New Bull Market or Sucker Rally?
>>As regards gold, many readers will now have figured out the plot.
Chase, JP Morgan and Goldman et al, facing a derivatives squeeze which will be exacerbated by a rising gold price have asked their friends the banks if they would be so kind as to wheel out some tons of gold from their vaults and dump it unceremoniously on the market, which they have obligingly done. A major reason for the timing of this move is that the credit rating of JP Morgan is about to be re-evaluated. What we can deduce from this, of course, is that these monster companies are net short in their derivatives' positions. At present, they largely control the gold market through their cosy relationship with the banks and are therefore able to keep the lid on things -- for now.<<
by Clive Maund
31 July, 2002
Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany where he trades US markets.
Anyone who has read my earlier articles on the broad market will already know what I think and may also recall that in my last piece here on 321gold entitled The Storm Breaks I mentioned the possibility of a pullback to the neckline of the giant 5-year Head-and-Shoulders in the S&P500 following the breakdown from this formation. This has now occurred and, in my view, we are now presented with one of the finest shorting opportunities of all time.
So, as cool pragmatic speculators, let's look at the opportunities and risks associated with the two main scenarios facing us, namely...
that we have now seen the bottom and the dawn of a new bullmarket is upon us
and, alternatively,
that the rise over the past week was a classic sucker rally following a major chart breakdown which will be followed by huge decline.
Playing Devil's advocate for a moment -- let's just suppose that the bottom is in -- what can we, as bulls, look forward to? A long tedious advance through a quagmire of overhead supply from millions of investors locked in at the higher prices prevailing over the past five years. Such an advance would be punctuated, of course, by sharp selloffs. Where would we set our stop loss level on the S&P? 880? 860? 800? Difficult to say, isn't it?
Now let's look at what bears have in prospect. Bears who short the S&P500 (or a basket of stocks) can look forward to the biggest panic selloff of all time over the coming weeks and months, quite likely weeks rather than months. This panic has a minimum target at 560 on the S&P500. With the neckline at approx. 930, a close stop loss level can be clearly defined. I would put it at 955, which, in my estimation, means that one is unlikely to be shaken out by a whipsaw move.
So, which would you rather be? A bull looking for a long slow advance through massive overhead supply, with vague or arbitrary stop loss levels, in a market perched on the edge of an abyss? Or a bear with the prospect of huge, swift gains and the assurance and the security of tight, clearly defined stop loss levels?
Not much of a contest, is it?
Gold
As regards gold, many readers will now have figured out the plot.
Chase, JP Morgan and Goldman et al, facing a derivatives squeeze which will be exacerbated by a rising gold price have asked their friends the banks if they would be so kind as to wheel out some tons of gold from their vaults and dump it unceremoniously on the market, which they have obligingly done. A major reason for the timing of this move is that the credit rating of JP Morgan is about to be re-evaluated. What we can deduce from this, of course, is that these monster companies are net short in their derivatives' positions. At present, they largely control the gold market through their cosy relationship with the banks and are therefore able to keep the lid on things -- for now.
But these companies are in deep, deep trouble for reasons I won't go into here and are like beached whales waiting to be sliced up. When they lose control of the gold market, which may be through their own demise and/or a massive move towards gold by investors feeling disillusioned and fleeced by the market as a whole -- there is likely to be a meltup in gold and gold shares -- a massive upward spike. We must presume that should these companies still exist when this happens, they will contribute to the meltup by their frantic short covering which should finally finish them off.
We must not lose sight of the fact that despite the shocking plunge in gold and gold shares over the past week or two, resulting from manipulation as described above, overall volume patterns in gold shares are very bullish and many gold shares are now above the major support of their long bases -- a classic buy spot, in fact.
Yes, the gold market is at present manipulated, but the dumping of gold by the banks is a measure of the desperation of the authorities as they try to shore up the crumbling fiat money system. They are playing a game they are doomed to lose -- perhaps they never heard about King Canute and his attempt to stop the tide coming in.
By Clive Maund, Diploma Technical Analysis - no responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
Kaufbeuren, Germany, 20 July 2002
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