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Time to buy... sequel

Clive Maund
27 May, 2004

Since the "Time to Buy" article appeared on 19th May, the precious metal share markets have rallied strongly, and have now made 9 straight days of gains - an unusual occurrence, and the dollar has just broken down from its 3-month uptrend.

This is all very positive, but the question now, of course, is "what next?"

The answers to the question "What next?" depend on what time frame is being considered, and are a function of the outlook for the dollar. I believe it is most practical to consider 2 time periods: short-term, by which I mean anything from a few days to a week or two at most, and medium-term, which is anything beyond that up to 3 or 4 months.

Looking at a 6-month chart for the dollar, we see that it has just broken down from a rising wedge formation. This wedge was a bearish pattern, which signalled that the uptrend was weakening, and that a breakdown and subsequent sharp decline would be the likely outcome. The advance in the dollar from February was a bear market rally within a primary downtrend, highlighted on the chart by the still falling (red) 200-day moving average, that served to completely unwind the oversold condition that had developed early in the year, and reverse the excessively bearish sentiment that prevailed at that time. Normally when prices break down from a rising wedge they waste little time before going right back where they came from, and lower, meaning that we can expect the dollar to head for 84 again quite swiftly, once the nearby support evident on the chart has failed.

This brings us to the short-term outlook. As already mentioned, the gold stock indices have been advancing for 9 straight days, an unusual occurrence that obviously increases the likelihood of a short-term pullback or, at least, consolidation, before the indices challenge the resistance now not far above. This fits with the dollar/gold picture, as although the dollar has broken down from the wedge, signalling that it should in due course head much lower, it is also dipping into an area of significant short-term support, shown on the chart, which turned it higher early in the month. This fact, combined with its short-term oversold status, MAY result in a limited short-term rally, which should not re-enter the wedge uptrend zone. From our point of view such a dollar rally would in fact be positive, as it would allow the short-term overbought condition in both gold and gold stocks to unwind somewhat, putting them in better shape to take on the considerable resistance that must be overcome before new highs can be attained.

There have been some very important fundamental developments over the past week or two, following a period of extreme uncertainty across many markets, and the "Time to Buy" article was written the moment I detected the birth of the new uptrend in the PM markets. Not the least of these developments was the nomination of Mr Greenspan for another 4-year term at the Fed, apparently after he had undertaken to keep manning the pumps. What this means is continuing liquidity, regardless of the consequences, and increasing inflation, possibly eventual hyperinflation. While this is not exactly good news in the general sense, unless you are thinking of the period between now and the election, it is certainly good news for the precious metals and PM stocks, as the continuing expansion of liquidity, which feeds inflation, coupled with a reluctance to raise rates in a very fragile economic environment and in an election year, will dig a deep hole under the dollar and are a confluence of circumstances that should act like "rocket fuel" for inflation hedges with intrinsic value such as the precious metals.

The "shopping list" of promising stocks in the American, Australian and Canadian markets provided in the version of the earlier "Time to Buy" article - that appeared for subscribers on my website - remains valid, especially if we see a minor reaction in coming days, affording better prices.

[You can subscribe here].

27 May, 2004
Clive Maund

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany where he trades US markets.

Visit his website at clivemaund.com

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Copyright © CliveMaund 2004. All Rights Reserved.
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