base will form, and there will likely be another drive to much higher prices in the future. At least that is my hope. I’m a long time bull and don’t want to see this market enter a final blow-off stage that will take years to rebuild. But the market will do what it wants. Entering new long positions at these levels could prove to be very dangerous. The smart money buys when there is little interest, and sells, often too early, to those chasing momentum.

Trying to trade the downside of this market can be tricky. In my earlier trading days I would often try to pick tops and bottoms. I had some success, but there were many losers, especially trying to pick tops. Most markets bottom more quickly and decisively. Tops are more difficult. Bulls seem much more difficult to kill. However, there are a couple of ideas using option spreads that may help reduce the risk of a net short position in gold or a net long put position. Some of these spreads can be constructed so a maximum gain can be achieved if the market does break, but can still offer a profit if the market continues higher. There is a zone of loss in the middle. This post is getting a bit long so I will try to give examples of those spreads over the long weekend.

This blog has been skeptical of the entire global warming movement for some time. I have repeatedly suggested that global warming has been a huge hoax with a political agenda. I have long suggested that the agenda is an effort to destroy the American economy so the government can step in to “rescue” the country from the perception of a failed free economy. It is very clear that this government wants to infiltrate and expand its influence in as many sectors of the economy and society as it can. It has already tried to spread its influence over the banking system, the auto industry, energy, Wall Street, executive pay, and is trying desperately to take over the health care system. If enough people are unemployed and hurting it will be much easier for the government to step in to “help.”

Now there is evidence that the science suggesting that global warming exists and is cause by human activity has been largely based on baloney. Hackers were able to obtain 160 megabytes of data including 1079 emails and 72 documents from the Climate Research Unit at the University of East Anglia in England. These emails supposedly were communications between some of the most prominent scientists pushing and promoting the global warming myth. These emails and documents, if they are authentic, suggest manipulation of data, falsification of data, covering up data contrary to their cause, applauding the death of a global warming skeptic, and on and on and on. In fact, from what I’ve read so far, much of the communication is based on not understanding why the real data shows there is a cooling trend, and how to disguise that fact, or how to spin it.

I recall Al Gore actually saying how any cooling is temporary and that the cooling is proof that global warming exists. Extreme liberal logic, or lunacy? Al Gore has profited over a hundred million dollars, so far, by his alarmist scare tactics based on junk science. Yet he will not debate the issue. Instead he tries to discredit anyone not falling in line with his crazy beliefs. If his ideas were just theoretical, that would be fine, but enough people in government believe him and if legislation is passed, such as the nonsensical cap and trade, it could really destroy the economy. Why would anyone in his or her right mind want to do that to this great country? Well, back to the greater agenda as suggested in the paragraph above. And of course those people aren’t in their right mind. And have you noticed that in the main stream media that the term “global warming” has been largely replaced by “climate change.” I suspect they really don’t care if the Earth is getting warmer or cooling. Their real agenda is to have punishing controls and taxes on businesses to the point of putting companies out of business so the government can take over. This sounds like a crazy conspiracy theory, but it has already been happening all around us. That trend is likely to accelerate as long as this administration has a like-minded congress.

Luckily Senator James Inhofe announced that he would try to open an investigation whether the United Nation’s Intergovernmental Panel on Climate Change “cooked the science to make this thing look as if the science was settled, when all the time of course we knew it was not.” It will be difficult for the main stream media to keep this out of their reporting. They can only try to discredit talk radio, bloggers, and Fox News for so long. This story will eventually get legs.

This blog mainly deals with the technical aspect of financial markets. But all the technical analysis in the world isn’t as important as the attempted fundamental changes going on in the economy and in our society. If these left wing lunatics get their way, there will be little need for freely traded markets. There will be little interest in owning shares of corporations. The government will own the corporations. This isn’t as far-fetched as it sounds. The government isn’t here to help. This government is here to takes over. The socialists and communists leaders of the past have always suggested that the swing to the left of the United States would be like the frog put in cold water and left to cook slowly so he wouldn’t jump out of the pot. Perhaps Mr. Obama is doing us all a favor by trying to put the frog in already boiling water. Hopefully the frog will jump out quickly. This seems to be the case since there is growing resistance as seen by the tea parties and townhall meetings. I suspect the resistance will accelerate exponentially as more and more Americans see their country and values being dismantled.

Here are a few links to read further on this issue:
Climategate: the final nail in the coffin of ‘Anthropogenic Global Warming’?
Inhofe to call for hearing into CRU, U.N. climate change research
EDITORIAL: Hiding evidence of global cooling

Stock indexes tried to push to a new recent high early in the week, but mostly feel back on Thursday and Friday. The last three impulses up have been quite evenly space and symmetrical, as can be seen on the chart to the left. The blue lines over the prices are the Ehler’s Mesa Adaptive Moving Average, which I use as a simple definition of trend. The previous drop in prices had those lines just crossing down but quickly turned back up in the direction of the main trend. Using technical indicators is not an exact science. I would consider this uptrend still intact as it is still forming a pattern of higher highs and higher lows. This will of course end at some point. The failure of much follow-through of the recent new high could be interpreted as the end of three drives up and have a bearish implication, but the same could be said of the previous tops. You can see a pattern of negative divergences in the adaptive CCI in the lower sup-graph. (For those not familiar with the CCI click here for basic understanding, and also refer to the other CCI articles on this blog for details on the adaptive version.) Negative divergences can precede a change of trend, but there can be a long string of negative divergences that fail to signal the end of a trend before a successful negative divergence develops. Be aware of this when back-testing, as the successful divergence seem to pop off the page, while the failures get glossed over. The eye can play tricks when looking at past data. As much as I feel this market is overdone on the upside, there is just not sufficient evidence to conclude a reversal is at hand yet.

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.