This is the guy I follow and is in the thread header. He has called things as well if not better than anybody. Charts with link:
gold-eagle.com
DAILY REPORT (02/22/09)
If you ever wanted to live in a period that you "can tell your grandchildren about", you've got your wish. We have embarked on the financial equivalent of the Ice Age and when it's all said and done, there won't be a dinosaur left. Just about everybody I know, including a large majority of my clients, have been in denial. Furthermore, almost no one is prepared for the monetary tempest that is hitting the mainland as I type. To be perfectly honest about it, I don't know if it's possible to prepare yourself for what's happening now; it's not like you can go to your local library and check out a handbook on financial collapse. Many people are under the impression that we are in for a severe recession, whereas I believe we are already knee deep in the worst depression to hit in the last one hundred years. No one will escape unscathed. There is a faction in Washington DC that thinks they can somehow alter the course of events, but they are sadly mistaken. The bear market that is gripping the world has been manipulated for years and it is about to take its pound of flesh.
Today's dinosaurs will turn out to be major financial institutions and companies that gorged themselves on easy money in the derivatives world for so many years. I have listed a few of what I view as "dinosaurs" below:
General Electric
Citibank
Bank of America
Goldman Sachs
Merrill Lynch
Ford
General Motors
Chrysler
Wells Fargo
and there are more, but I think you get the idea. For years these companies sold complex derivatives to the world, in the guise of assets, in order to live a better today at the expense of all of your tomorrows. Well, that game came to an end on Thursday, February 19th at precisely 4 pm. At that precise moment the Dow closed below two important levels, thereby confirming the Transportation Index, and gave off a major bear market signal like none seen in one hundred years.
When Mr. Obama first became president there was a lot of talk about forming a "bad bank" just like Reagan did with the Resolution Trust Co. back in the 80's. This faded and has since been replaced with rhetoric about nationalizing banks. I have no doubt something like that will happen; after all we have to reward the folks who created this mess just one more time. I also have no doubt that it will fail. You can pump money into these companies until hell freezes over and it will solve nothing. A debt crisis cannot be resolved with more debt, especially when cash flow is being reduced almost on a daily basis. Debt must be eliminated to the point that real cash flow, not projected cash flow, can pay off what is left. "When I say eliminated, I really mean to say written off because it can never be paid. The Fed tried to inflate it away but failed miserably and that is something they will chisel on Bernanke's tombstone at the appointed moment.
The rest of the world is not any better off. In fact if you listened to Paul Volcker's speech today, you would have walked away believing that it is worse off. According to Mr. Volcker "industrial production in the rest of the world is declining faster, at 10% over the last six months, than it is in the US, and faster than in the Great Depression." Cheery news! Given the situation you would think these companies would be ready to knuckle down and do some serious work. Maybe something as simple as face reality! Not to be though. They would rather pay lobbyists' millions and millions of dollars so they can keep on with business as usual. By that I mean that these institutions refuse to mark to market the junk they stuffed into their respective portfolios. Instead they developed complex mathematical models that inflated the prices of their "assets" on a regular basis with no regard to true value. Now that the jig is up and the last thing they want is for these assets to reflect a true market value. Why? It would mean they are bankrupt, that's why!
Imagine if everything in the world were run like that. We could go to the supermarket, drugstore, or car dealership of our choice and pay some arbitrary price that we determine for the item of our choice. What could be better than that, for us? Of course all the businesses that we frequent will go belly up because, human nature being what it is, and we'll error in our favor. There's and old saying, "the bank never loses", but life isn't like that. It's the equivalent of a coin with only one side. There just ain't no such animal! I am convinced the economy will never hit bottom until these special circumstances are cleansed from the system. We are a long way from that point and that means we are a long way from the bottom. These celestial bodies have tremendous power. How do you think Stanford Financial dodged the SEC for three years, the FBI for a year, the IRS for god knows how many years, and nothing happens! They grease the wheels and life goes on. Madoff did the same thing.
Fortunately there is a great equalizer out there and it's called a stock market. Countless individuals, groups, institutions, and even governments have tried to manipulate it for their own benefit and all have failed. Some had the appearance of success, but only when they happened to be going in the direction of the primary trend. Also, some have been able to prolong a primary trend, but no one has been able to change the direction of a primary trend from bull to bear or vice versa. Many have tried and all have failed. Personally, I have witnessed superhuman efforts designed to change the primary trend of the gold market as well as the Dow. I have no doubt that in the attempt enough capital to buy a small country has been wasted. Focusing strictly on the Dow for the moment, I have been commenting for months on the battle for 8,144 and today we have a victor.
Below I have posted a weekly chart of the Dow and I have highlighted the current primary bear trend as well as the secondary bear trend:
It is not a pretty sight and you can see how it is rolling over into a steeper fall (downward sloping blue lines). You should also note that RSI, MACD, and the histogram have all turned down again, while the 50-wma has crossed below the 200-wma; all bearish indicators to say the least (red arrow). Finally, I highlighted the November 20, 2007 closing low of 7,552.19 (higher of the two horizontal red/green lines) as well as the support from the 50% retracement of the entire bull market at 7,470.72.
The latter support is to my mind far more important than the former as it invokes the 50% Principal. In order to understand this concept you need to know that the bull market stretched from the July 12, 1982 closing low of 776.92 to the October 9, 2007 all-time closing high of 14,164.53. That's a rally of 13,387.61 and a 50% retracement of that rally would take you back down 6,693.80 points to 7,470.72. So far so good! Now a close below that level, and it doesn't matter by how much, indicates THAT A RETEST OF THE 1982 LOW IS NOW A POSSIBILITY. On Thursday the cash Dow closed at 7,465.95, below the 50% support, and Friday's additional 100 point drop was further confirmation. As if that wasn't enough, take a look at the following weekly chart of the Transportation Index:
As ugly as the Dow looks, this chart is worse and has been warning of the breakdown for weeks.
Most folks fail to realize that the Transports led the Dow higher throughout the last four years of the bull market, topped sooner, led the Dow lower initially, then supported it in a counter trend move, and finally succeeded in pulling the Dow down into the cesspool. The Transports took out their respective November 20th low in January, and made lower lows on three separate occasions before the Dow finally confirmed. What's more the Transports broke below their respective support from the 50% retracement at 2,898.31 on Tuesday, February 17th with a close at 2,803.62, two days before the Dow. It then posted lower closing lows on Wednesday, Thursday, and Friday, ending the week at 2,698.07. Finally, during the last nine trading sessions the Transportation Index has lost 15.75% of its value as compared to the Dow that has given back 10.95%, the S & P with a 11.48% drop, and the NASDAQ with a mere 9.44% loss. Clearly the Transports are leading the parade to lower lows.
That's all great stuff, but what can we do with it? How can we use it to make money, or at least avoid getting our head handed to us? In order to avoid losses with the declines that are coming, you could simply go to cash and wait for better times. On the other hand if you want to look for profits, you have to sell the Dow short and you can use the June Dow futures contract to do so. I have just been given a major bear market signal by the Dow, perhaps the biggest in a century. Furthermore it has been confirmed by the Transportation Index, so the odds heavily favor a continuation of both the primary as well as the secondary trend to the downside. Personally, I like those odds. Of course we can have intervention and we can have counter trend moves, but they are temporary and will not change the primary trend. In fact I would not be surprised to see some sort of two/three day counter trend move this week, maybe back up to the 7,657 or even 7,790 level. Who knows and it doesn't matter.
What matters is the bear is in charge and we are headed lower. When you look at the weekly charts for both the Dow and Transports, you should really focus on just how the indexes are rolling over. Look at how each successive blue trend line is closer to vertical. That tells me that we are entering the final or blow-off stage, of this leg down in our bear market. Notice I said "leg down" but I did not say an end to the bear market. I am convinced that we'll make some sort of buyable bottom once we see a 1000 point down day that actually exhausts the urge to sell. For months I have been pointing toward the Lowry's buying
power/selling pressure statistics and saying that sellers are far from done. On Tuesday we saw yet another 90% down day and selling pressure hit a new high on Friday, while buying pressure made a new low. Bottoms do not look like this. I truly wish the idiots who came out on Bloomberg on Thursday and Friday, advising people to buy stocks, would look at Lowry's. They might learn something!
I am convinced we'll see a drop of as much as 1,500 points over a day or two, which will exhaust the urge to sell. I am looking for a bottom of 5,890 in the Dow and that should equate to 2,285 in the Transports. Once we see this wash out, then you can buy and expect to make money to the upside for a reasonable period. If we bottom in early March, I would look for the rally to last six months and maybe run as high as the 9,005 level and maybe even 9,913. Of course, such a rally will convince everyone that we have a new bull market and it's safe to get back in the water again. Mark my words, they will be wrong!! There will be a second leg down in this bear market that will take the Dow Jones Industrial Average down to 4,123 and maybe even as low as 2,450. The next leg down will not stop until the PER for the Dow hits 7 and the average dividend for the Dow exceeds six percent. Currently the PER is at 18 and the average dividend is around three percent, so you can see we have a long ways to go. Before we can buy though, we need to see a wash out and that should begin within a week or so. My advice is to fasten your seatbelts because it will get ugly.
One of life's mysteries continues to be the behavior of the US dollar and Friday was no exception. I believe I grasp the reason behind the move off of the March 2008 lows, as that can be attributed to the demand for dollars
needed to service a massive dollar denominated debt load around the world. This demand is fueled by a deflationary fire that will not be extinguished by printing countless quantities of fiat currencies as Mr. Bernanke so foolishly believed. His flip remark about having a printing press, and knowing how to use it, will keep him up many nights over the coming years.
The Fed continues to print money and issue credit for people who can't qualify and can't pay what they presently owe. I believe this will go down in financial history as one of the worst policy decisions since Nero decided to fiddle while Rome burned around him. Credit is not the solution. Debt elimination is the only solutions. Incomes are shrinking by the minute so debt must be reduced to the point where present income can support a payment, and only then will income begin to stabilize. The only way to eliminate debt is to write it off. Let the banks sink! Don't give them more money that will never see the light of day in the US economy. The US must write down/off bad mortgages so the economy bottoms, and then the rest of the world must begin to write off US debt as it will never be paid. If Bernanke prints the paper to pay it, it will destroy the US economy, the dollar, and take the rest of the world with it. If he doesn't, the US and the world will fall deeper into a bottomless deflation. Either way he's a dead man. Write debt down now, go to a gold standard that everyone lives by, and in five years you'll have a decent world economy.
Meanwhile the question is whether or not the dollar will continue to rally over the short run in spite of the nasty downside reversal we saw on Friday. The March US Dollar contract rallied early on to reach an intraday high of 88.39 (above the previous day's intraday high), and then fell down to an intraday low of 86.34 in just minutes. It finally closed the day at 86.70,
and that was below the previous day's intraday low. Hence the downside reversal. Usually reversals are an indication of lurking problems and when I put that together with the fact that we had several sessions over the last week or so where the Dow, the dollar, and the bond all fell, I begin to wonder what's brewing. On the positive side the secondary trend is up (the primary trend is bearish) and we did see a new closing high of 88.33 on Wednesday so that is bullish. The major obstacle to any further upside movement will be very strong resistance at 89.78 which was tested back in
November. If this recent reaction turns out to have produced a lower high, then the dollar should begin to unravel pretty soon (count in days and not weeks), but I still think it's too early. On the other hand, the Point & Figure chart for the US Dollar Index has a bearish price target of 67.00 and that is as unbiased as you can get. This week should bring clarity.
Finally we come to gold, the one thing just about everyone loves to hate. I have rarely seen such a negative environment in the sense that everyone is talking about the coming correction. Dennis Gartman was on Bloomberg Friday saying he likes gold but won't buy more until he sees a correction. Richard Russell said more than a weak ago that he thought gold was running out of steam, and I get e-mails every hour on the hour from clients telling me gold is now beginning a correction that will take it down X%. Honestly, I just ignore it all and try to listen to the market. On Friday the April gold rallied 25.70 to end the session at 1,002.20, a new closing high for this leg up. The intraday high for the April contract was 1,007.70 and above the 1,004.90 resistance, but what is even more important was the fact that spot gold closed at 993.20 and still below the critical 999.40 resistance level that ended the last rally a year ago. Most current "wisdom"
thinks we'll see some sort of reaction to the downside here, but I never subscribed to current wisdom. It's the same conventional wisdom that said
gold can't rally with the US dollar, but it has. Conventional wisdom and four dollars will get you a cup of coffee at Starbucks.
I am convinced that both gold and silver will continue to rally, with some volatile reactions thrown in for good measure, to much higher levels than most think possible. I have maintained my 1,372.80 price target for this spring for quite some time and see no reason to change. Likewise I see silver hitting a minimum of 24.60 and it could even go higher. Silver is by far the cheapest commodity out there, and I continue to buy each dip. You
can easily see in the weekly chart that silver is lagging gold and has yet to break out, although the recent close above the 50-wma is a bullish indicator. I see silver's real tests coming first at 15.63 and then at 16.20 (red/green horizontal line). Never forget that silver will act as money at some point in the future, just as gold will.
I want to conclude with a few well chosen words about gold stocks. The HUI, posted below, has acted very well in spite of the decline in the Dow and that is a major change from previous behavior. A positive change like
this is always a bullish indicator. This bullishness is also reflected in the following Point & Figure:
You can see that there is a bullish price target of 380.00 and that is still well above Friday's close of 321.45. I don't want to give the impression that any of this will be easy, because it won't. There are going to be violent, even scary reactions, and they'll serve to chase out all but the most resilient bulls. I believe this bull market in gold will leave most gold bulls broke because they buy too high and bail at precisely the wrong time. The only way to deal with this particular market is to buy and sit tight. Also, you have to watch what you buy. I recommend Buenaventura, Goldcorp, Golden Star, Newmont, Royal Gold, and Silver Wheaton, and I avoid juniors like the plague. The juniors are a tough game and I don't even try to play. I stick to the blue chips, a few of which even pay dividends, and just try to sit tight.
In conclusion, I wish I could say something really intelligent to reinforce what I see coming, but I have the feeling I've already said too much. I get a lot of "hate mail" saying I'm anti-American, but the folks that send me that stuff have no idea what the America I grew up in was like. Hell, I could leave the house for a week and leave the door wide open. All that would happen is some neighbor would come along and close it for me. Try that in today's world. What's more, I don't even know who my neighbor is. I have been warning you for years about the collapse, and now its here. If the Dow were to fall down to the 1982 low of 776.92, could you imagine what that world would be like? Social unrest and chaos would be the name of the game and whoever is President would more than likely rule from a bunker and use martial law. Almost always improvement comes at a cost, but we're used to getting things for free. That day has gone. Back in the late 50's and early 60´s, we built bomb shelters in the back yard, in case of nuclear attack. You might dig out some of the old blue prints as it may come in handy.
ebo@dtanalysis.com
Dow Theory Analysis SAC
February 22, 2009 |
