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December 2, 2009

If I Were A Bull

Since markets persist in their non-conformity to my short-term expectations, I figured perhaps a devil's advocate post may be in order to see if I can convince myself of the opposite case. After all, if asset prices are to continue higher, there must be a reason, and smart people like you and I ought to be able to see it coming, don't you think? Let's have a look.

The SPX has hit a wall right under the 50% retracement of the bear market decline. Fibs are a ubiquitous tool which I personally reject. However, I keep myself apprised of these levels simply to remain aware of what others may be watching.

s&p 500 daily chart

There does appear to be a struggle right under the 50% retracement. If this level were to have acted as a pivot point, price should have performed a clean bounce. The fact that price action remains bunched up just under a potential pivot tells me that the market is likely just cleaning out supply before punching through. Furthermore, if this bunching action acts as a mid-point for the move out of the last pivot low, the S&P 500 will go straight to 1200 when it breaks out.

Gold unfolded a massive consolidation pattern from early 2008 into the fall of 2009.

gold chart

Can you imagine gold jumping above $1300 before we see our expected correction? Not much of a stretch, really. It's an unpleasant thought, tempered only by the fact that if price were to accomplish such a move, the correction would just be that much more violent.

Likewise, silver recently broke out of a minor consolidation which projects to $20.

silver chart

Also, gold miners refused to be contained by a bearish expanding wedge.

gold mining shares

GDX is a tricky one, though. In October, shares broke to a new rally high on accelerating volume just before rolling over into an 18% decline.

Finally, the dollar remains within a 6-month downtrend channel and has given no clear signal of a bottom.

dollar chart

Until the upper channel line is conquered, bears remain at grave risk of suffering a panic sell to end the buck's current bear wave. Such a panic would certainly spike PMs and equities.

Well, there you have it. Potential panic buys to SPX 1200 and gold $1320 lay just ahead. Now that I've laid out a bullish case, we should get a plump 3% drop tomorrow.


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