A view on the precious metals

In the precious metals complex, I'm watching closely 3 components : gold, silver and the gold bug index HUI. Until the recent sell-off, the three have advanced more or less synchronously. Moreover, the run in the precious metals that preceded  was  real not only in US dollars, meaning the investors are scared of  the  (hyper)inflation on the global scale.
As the dollar has started to gather some strength, these hedges have been thrown away. But, as far as we continue to stay in "corrective mood" in the broad market, the things are, in my opinion, not done, especially for gold. The yellow metal's sell-off is looking much as a correction and I would expect gold to reverse from 108-109 range to push higher at the beginning of New Year as high as 126-132 for the ETF (GLD) or 1270-1330 for cash. Indeed, I would expect gold to make new historical highs as we enter the initial phase of the new wave down for stock indexes,   it was already the case  in the 4Q  2007 and 1Q 2008.

For the gold miners and the silver, the things are much trickier. They are more sensitive to the prospects of the broad stock market. And, in my opinion, they are far from being bright at this point.The gold bug index has stopped its advance right before the top of 2008, rising the probability of the double top.

The silver has reversed right under its Jul 08 minor top, nearly my preferred level of March 08 gap (19.40). I must say, that the whole advance in silver and HUI looks to me as corrective, since I can't rule out that their declines from the March 08' was in impulsive way.

So, my conclusion: the gold is very certainly correcting and will take new highs in the beginning of the 10', pushed by the deflationary forces. We may have the situation where gold and dollar move in the same direction. As for the  gold stocks and silver, the situation is not easy, at least they will lag gold, creating the situation of non-confirmation.

Risk appetite and some confirmation

I've been expecting the techs to underperform the broad market and especially big caps well before the markets start to roll over.  And that's what we have had.

 On the chart bellow we see the Nasdaq Composite to Dow Industrial Average ratio. It reflects the willingness of investors to buy riskier  (more expensive on the relative basis) growth stocks.  This ratio has put a top at the end of September and since, it has declined in the clear 5 waves pattern, meaning, from the Elliott waves point of view, the trend has changed.

So the rally in "risk appetite" has lasted a bit less than 10 months, and hence it confirms the coming reversal in the major averages (SPX, DOW)  which will mark at the same time the beginning of the 3d wave down for the Nasdaq to Dow ratio.

Want a bigger sallary? Pay back your debt.

While markets seemed to be happy with the news of BoA paying back government bailout funds, I think this event is  not inflationary, especially for the dollar, - money are taking off the table and go back to  their creator.
And, naturally, it's a good way to motivate other bank executives: "Wanna more money, pay back your debt".

Santa rally, really?

What an entertainment to see bears turning bulls after the 60% rally. Yelnick has called "Wolf!" some times already since at least September, but finally he's calling for the Santa rally to the year end, and may be until February.
Oh, yeah, I understand, it's quite difficult to track any Elliott waves in the corrective crap the SPX or DOW  are made of, so we start to imagine it was just an accumulative phase and we gonna explode on  the upside.
Meantime, I don't see any reason for the averages to accelerate  hence there are virtually no bears in the woods to hunt. Or, may be, still Pretcher, if he calls to cover his double short position, I will immediately put in the mine.
The best illustration is provided by the DOW: he's well as he is, drifting higher under the green line,  enjoying the last weeks of this indian summer.

A tough call

In the time of rush on gold, I'd like to share my call on Silver:
We gonna put a top in coming days under the 08' highs, the most likely around 19.40 for the ETF (SLV). This top has a very good chance to stay for more than a year, and if the markets plunge in the second wave of deflation, as I expect, we'll see silver under 08' October's lows of 8.50.

A small check-up

It's how I would call the sell-off in risk assets that has followed Dubai's announcement. As a result of this check-up, - everything is in place and working: firstly sell emerging countries debt, stocks and currencies, simultaneously buy dollar and contracts on US government bonds. Fine, mission accomplished!
By its self, even the Dubai's default is far from being able to put in danger the world's financial system as it was the case with Lehman Brothers. What is more important it's the reminder to an average investor: "Ok, here in US, Europe, Japan, things are ugly and you can't earn anything on your money, but  be careful when you go outside! Even if it looks great (as Dubai did) it can hurt badly and you'll loose about everything."

Now let's look at currencies. Bellow are two of them : the  Euro, something like a big cap (of DOW Industrial index) and a "high beta small cap" - Australian dollar. And in this space the flight to quality is obvious.

As we can see for EUR/USD, the sell-off wasn't able to push bellow the red trend line. It's certainly a sign of strength and resilience for the single currency. Until this trend line resists we're still able to push higher, toward the upper trend line (1.537) . And seeing what is happening with gold, I consider it as a high probability event.

As for the Aussie, I'm happy that my call was confirmed. We have pierced and later busted the supportive red trend line as well as 55 days exponential moving average. That's serious. While AUD/USD have to go under 0.89 to confirm it's down trend, I think, before, it may take some time to consolidate in the 0.89-0.94 range.

So, getting exhausted?

Wednesday's dollar move has finally produced what I've been expecting since quite some time, - a spike on the downside. In my opinion it is one, indicating the trend is exhausting. The kind of spike which doesn't change anything technically and is seen barely as a beep  on the long term charts, but at the moment is perceived by the trading public as a catastrophe: "we gonna crash!"

By the way, the 2 high yielding currencies I'm watching closely (kiwi  and aussie) were far enough from confirming this exploit. Just may be they know something more about Chinese reflation and just may be that is more important than no more significant statements from the FED about long lasting low interest rates? Indeed, are we in the environment where the interest rates or the capital preservation matter more? I'm pretty sure in coming weeks we'll start to see the answer.

Watching the grass grow

While I've been expecting that this rally should last until the year-end  I didn't think it would get so boring. I definitely prefer the tops of bull markets, with their spikes as early bears get squeezed.
Nasdaq Composite goes nowhere since 2 months already.

Hopefully, there is DOW, the big caps are still desired.

And if you think we gonna break out on the upside, look at the high beta small caps Russel 2000:

And some of not so old leaders,

Homebuilders:

And Semiconductor Companies:

 Ok, ok, I know, the real story is about Gold. There is a lot of action. People are scared by coming hyperinflation and are buying gold as if there is no tomorrow. Personally, I'm far from being sure , most of them really understand why they need gold, but it continues to be the game du jour until it's no more.

"Les carrotes sont cuites"

That is coming to my mind right now, - a famous french expression which was a code message to the French Resistance (to start their operations), broadcasted by BBC before the allied invasion of Normandy.

Dollar's turning point?

So hated dollar started to show some strength in recent hours. Already, EUR/USD failed to put in new highs  while USD index established new lows. Indeed, index was pushed by the strength of other currencies, among which I would cite Australian dollar, the biggest beneficiary of the reflation process.

Is this weakness real? I think, in any case, AUD/USD must be watched seriously as an indicator par excellence of the Chinese part of reflation. And let's not forget, that at 0.94, AUD /USD is just within 4 cents  from the '08 high, - about a perfect shorting opportunity for someone who does believe in the near end of this fiesta.