From: b
Time: 2011 09 1 4:52 AM
Subject: RE: What will overrule ?
Livermore said it well:
"All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope – that is why the numerical (technical) formations and patterns recur on a constant basis."
-- Jesse Livermore, "How to Trade in Stocks"
But in my opinion, one needs to look at all three elements when trading/investing - fundamentals, technicals and sentiment. It sounds like what you're saying is that sentiment due to fundamentals etc. will be more important as time goes by... and I agree but TA is always a factor, and TA does include trend lines - "overbought" or not.
It was almost 4 years after the "irrational exuberance" comment until the market topped too.
From: H
Time: 2011 09 1 1:35 AM
Subject: Re: What will overrule ?
I have in fact made a roughly similar argument a little while ago based on technicals alone.
The salient point is this: in commodities and gold, the market acts in an opposite manner to how the stock market acts. This is to say, in gold, tops are 'spike tops' and lows are long, drawn out accumulation patterns. In stocks, the lows are 'spikes' and the tops are long drawn out distribution patterns.
Why is this so? The reason is that the same emotion that drives stocks down is what drives gold up: fear. Fear creates 'spikes'.
In stocks, we sometimes observe a phenomenon in bearish phases that I would term an 'indicator failure'. A good example for such a failure are the crashes of 1987 and 2008 (and even the minor upheavals like the 1998 mini crash). What this describes is a situation where the market reaches very 'oversold' levels, but then, in spite of this condition, suddenly plunges by a large percentage in a very short time (the crash).
In gold, the exact opposite can happen when it becomes very overbought. The overbought condition may be indicative not of greed, but rather of growing fear. So you can get a situation where a severely overbought market, instead of correcting as it would normally be expected to do (and which it does in fact do most of the time, probably in 9 of out 10 instances), continues to become more overbought and actually accrues enormous additional percentage gains in a very short period of time. This happened e.g. in both gold and silver in 1980, it happened in hard red winter wheat in 2007/8 (fear of a shortage), it happened again in silver earlier this year (that was a special situation where imo silver's main driver suddenly shifted from the industrial demand component to the monetary demand component).
It is certainly possible that gold is now at a roughly similar juncture again, although we can of course not know that for certain.
What we DO know for certain is this:
1. in spite of being overbought for many weeks already, gold refuses to sell off, apart from quick shake-out moves.
2. the fundamental backdrop for gold has turned very bullish on many fronts. Credit spreads are widening, real interest rates remain negative, the faith in monetary and fiscal authorities is crumbling ever more, the growth of money supply has accelerated, and the financial crisis has widened and deepened, and is now not only encompassing the banking system but also entire sovereign nations. At the same time, most institutional investors (pension funds, endowments insurers, mutual funds, hedge funds, etc.) still only have a very minuscule allocation to gold just as all these factors come together to create a perfect storm.
We can therefore conclude that the probability of the market ignoring 'overbought' signals has increased. Still, in such a situation we often see very scary and deep short term declines, which are the market's way of bucking people off. The important thing is what happens after such scary declines (like the recent 9% plunge over just two trading days) - namely how quickly they are recouped. If it happens very fast, then it further buttresses the idea that the market is undergoing a 'phase change' to borrow a term from Marty Amrstrong.
On Wed, Aug 31, 2011 at 9:29 AM, K wrote:
This is a question to H and all technical analysis experts on this group
As is well known to all, the recent run-up in Gold has made it very over-bought. Whilst the price drop from 1910 to 1705 did manage to ease the situation a little bit, but on the weekly charts it is over-bought by a good margin.
Now, as we all know from 2002 up until 2008, Gold's moves were a mix of fundamentals & technicals.... whilst fundamentals have been there for sure, but one can say that it was not over-whelmingly strong and so technicals played their role as well (which I think is fair, no complains)
But now we are moving into a phase where this sovereign debt crisis (or if you would like to call it currency crisis or whatever) will give a new meaning to owning Gold. It will be the fear to own real money that will attract people to Gold. It will add overwhelmingly to Gold's fundamentals and rightly so ! It has been money for 6000 over years & just because helicopter pilot thinks it is tradition does not change Gold's role as a monetary asset. So as & when this crisis picks up speed, so will the rush to own Gold. And when the fear rises, it will not be seen even for a minute as to how much overbought or oversold Gold price is.
This could play out over the next 2-3 years. So when this happens, there will be the rush to own Gold and with limited supply & prices moving higher it surely shall remain overbought for months and/or years.
So the question is : will these next 2-3 years be a period where fundamentals will overrule technicals, and that too by a very great margin ? and if so then should technicals be ignored in order to sit tight with this asset ?
Kind regards
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