The rising price of crude oil to date has had a somewhat limited affect on the economy ( so far) but my overall analysis of the crude oil chart says to me that there is still plenty of bullish potential for the intermediate and longer term time frames.

Certainly it seems somewhat odd that the S&P 500 is near all time highs while crude oil is also hitting record highs at about the same time ( Gold may soon do the same but will be analyzed in a future posting). According to my previous posting ( The S P 500 will break to new all time highs ) the S&P 500 will eventually break to new all time highs joining the crude oil run.

Traditional wisdom would suggest that crude oil and gold at new all time highs would suggest a weak economy or inflationary concerns. The inflationary bite has not really been seen yet in my opinion. There is plenty of anecdotal evidence to suggest that increased inflation is here and that it is growing, but to my knowledge, so far anyway we do not have a situation of run away or a really “painful” inflation situation.

Perhaps what we are dealing with is the old ‘frog does not notice the water is boiling analogy until it is too late’. This could be the case. It could be that by the time the public and the investment community at large realizes that inflation is a very bad problem it will be too late.. and the effects will be large enough that they are seen obviously everywhere.

I will tell you what the crude oil chart is telling me from my experience and observations. Number one, the overall trending pattern since 2001 is of a parabolic arc symmetry. What this means is that as time moves forward price subsequently rises at a faster and faster pace until you come to the point of almost zero price declines. In other words, it looks like crude oil wants to take the path of a parabolic blow off with eventual near vertical price rises until it exhausts itself. Since about mid 2004, the price of crude oil has chosen to build a rising wedge price formation which is a price consolidation pattern. So even though the price of crude oil has recently hit an all time high, the current price is still contained within this rising wedge formation. This suggests to me that we are likely due for some sort of pullback into the rising wedge range at this time. However if the crude oil chart elects to break out and upwards (green arrow) out of this rising wedge it could lead to a very fast straight line bullish move.

I have discussed rising wedges before and they are somewhat of a tricky price pattern. The normal thinking is that they are temporary bearish patterns and not necessarily ‘end of bull market’ patterns. They have a bearish tendency because you have a combined situation of diminishing price appreciation and constricted price range both of which indicate less demand.

However, rising wedges can fake you out and also be very bullish. They show this bullishness when price breaks out upwards over the top resistance line. So the exact opposite message is being sent, one of extra strong bullishness.

The price of copper has also exhibited such a rising wedge pattern as I pointed out in commodity copper shows good technical analysis trend. The copper price is starting to break out of that rising wedge however further confirmation is needed.

Time wise, this rising wedge in crude oil could extend all the way out to January 1st 2006, but the jury is still out on how long it takes to make its decision.

Crude oil at new highs, the S&P at new highs, and gold at new highs…

Honestly…

Can it get any crazier than that?

Thomas.

The S & P 500 will break to new all time highs. I have no doubt in my mind as of June 20th 2005 that the S&P 500 will eventually break out to new all time highs and likely head for a test of the next swing point of May 22nd 2001.

We saw very good volume expansion on the S P 500 on June 17th, 2005. This volume came through despite typical slow summer trading activity. But more importantly the volume came through significantly higher than the previous price swing of January 3rd 2005. March 7th, 2005 still needs to be tested in terms of price and volume, however given how the S P 500 has pushed up against this resistance line with above average volume, the evidence suggests a break of resistance is coming.

How do I know that we will break to new highs and likely attack the swing point of May 22nd 2001 ??? Well the evidence comes mostly from the S P 500 volume analysis, the most powerful analysis you will ever encounter in your trading matters. As you can see from the chart I have created to the left there is the specific resistance level of 1220 on the S P 500. On June 17th 2005 we tested this level. The volume on June 17th was 2 billion shares. This volume was about 33% greater than the previous swing (Jan. 3rd 2005) volume of 1.5 billion shares. The three price swings around the date March 7th 2005 have volume betweeen 1.4 and 1.6 billion shares. These have not officially been tested yet.

The volume expansion on June 17th was extraordinary! This market wants to push higher and do so in a big way! The volume is the energy, the force and the reason why the market will move higher above the 1220 resistance level and head for the May 22nd, 2001 swing.

“If the market tests a previous swing on equal or greater volume, ultimately that swing will at a minimum be tested and likely exceeded”.

Not only did we test the Jan 3rd, 2005 swing on equal volume, we did so on about 33% greater volume!

The bull market lives on!

Thomas

P.S. The gold market is also extremely interesting at this point! Will the gold market head to new highs? It would be truly extraordinary to again see gold and the S P 500 breaking to new highs at the same time! If it happens it will be absolutely fascinating to me! Stay tuned for my gold analysis.

Option Trading in Merck?

I have been watching Merck (MRK) since yesterday. As you probably already know, Merck stock had a massive sell off in October 2004 related to the recall of one its blockbuster drugs. Since that time the stock has been undergoing somewhat of a consolidation from that huge volume washout.

It is looking to me like the current stock chart pattern being created is an ascending triangle. There was also a huge sell off on about 60 million shares in late January, but then a complete reversal of that and rally on 60 million shares in mid February 2004.

Right now it is hovering right under longer term resistance of 32.5. I like the overall set up and the potential here. The key indication for a breakout from this pattern will be the volume in the days ahead at 10:35, 12:45 and then the final volume near the close. The volume should be the clue that Merck stock wants to make a breakout from this pattern. 20 million shares or greater would be perfect.

I am opening up this before and after case with the following.

Merck May 05, 32.50 CALL

with price 1.15

Target is 2.00

also, Merck Stock

with price 32.3

Target is 35.00

Peace!

Im out.

P.S. My apologies for not hacking up the chart a bit more. I am currently not on my original computer and had to slap up any chart I could find.

P.P.S. There is a steep trendline that I could not draw in the chart that is important to keep this price pattern intact. I will draw it in later, but for now this will have to do.

Here are a couple of charts on the 30 year T Bond Futures. Steven J Williams who graciously allowed me to repost his ‘ Is a US Bond Crash Coming ‘ article makes a compelling case that we may eventually see a US T Bond Crash, maybe in 2005?

At the Brink of a Break Down

It is an exciting forecast, but the range of possibilities here are quite diverse. A crash could actually be a multi year event. It does not necessarily have to be a sudden very short time frame event. Just look at the 1929 crash and how long that took. The scary thing was to them at the time it probably did not seem much like a crash. They only realized it many years later after they had enough perspective.

The chart to the left is the quarterly price bar chart of 30 Year T Bond Futures. It shows that on a quarterly basis (quarter is ending after a few more days in March) we have just completed a bearish shooting star candlestick pattern. Also since 1999, the over all pattern appears to be a very large symmetrical triangle or coil. That is a very large amount of cause for a big move. It is looking like the move will be down, perhaps fast down. I am no elliott wave expert, but if we break through the lower blue trendline, this could mean we are in a C wave down in elliottwave terms which are usually the fastest and most destructive waves in terms of price loss and time. Also note the quarterly MACD that is about to crossover to the down side further confirming the possibility of bearish break down below the triangle’s outer boundaries. The crossover has not officially occured yet however.

Daily 30 Year T Bond Futures show Major Sign of Weakness

Zooming into the daily chart you can clearly see that T Bond Futures elected to do a major sign of weakness breaking support and now opening up the door to further price weakness and trend.

The whole market environment sure is becoming interesting as it seems to have a habit of doing from time to time. Gold and commodities at intermediate term trend change. Bonds at crucial juncture. S P Futures and broad market also at intermediate term trend change?

Plenty to keep track of as time rolls on.

Upcoming charts include the S P 500, XAU gold index, another super long term chart of Gold and another Gold stock that has a compelling long term potential set up.

Peace.

Have a great weekend.

tc

A reasonably good case can be made that Gold Futures are at a major juncture here. I made a few points that supported this possibility in a previous post. Perhaps relying on the monthly MACD is somewhat simplistic. But you would be surprised how accurate this one simple indicator can be in picking major tops and bottoms or either intermediate or longer term nature.

Cycle Turning Point in US dollar right on PEI date

There is another piece of evidence that hints the dollar bounce this time will be more sustainable and have a good shot at being either 23 or even 38% retracement. I am talking about the Marty Armstrong Princeton Economic confidence model turning point. The last one occurred precisely on January 1st, 2005. If you look closely at the price chart of the US Dollar index you will see that the US dollar also turned precisely on this particular date. Right after this Princeton Economic Confidence model turning point, the US Dollar showed a big sign of strength on the weekly basis. This last week it has also shown a sign of strength.

I was going to post a link to that PEI Economic Confidence model chart which shows the January 1st 2005 turning point, but I cannot find the link at the moment. I will post it up here soon (by early next week) when I find it.

This chart is just a closer up look at the daily prices. You can clearly see the straight up trend line that has defined gold’s move up from 2003. A break or very sloppy or weak reaction at this line in the upcoming weeks could warn the uptrend will be broken and provide yet more evidence that a much longer retracement/consolidation is due for the Gold market.

As I have said before, it is usually not a good idea to fight an intermediate term trend change. I have also said that I do not believe this is the end of the bull run in gold. I have a chart that makes a good argument that the bull market is in fact just starting. The key is always a question of time frames.

By the way, if gold is going to be making a major intermediate term top (still to be confirmed), then one has to wonder about other commodities? Are they making a top too? I will try to look into this in the weeks ahead.

Peace.

I’m out.

TC

I am very pleased how this before and after category entry worked out here at the stock and commodity trading forum. When I opened this one up a few days ago I knew it had some potential and am glad that some things can be learned from this case. In many, perhaps most cases, it is a very bad idea to be thinking ‘long’ when a stock has shown persistently strong down trending price action. Stocks need lots of time to build new bases (aka price work) out of such persistent down trends.

There is definitely a time and place to be brave and try to pick bottoms, but before you do so be sure that you have as much evidence on your side as possible. You want to be sure beyond a reasonable doubt that a stock has done enough flat basing and volume work before a new mark up phase can progress.

The clues that existed in DRD Gold

So then why did I open up this before and after case for Drd Gold? The stock was clearly in a very treacherous down trend with heavy volume all along the way. Here’s why:

• There was evidence that Drd Gold elected to do a massive one day selling climax
• As of the initial posting, Drd Gold was at or very near previously oversold WEEKLY Relative Strength Index (RSI) readings
• The actual selling climax day finished the day with a mid range price bar showing me there was already initial demand (more on this in a minute)
• The price action AFTER the selling climax was retesting on very low volume
• The retesting price action had the characteristics of an arcing price action
• A 41 million share day is very difficult to break with ease to the downside with valid volume

Clearly the news was very bad during the time before the ‘news’. Bankruptcy talk, earthquakes, a strong rand that only wants to get stronger (not true anymore). I mean geez, how much worse could the ‘news’ have become?

The Composite Man, the All Knowing Market Force

The question that needs to be asked though is who was stepping up to the plate buying shares of Drd Gold in the midst of panic on that 41 million share downside crash day? Someone must have been buying there. I believe the buying entity there was what Richard Wyckoff termed the composite man. The composite man is the ‘all knowing’ market force that buys the lows and sells the highs with regularity and has unlimited resources and knowledge much better than most typical market participants.

It is useful to think or frame market analysis this way because it can help you get along side the smart money if you look at the market in terms of ‘what would the composite man be doing here’ ?

So if we assume the composite man was buying the lows of that panic sell off day, surely it would make sense that after buying up all that inventory, they would want to defend their position right? Well it appears to me that this is exactly what happened during the last few weeks on Drd Gold.

The composite man was buying up inventory on the 41 million share day sell off ending the day with a mid range close. So naturally, that buying needed to be defended on the retest of the low.

Another interpretation is simply that the panic sell off day met demand as it encountered long term support. No matter how bad the panic, or how bad the sell off, every time price meets long term support (or resistance) there is a very high probability in my experience that it will be met with supportive demand (or weakening resistance) even if price initially breaks through that support (or resistance).

Note in the first chart also the arcing nature of the retest of the panic day. This was additional key evidence of slowing of selling pressure and the gradual building of new demand.

Weekly Relative Strength gave a clue

This next chart is simply an illustration of the weekly oversold level as indicated by the weekly price chart plotted against weekly RSI (Relative Strength Index). Drd Gold definitely has lots of more price work ahead of it before any firm conclusions can be made about the permanence of its price at these levels. However, as I indicated in this previous post, the story could be interesting and worth revisiting as the year plows on.

Note that the last time Drd Gold was able to break it’s long term down trend, it took about 1 full year of cause building before a new up trend could be established. Will it take that long this time too? I don’t know. The bottom line is first Drd Gold needs to establish some sort of a new base (cause building) and break the long green down trend line before anything else of substance can transpire.

Finally the above chart is simply a representation of the over all bigger picture on Drd Gold. You can see that the yellow shaded area represents a secondary price channel. The current monthly price bar, being a bullish hammer is hinting that the price of Drd may eventually be able to climb back within that yellow channel. If it does so successfully then it could imply a move back to 2.5. This premise is based on the simple concept of oscillating stock prices.

Ok, that about wraps it up for this before and after case!

Peace. I’m out.

P.S. By the way, one point that I think I will try to emphasize more and more is the importance of moving on immediately after any target is realized. This could be one of the single biggest mistakes that people make, becoming too attached to what they were originally involved with. This was mentioned as point number 10 here.

The US dollar appears to be set up for a more extended upwards rally after bouncing for the third time from 14 year support. Over time the dollar trades inversely to gold so the chart set up in the US Dollar index is no big surprise here given yesterday’s analysis of gold futures.

Fed Defends the US Dollar

The 14-15 year long term support line appears to have held up successfully. This now opens the door to the possibility of the dollar finally moving on to do at least a 23% upwards retracement of its decline from the January 2002 peak, or between the 90 to 92 area. It has been long overdue and if it materializes could be the start of a long cause building process that eventually allows the US dollar to break this all important 14-15 year support line. I believe eventually this long support line will eventually be broken, but only after having developed the necessary cause I just mentioned. How long will it take for the cause to develop? This is unknown at this time. The degree of upwards retracement will be a hint as to how weak or strong the dollar really is. Similarly as I mentioned in yesterdays posting, gold futures ability to hold price relative to the US dollar rally will be another hint about how long this whole consolidation process will take.

Basically what we are dealing with here in summary is an upward correction in the US dollar and a downward correction in the gold price. What this really means is that there will come a point in the future that should be a very very attractive entry (buy point) in the metals area. But again, the exact timing of this inflection point is unknown at this time. More price work is needed.

US Dollar Inverse to Gold

The second US Dollar chart here to the left again shows clearly a bullish monthly MACD crossover. This is the exact opposite of what is occurring in gold futures right now. The arrow I drew pointing to the 92 level on the US Dollar index is the likely first stop and test. The 92 level would be slightly greater than a 23% upwards retracement. Obviously this is going to take some time assuming it does happen. We could be talking about 1 to 3 years of corrective sideways action in the US Dollar. It will be very interesting to see how gold does during this time. If the dollar does rally very strongly it is probably wishful thinking to believe that gold will just move sideways or not correct much.

If this does play out as I have briefly outlined above, it will indeed bring forth the mother of all buying opportunities in the metals themselves and plenty of USA based mining stocks. What you will likely see is total and utter despair and fear about the gold market, and perhaps somewhat bullish ramblings about the US Dollar. The noose is tied so tightly around the US dollars neck at this point that even with a 38% upwards retracement, the longer term pattern and trend for the US Dollar index is down.

TC

Have you followed the gold story since 2000 ? Even if you have not followed what gold futures have been doing since the year 2000, chances are that you have at least heard through the popular press about the exciting moves in gold during 2003. The long journey of gold futures from the 2000 lows up to the 2004 52 week highs sure has been an interesting and exciting one.

Let’s face it, most US investors and traders focus their attention on the broad market, paying little attention to the tiny gold market. The Gold market is a small and unique market that rarely gets any sort of mainstream press attention. It has its own special nuances that make it unique and potentially very profitable for those able to identify major trend changes.

I am going to be covering gold futures here at the Stock and Commodity Trading forum quite a bit over time. It is definitely in my opinion worth watching and also important on many other levels for the simple reason that a long term rising gold price means trouble for many other market sectors.

How Familiar are you with the Gold Futures Story?

Gold Futures declined in a massive long term bear market from 1980 to the year 2001. At the lows of 2001 the consensus was that gold futures were just an ancient relic no longer needed by society. So you had plenty of bearish consensus at the 2001 lows.

Precisely at that time however gold futures were making a double bottom and a rounding bottom technical pattern hinting that the smart money was accumulating the metal at that time. The accumulation then transformed itself into the mark up of the gold price launching gold into a new bull market.

That bull run in gold futures between 2001 and 2004 was directly related to 100% to 700% upward moves in many gold mining stocks.

The previous three paragraphs are obviously only a brief summary of the gold futures story. There is so much more to it from a technical and fundamental perspective and I can lead you to plenty of other online resources that are pro gold and long term bullish on gold.

For now though, to keep on topic, I want to take a quick look at gold futures from the technical side.

What is the Current Technical State of Gold Futures?

Making a determination about the health of any market index on an intermediate and longer term basis is crucial. Why? Because you never want to find yourself fighting a longer term trend.

Since the lows of 2001, gold futures have made a spectacular upward move that has been both very persistent and very bullish. Technical resistance levels were taken out with signs of strength and confirmed volume. The performance of gold has been spectacular. The performance has been very good, however some may argue a less than stellar performance relative to how it did in the first half decade of the 1970’s. Gold rose from 35 to 200 during the first half of that decade, a 470% move. The present run up in gold futures since 2001 took us from 250 to 450, an 80% move. Clearly, the economic variables are not identical to what they were during the first half of that decade.

For those of you that do not already know, the price of gold moves inversely to the US Dollar. It is basically a battle between the paper dollar and the hard money gold. The chart to the left of this text is a chart of the monthly gold futures continuous contract. Right now this chart to me is very clearly showing that gold futures are at a critical juncture. Why critical? Well because we have what appears to be a monthly MACD crossover to the downside (bearish side). This is occurring after the indicator had based out for about one year. A bearish monthly MACD crossover in my experience is usually not something you should just ignore and pretend does not exist. While it is true that in many cases the MACD on daily, weekly or monthly time frame can give false signals, risk management suggests that you do not ignore a bearish signal when it shows itself, especially when it is of the longer term nature.

Every time I see a bearish or bullish monthly MACD crossover it usually either causes a very high level of bearishness or a very high level of bullishness. Making the determination of whether or not a MACD crossover is a false signal requires analysis on a few other levels including price itself, other indicators and volume as well.

For this analysis, I have to take the stance of extreme caution on the gold futures price based on what appears to be an imminent bearish monthly MACD crossover. I should also point out that even if the gold futures price does a 50% retracement to 350, the whole bull market case can still be intact. So far, from the lows of 2001 to the 52 week highs of 2004, gold futures have done only a 23% retracement. The degree of retracement that occurs will be key in determining the future strength or weakness in this market. Definitely a development worth watching.

The early 1970’s run up in Gold

As you can see in this next chart, the early half the 1970’s run up in gold was much more powerful and persistent than the one we have seen in the early half of 2000’s. But also note that there was a bearish monthly macd crossover in late 1974. That topping process took some time to develop but eventually led to a 50% retracement in the gold price of its entire up move from 1970. This was definitely not the end of that great bull market as gold eventually found support and went on to peak at 800 in 1980.

What is the most bullish scenario gold futures can produce going forward? The most bullish scenario would be a pullback and retest of 410, holding that support level and then only going into a sideways corrective action. That would only be a 23.6% correction and imply significant internal strength in the gold futures market and eventually more bullish outcome. At the present time I do not believe that this will be the case. It is difficult to say with any level of confidence if this more bullish case will materialize. The first road sign we need is a retest of the 410 level.

Following the gold futures market will definitely be interesting to watch going forward! I will keep an eye on key levels and make comments as developments warrant.

Peace.

tc

P.S. My next post is going to be about the inverse of Gold. Cool eh?

I have already given Drd Gold mention a couple of times on here, so I thought why not put Drd Gold into the before and after category for the fun of it on a near term basis analysis. Maybe there could be a lot to be learned from this one. We shall see. Part of the reason for opening this one up is to see if the 41 million share sell off day a few weeks ago was the selling climax.

Highest Volume day on record for this gold stock

That 41 million share sell off day was indeed the highest single volume day ever for Drd Gold according to my research. Yes, the news is horrible right now on Drd Gold. There was even news recently of earth quakes near some of their mines causing them to shut them down. Talk about bad news! geez. On top of the financial difficulties they are having, then add an earthquake in there to make things worse. This is yet again, another great example of the relationship between news and the price. The news is clearly very bad.. Perhaps the only good news that is at least starting to come about is a more supportive rand gold price mentioned in the post previous to this one.

Again, the intermediate trend in Drd Gold is still quite bearish. Strong downward persistent price trend with no real indication of a change in supply demand relationship to the bullish side.

So the reason I am opening up this ‘before and after’ virtual trade is to highlight what could possibly be a shorter term bullish situation within an intermediate term more bearish situation.

One other quick thing I wanted to mention without showing the gold stock chart for it is that the RSI level on the weekly chart is at 26.74, a level only achieved 2 other times going all the way back to July 16th 1999. The other time was November 17th, 2000. In both other instances those RSI levels marked long term price lows for Drd Gold stock.

On the shorter term chart again it comes down to the volume story here. I do not think Drd Gold will be able to break below this 41 million share day swing. At least not immediately if it even were to do so. Price is now drifting down in a slow lazy retest near the low of the high volume swing.

So the virtual before and after setup is as follows:

Entry at .83

Protective Stop at .80

Objective is to between 1.00 and 1.09

Risk is -3.6%
Potential Return: 20 to 31%

Peace.

Im out.

P.S. I can’t wait to put up the price of gold and silver charts (the long term ones I mean). They will probably be some of the most important longer term charts I will have ever put up on here.

P.P.S I am going to officially name this before and after case “Diving Head First into an Inferno”

This is just a brief post and mini follow up on the S&P 500. In a previous post I had mentioned that the S P 500 was creating what appears to be a rising wedge pattern.

Today it looks like we broke down out of this pattern with fairly heavy volume of 1.65 billion shares. Prices usually move swiftly when they fall out of or rise up from wedge patterns. Assuming we get to 1165, that level will be key to examine to see what the volume test is relative to the previous swings. There is no doubt that the entire up move in the S&P 500 from the 2003 lows has been impressive, but the question always is when is the next intermediate trend change coming?

Is the S P 500 destined to create a massive trading range between 800 and 1200 ?

The support that must hold on the S P 500 is the 1125 to 1150 level assuming we make it there.

Also important to note is the monthly MACD indicator seems to be quite mature in its advancement and may be giving early indications of the beginning of a intermediate term trend change. A negative crossover by the monthly MACD on the S P 500 index would be quite a bearish sign and obviously have implications for most broad market stocks.

The CRB index blasting to new highs daily.. Crude Oil hugging resistance at 55 or so. And GOLD creeping up every so slowly and quietly. Could it be that we are on the verge of a major trend change in the S P 500 and Gold/Commodities?

For the longest time commodities have powered higher, and so has the S P 500 and the broad market. It has been an across the board run up in almost everything to be quite frank. But the question some people have to be asking is how long can this go on?

It is true that inflations can exaggerate moves in everything, gold and commodities, real estate, the broad market. But who will ultimately be the winner in an accelerating inflation? If you answered commodities I believe you are correct.

The key here is to try to identify if 2005 will be ‘the year for gold’. I have some evidence that suggests this could be the case, but ultimately as I am sure you agree it all depends on the price charts and specific levels either being broken or unsuccessfully broken.

The next series of charts I post on here will be gold and silver charts, hopefully before the end of this week.

Determining which way gold will go this year could be the factor that helps to decide what everything else will do (broad market, bonds).

It sure won’t be easy but I will post some charts up that may shed some more light on the subject!

tc