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September 2, 2009

Golden Triangles

Just in case you didn't notice (tongue firmly in cheek) the major story of Wednesday's session is the monster breakout from triangle formations achieved by gold and gold mining shares. Of the 13 precious metals-related equity positions in the Docfolio, all 13 were all solidly higher... 9 sporting 10%+ gains, 2 of them 20%+, and all but one were up at least 8%. With such a victory of patience, it would be easy to pat oneself on the back and start talking about how much money is to be made between now and spring. Instead, I'd like to throw out a couple of cautionary notes about getting too aggressive at this juncture.

My first concern is the wave count in the dollar. As noted yesterday, it is possible the 5th wave down of the major wave coming off the March high may have aborted early.

dollar index wave count

Today's narrow-range consolidation could portend a continuation higher in the next two days. Even if we were to get another quick dip in the dollar... perhaps down to the 76 pivot... it would constitute an ending move to both the major wave and the minor 5th wave. It seems we are destined one way or the other to spend September and October retracing a portion of the summer drop. Now, precious metals do not have to fall as the buck rises, but a rising dollar will create a headwind.

gold chart

Each parabolic cycle in gold has seen the following sequence of price movement: breakout, creep higher, parabolic. Perhaps the countertrend move in the dollar index will coincide with the creep phase of this cycle, and the parabolic phase will coincide with the next major dollar wave lower.

Another cautionary tale is being told by platinum.

platinum chart

Platinum has consistently lead gold and silver during the bull market. It's possible platinum has lost the leadership role, but I don't want to count on it just for the sake of justifying my positions.

The bottom line is that I'm standing pat on my current precious metals positions, but I'm not ready to get super-aggressive. If I'm wrong and metals just go wild from here, well, no complaints. I'll still have a fabulous time. However, if the dollar waves play out as expected, I'll be ready to bump up my book when I think the countertrend move is ending.

Let's jump right into equities with a look at the S&P 500.

s&p 500 bear market

Today's action looks like nothing more than a pause in the selling. I expect our favorite index to take a stab at the 65DMA tomorrow or Friday. This expectation jives with the notion of the NRC in the dollar chart foretelling a continuation higher. If the dollar index decides instead to complete its wave count with a dive to 76, we could see one more nasty head fake higher in equities, but in my mind, a final pop in equities is a lower probability.

At this point I've still only got my hedge trades on the book... which, by the way, are working out fabulously since the last few days have seen my longs up and my shorts down... but depending on how the SPX navigates it 65DMA, I may get more aggressive with the short side.

I'll leave you with one more piece of supporting evidence for an end to the stock rally:

oil chart

If oil's rally has ended, the stock rally will almost certainly be toast. A break below the 55WMA for crude will be a heavy burden for equities.

Have a good evening.


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