Bottom Fishers Beware
Jan 8, 2007
we saw last week's commodity bloodbath coming and stood aside,
with warnings being issued with respect to Precious Metals stocks
on the 14th
December, and with respect to gold and silver themselves
in the Gold and Silver updates on the 30th December, which did
not get posted on public websites as usual due to illness and
with respect to the oil sector on 2nd January. We also bought
Puts in Newmont Mining (NEM) in mid-December, and in Silver Standard
(SSRI) in the middle of last week.
With plenty of talk going around
to the effect that last week's rout has produced a buying opportunity,
how do things look now? We will now take a quick tour of the
charts to see.
Gold looks awful, having broken down from a Head-and-Shoulders
top on Friday. It should now drop down into the support zone
in the $570 - $580 area shown on the chart. However, with the
dollar now short-term overbought following its sparkling performance
last week, and prone to react/consolidate, we should not be surprised
to see gold rally back to the underside of the H&S top, i.e.
to the $612 - $615 area, probably early in the coming week, which
would be viewed as an opportunity to short it, with a close stop
above the neckline.
The situation for Silver is very similar to that of gold.
It broke down from a particularly fine example of a Head-and-Shoulders
top that projects the price back down to support in the $10.50
- $11.00 zone. A relief rally now back up towards the neckline
of the H&S top at $12.40 would be viewed as providing an
excellent opportunity to short it with a close stop above the
Not surprisingly, Precious Metals stocks, as measured by the
HUI index, broke down from a Head-and-Shoulders top in
tune with the Gold and Silver breakdowns from their H&S tops.
Although the short-term oversold condition may generate a bounce
early next week, the outlook is grim, with the index expected
to continue to drop steeply back into the strong support in the
270 - 280 area. Thus, any near-terms rallies will be viewed as
providing an opportunity to short the sector across the board.
The last rites were read for Copper last week, after it
broke down dramatically from its 2006 top area. As we can see
on the chart it is now substantially oversold and way below a
still rising 200-day moving average. This may well generate a
rally soon, especially if the dollar reacts/consolidates as expected,
but a formidable wall of resistance has now built up above 2.90,
which can be expected to cap any rally attempt. With the picture
now very bearish copper is an obvious short on any such rally.
Oil broke down from its 5-year uptrend last week, although,
as we can see on the chart, it has yet to break down below an
important support level at and extending below the late 2005
low, once it does, which will be signified by Light Crude breaking
below $54, it will be a bear market. Whilst this support holds
there is still an outside chance that oil will rally to the $70
area to complete a Head-and-Shoulders top area, although developments
across the commodities sector last week are making that increasingly
unlikely. It is considered hazardous to short oil while it remains
Now we come to one of the underlying causes of the unraveling
of the commodities sector - the US dollar. The following
is lifted from an article that was posted on a number of public
websites a few days back on the 4th - "A major precipitating
factor behind the carnage in commodities yesterday was the action
in the US dollar, which rose strongly. The last thing you want
to be part of in this business is a very large crowd, and dollar
bears are a VERY large crowd. Over the past few months dollar
bulls have been almost as hard to find as mahogany trees, while
you could probably fill a thousand baseball stadiums with dollar
bears, at a conservative estimate. This is a situation that creates
the potential for an explosive advance, and it is the dawning
perception of this possibility that is believed to be a contributing
factor behind the extraordinary action yesterday. A glance at
the long-term dollar chart quickly reveals that there is plenty
of scope for a substantial advance, even if the fundamentals
appear to rule it out, especially as it has recently been flirting
with multi-year lows." Now we will subject the dollar chart
to deeper technical scrutiny.
The writer has a working knowledge of Elliot [Elliott] Wave theory, even though it is seldom
applied on www.clivemaund.com because it can be very complex,
difficult of interpretation and time consuming, and its practitioners
frequently go into excruciating detail which only succeeds in
making it even more confusing. However, in the case of the dollar
right now, if we stick to the basic waveforms, it presents a
startlingly clear picture. Look now at the accompanying chart
and you will see a downwave between early 2002 and late 2004
that breaks down into a clear 5 wave sequence of 3 impulse waves
(1, 3 and 5), punctuated by 2 countertrend reactions(2 and 4),
with an extended 3rd wave that itself breaks down into a subset
of 5 waves numbered I through v. The 5 waves comprising the downwave
indicate that it is in the direction of the primary trend, but
they also call for a substantial A-B-C countertrend move that
serves to correct the entire downwave. The strong rally during
2005 and the reaction during 2006 are thought to be the A and
B of the countertrend reaction from the massive underlying support
that dates back many years to the early 90's, but to complete
the countertrend upward reaction we need to see a C wave, which
can be expected to be large and to devastate commodity prices.
The reason why this C wave is believed to be about to begin,
and may already have begun, is the extraordinary and overwhelming
bearish sentiment that has prevailed over the past several months
- normally, when everyone is bearish, there is only one way a
thing can go, and that's up.
On the 6-month dollar chart we can see recent action in detail,
and the strong 3-day gain last week that caught so many out.
After a rise of this magnitude it is entitled to take a breather,
as it is now short-term overbought, and has entered a zone of
significant resistance with its moving averages still in bearish
alignment. Therefore we should not be surprised to see reaction/consolidation
in coming days leading to a relief rally in commodities that
will provide better entry points for establishing short positions.
On www.clivemaund.com we do
not cheerlead gold, silver, oil or anything else - if it looks
like it's going down, it gets sold, and if it looks like it's
going down a lot, it gets shorted. On the site at this time we
have drawn up a list of suitable stocks to either sell short
or to buy Puts in, for portfolio protection or for speculative
gains. To end on a positive note for gold and silver, if the
scenario described here comes to pass, the long-term bullmarket
in gold and silver will resume with a vengeance once the dollar
C wave up is complete.
Readers are referred to 2 great
articles, which, although written several years ago, are still
relevant today regarding the possibility of a dollar spike, especially
at the present juncture. One, entitled A
Day Late and A Dollar Short was written by George J Paulos
and Sol Palha, and the other, entitled Could
Short Squeeze Send Dollar Soaring was written by Rick Ackerman.
Jan 7, 2007
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Visit his subscription website at clivemaund.com. [You can subscribe
No responsibility can be accepted for losses that may result as
a consequence of trading on the basis of this analysis.
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