SEC’s curbs on short selling a waste of time

 

The rule puts in a so-called circuit breaker for stock prices, restricting short-selling of a stock that has dropped 10 percent or more for the rest of a trading session and the next one. The new curbs take effect in about 60 days but stock exchanges have six months after that to implement them. Full story=

The above rule will only serve to delay the inevitable and could actually worsen the situation. For example let’s say a former high flyer disappoints the street with its earnings report. Normally the stock is bid up in anticipation of blow out earnings, but now the earnings come in lower than expected, so the stock drops 20% in one day, but short sellers are now cut out of the game. Like a dam the pressure will build up and a day later when the short sellers can jump in, it might cause the stock to drop more than 10% and so forth. This effect could go for a longer period of time then if normal market forces were allowed to play out. When one is forbidden from doing something the desire to the opposite increases twice fold; the more one is prevented from doing something the more one wants to do it. Thus this rule is just a silly piece of legislation that will not really achieve much in the long run. In the short run it might provide the illusion that it has the effect of stabilizing the markets.

 

 

 

www.tacticalinvestor.com

How to become a better Investor

by Sol Palha

The main focus of any good trader should be to spend time trying to identify new and upcoming trends; this is not an easy task. It’s a difficult task because one has to go against the herd; one has to on many occasions even go against one’s own way of thinking because one is embracing a concept that one’s own nature will naturally try to rebel against. The reason for this struggle is due to the fact that we are wired to seek the company of others; we feel safety in numbers. This may be true when it comes to real life dangers but when it comes to investing it’s a fatal error.

In fact, if one just focused on the main issues we have discussed over the years, the end result would have been quite profitable. For example, we focused quite a bit on Palladium from the end of 2008 to early 2009. In the bullion portfolio, we had the label screaming buy up several times when Palladium was trading in our suggested entry ranges. Subscribers know that we do not often use the phrase screaming buy, so when we do it usually means that we think we have a unique situation at hand that won’t last long.

Towards the end of 2008 we also spoke of the potential for bonds to mount a very strong correction and warned individuals against opening new long positions. Bonds mounted one of their strongest corrections ever and by June of 2009, they were down over 20%; a massive move for the bond market.

From roughly the end of 2008 towards the beginning of 2009 we spoke of the fact that the market was going to mount a strong rally as the plunge was overdone, and that it was trading in the extreme zones. Again patience and discipline were needed, for the markets did not turn around immediately. We issued our final targets of 10,500 plus for the Dow in February; at that time, everyone thought the world was going to end.

Towards the end of the 2009 we started to focus heavily on the markets pulling back. This is the reason we started to actively close out many of our positions and it’s also the reason we tightened many of our stops. So far, we have had a brief taste of what lies in store, but the main move has not begun yet. Most will wait until it’s too late to react, very few have the patience to take profits and wait for a better opportunity.

We also spent a lot of time talking about the Dollar mounting a strong rally and gold pulling back. Again individual could have jumped out of other currencies into the dollar, closed out some of their long positions in gold and so on. We could list many such stories; however, that’s not our goal here.

Why are we bringing this up? Well, it’s not to talk about our timing skills. Our goal here is to illustrate that most individuals are lacking when it comes to patience and discipline; most individuals want to chase every single opportunity or at least what they deem to be an opportunity. To most opportunity means following the herd. They feel that if they pay for something they should get maximum usage out of it regardless of whether they win or loss.

To illustrate this point, try this simple exercise. Choose a day and try to do nothing for 1-2 hours and by nothing we mean absolutely nothing. Very few will be able to achieve this. In fact, most will find that it’s really hard to do absolutely nothing. (Doing nothing does not mean watching TV, reading book, playing games, etc., it means doing nothing). However, many can run around the whole day trying to do something but achieving nothing. So in reality the truth comes down to this. As long as one can fool oneself that one is doing something (even if one is achieving nothing in the process) its fine, but to actually sit down and do nothing, now that is a terrible and undoable deed. Now apply the above concept to investing and see how true it is. Many feel that they should try to do something all the time, even if they achieve nothing or even loss money in the process, its fine because they are doing something; sitting down, doing nothing and waiting for an opportunity to present itself, now that is simply unimaginable.

Patience and discipline are the most important traits any trader can hope to master. Would it not be much easier to focus on your real needs and not your fantasies? Why not sit down and look for 1-3 great opportunities and wait for the trades to come to you instead of chasing them

We are almost certain that if a subscription service stated that after they produced 6 or more plays that produced wins in excess of 30%, they would issue no more plays, that the majority would throw a fit and cancel their subscriptions. This clearly illustrates the principle of wanting to get something even though nothing might be achieved by forcing a move. The wise man is happy if he can find 1-2 good opportunities a year. There is no need to chase them, just wait for them to come to you. Sometimes you have to wait a few weeks for them and sometimes months and this is what we focus on. We do not like chasing for it usually leads to trouble. All one really needs is one great opportunity a year and one will achieve spectacular results over the long term.

Is it not funny that most find it difficult to sit down and do nothing for 1-2 hours, but as long as they can pretend they are doing something while achieving nothing they are happy? There is a huge difference between the two, in one you are dealing with reality, in the other reality is eluding you; you are just living in an illusory phase.

Thus going forward, try to find out what you really want, who you really are, what are your needs, what are your goals really are? When you know what you really want, achieving it becomes a lot easier than simply aiming for some arbitrary pie in the sky dream.

Tactical Investor

Dollar and Euro Review

Feb 18, 2010

A quick glance at the Euro reveals that it’s putting in broad based top formation; it has been unable to trade past 150 for any decent period of time. It is also putting in a bearish rising wedge formation. A break below 148 for 3-5 days in a row should take it down to the 144 ranges. The next step would be to trade below 144 for 3 days in a row or close below it on a weekly basis. If it achieves this, the next target becomes 141, and it could potentially spike all the way down to the 138 ranges before stabilising. Global Pulse Nov 2009.

The dollar has broken out very strongly from this falling wedge formation. A strong break out is usually a very good sign that the trend is going to last a few months. Conversely, in the picture below we see that the Euro has broken down very rapidly after putting in a rising wedge formation. Global Pulse Dec 22, 2009

The Euro exhibited further weakness by its inability to rally to 146 after testing 142. After trading as high as 145 it rapidly broke down and dropped all the way down to 140 before stabilising. This violent action indicates further weakness in the Euro and is also a signal that it could now potentially trade below 130.

The dollar, on the other hand just achieved a critical mile stone by closing above 78.50 on a weekly basis. This is the first strong signal that the dollar could potentially mount such a strong rally that it could/might catch both the bulls and the bears off guard. The dollar has generated a buy on the weekly, daily and hourly time frames; if by some miracle it generates a monthly buy signal (this based on 9 years worth of data and each bar represents one month worth of data), it could change the upside targets dramatically. However, we do not want to get ahead of ourselves as new monthly signals are usually a rare development. The euro, on the other hand has generated a sell signal on the weekly, daily and hourly charts.

The final development would be a monthly close above 81 for the dollar index; if this comes to pass it should lead to a test of the old highs with the possibility of spiking as high as 91 before a top in is place..

A monthly close below 140 for the euro would be negative development and signal that the Euro could now potentially trade all the way down to 125.

.

The Euro is facing a host of problems and rather than repeating them all we have attached an extract from the Jan 5th market update titled “Euro woes” that was sent out to our subscribers that covers this topic in detail.

In terms of the dollar we can make the following assertions

Technical picture

Multiple indicators have generated a buy signal and up until very recently the dollar was extremely oversold. We also have the dollar carry over trade, if this starts to unwind in the same way the Yen did, it could lead to huge spike upwards as was the case with the Yen. In the Yen carryover trade, the New Zealand dollar was the beneficiary as individuals borrowed in Yen and jumped into New Zealand dollars. Right now most of the competing currencies are the beneficiaries of the US carryover trade, but the main one is the Euro. Thus if the unwinding process starts to gather steam the Euro, Franc, Australian Dollar, Canadian dollar, etc., could experience severe pull backs.

Mass psychology perspective

The dollar is still universally despised and so when an investment is despised to such an extent, mass psychology indicates that a strong reversal is usually close at hand. From hating the dollar the majority will slowly start to embrace the dollar and this will be what drives it even higher. Unlike contrarian investing mass psychology does not advocate taking a counter position to the masses the moment they become bullish on an investment. When they change and embrace an investment, there are 3 stages, the Luke warm embrace, the full embrace and then the euphoric embrace. We will soon approach the Luke warm stage so potentially there is still quite sometime before we hit the euphoric stage. It’s only at the euphoric stage that we will start to look for an exit.

Now normally the above two developments are sufficient for us to jump into an investment. However, this time the fundamentals are also against the Euro and instead of repeating them all over again. We are just going to post an excerpt from the Jan 5 market update below.

Euro Woes

The European Union established the growth and stability pact which imposed the following two conditions on all members

1) Deficit spending cannot exceed 3% of the GDP

2) Total Government debt should not exceed 60% of GDP

The table below clearly illustrates that many of the members are blatantly ignoring these rules.

Country	Budget Deficit as % of GDP	Debt as % of GDP
Greece	-12.7%	113%
Portugal	-9.6%	53%
Italy	-5.0%	115%
Ireland	-12.2%	65%

Spain’s budget deficit could reach 90% of GDP by 2011, currently it is roughly at 60% and rising, so we have yet another contender to join the list of troubled nations. S&P has already downgraded Spain’s sovereign AAA credit rating. In fact, at this point Germany is the only country in the EU that deserves the AAA rating, the rest all face varying degrees of trouble.

Germany the head honcho is in no mood to lend money or help its fellow members as they have their own problems. Now a strong currency makes it hard for struggling countries to make their exports attractive by devaluing their currency. Under the one currency umbrella, they no longer have this option. For example, Italy had a history of systematically devaluing the lira when faced with tough economic conditions; they no longer have this option now that they are part of the Euro. Thus the next step is to simply openly flaunt the rules. If no punishment is forthcoming for breaking these rules, then there is nothing to stop other members from doing the same.

Thus there is a very good chance that something could crack here and that the Euro might not end up being as safe as so many make it to be. While the US has problems, the problems facing the EU are starting to look even more daunting. Look at the table above all 4 nations are openly flaunting the rules laid by the growth and stability pact, actually when we add Spain to the list it the count rises to 5.

This situation is going to create rifts in the EU as weaker nations now have to adhere to a fixed standard, and as a result they are going to continue to blatantly ignore these rules. This in turn is going to seriously start to aggravate the larger stronger players such as Germany and France, which could possibly lead to the one of the following outcomes.

Some members could be kicked out

Members could start to openly revolt against these rules and make demands to ease them or ask for lengthy time extensions before coming into compliance with these rules.

Either of the developments could have a very strong negative impact on the Euro. So when we look out the window it appears what we stated many times in the past might become a reality. “Every currency is rotten” and the rats are jumping from one sinking ship to another. We are also very close to entering competitive devaluation stage (better known as the devalue or die era) where every nation in order to gain an exporting edge starts to devalue its currency.

Thus individuals should not smugly gloat over the dollar’s demise, for they might be missing the real trouble that is taking place in their own backyard. This problem facing the EU is another reason why the dollar could potentially mount a stronger rally than most expect and why it might even potentially surpass all our posted targets. When the ship is sinking panic takes over and people jump before they look. Thus if anything out there makes investors feel skittish about the Euro, it could potentially trigger a mad rush for the exits. Are we saying this is definitely going to occur? No we are not but given the large deficits 5 members in the EU are running; it’s safe to say that all is not well and that the situation could take a turn for the worse very rapidly. Greece could turn out to be another Iceland, if they do not get their act together very very fast.

The US dollar for all its current woes is at least backed by the full faith of the US government; the Euro in contrast is backed by nothing. No one nation backs it, it's backed by a group of nations whose economic conditions could/might force them to eventually abandon the Euro (strong examples right now are Greece and Italy, Spain and Portugal are not far behind). Going forward the currency markets are going to become increasingly complex and entangled.

The only real competition to the dollar is the Euro and the following two articles make a fragile situation appear even more fragile.

The only real competitor right now to the dollar is the Euro and the Euro could be in trouble. Moody’s recently made the following comments on two key members.

The Portuguese and Greek economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said. While the two countries can still avoid such a scenario, their window of opportunity ’’will not be open indefinitely,’’ Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22. Full Story

In our opinion they should be adding Spain, Italy and Ireland to the equation and we are sure several more members are going to be running into trouble soon.

Saving the euro from a Greek tragedy

EU finance ministers are pressing their indebted and riot-prone Balkan member to embrace a massive austerity plan and plug its debilitating deficit. But with markets skeptical and the appetite for more bailouts at a low, there are deepening concerns that a Greek meltdown could deal a severe blow to the very European idea of a common currency, and set off a domino effect through Italy, Spain, and Portugal. The EU's economy commissioner Joaquin Almunia warned of a domino effect, saying Greece's debt crisis is already hurting other indebted countries that use the euro as nervous bond markets hike borrowing costs on fears that Greece could default or demand an unprecedented bailout from reluctant EU states.

"The fate of one is the fate of all," he said. "This situation in Greece is having effects in other countries." Eurozone nations are trying desperately to patch up the cracks, promising Monday to do more to run their economies in a uniform way and accepting possible warnings when they go astray -- a major shift for sovereign nations that are not keen to see more EU oversight.

But Greece is the real litmus test.

If Greece can't deliver the cuts it is promising and risks not being able to repay its debt, it will likely seek a bailout from EU members to rescue it from a crisis of its own making, where failure to curb a bloated public sector and endemic corruption have dragged down economic growth. Finland's Finance Minister Jyrki Katainen bluntly said that would be asking too much. The Greeks couldn't expect "any outside help" and "it's purely up to them how well they will treat this crisis," he told reporters. Full story

Conclusion

When we take all these factors into consideration, there is a real possibility that something could go potentially wrong in the Euro zone. Greece is a ticking time bomb and not only is the government plagued with corruption, but unless they implement very severe and painful cuts, the problem is only going to get worse. A default here could trigger defaults in other weak members such as Ireland, Italy, Spain and Portugal.

The current pattern is projecting that the dollar will mount at least a 3 month rally if not longer that could lead to a new 52 week and possibly 2 year high. A strong rally in the dollar could have far reaching effects. It will certainly lead to a pretty severe correction in the commodities markets and most competing currencies will in turn experience strong pull backs, with the potential for some to completely break down.

If you have no position in the dollar wait for a pullback before opening positions in UUP and short positions in the EURO via EUO.

 

Disclaimer: we have positions in EUO and UUP.

Random Musings

Feb 13, 2010

India

We are just going to briefly touch this topic today and if time permits spend more time on it in future updates. The Indian Government announced that the economy expanded roughly at 7.2% for this fiscal year; like china this is an astounding growth rate and on the surface would justify the bullishness surrounding its stock market. However, as always there is more to the story than meets the eye.

First of all, the Indian government always has a problem in managing its budget; even in good times they manage to run a budget deficit. Another problem is that you have budget deficits on two fronts one from the central government and one from the provincial governments and their total budget deficit could run well over 12% of GDP. Such a high budget deficit puts them in the league with the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

India like most nations decided to stimulate their economy, but they decided to embark on monetary and fiscal stimulation at the same time. They lowered repo rates to 4.75%, but inflation is running at roughly 11% so what you have is a negative rate of interest here.

It held its lending rate, or the repo rate , unchanged at 4.75 percent and its reverse repo rate , at which it absorbs surplus cash from banks, unchanged at 3.25 percent.

Despite increasing inflationary pressures, the central bank has been under pressure from senior government officials to hold off from raising its policy rates, which they argue would undermine the economic recovery. Full story

When India's deficits get too high it relies on foreign financing unlike China and so while the growth rate is high, investors might not mind financing these deficits, but a slowdown could cause them to flee and produce a similar crisis as the one that is currently plaguing Greece.

India is also suffering from a drought and food prices are rising at roughly 15-18% a year. The best thing to do now would be for the governments to cut back seriously on public spending but the congress party in command has a history of spending heavily on public projects, and so we cannot expect any change here.

A look at some of the top stocks indicates that they are pulling back or building up patterns that suggest all is not well. Our advice if you are heavily invested in the Indian and or Chinese markets is to lighten up or completely get out until the situation mellows out. The current trend is very dangerous and inflationary forces are already manifesting themselves strongly India; a slowdown in economic growth could lead to rapid breakdown in the stock markets. The BSE SENSEX Index has already put in a rolling top formation (this is what took place in the Dow); a break below 15,500 for 5-7 days in a row, could lead to a test of the 12k-13k ranges. There are many good long term plays in India, some of which are IBN, INFY, RDY, etc., but right now they are all still trading at lofty levels and so a strong pull back will provide for much better entry points. It's time to be cautious; as they say it's better to be safe than sorry.

"There's no security on this earth, only opportunity." - Douglas Macarthur, 1880-1964, American Army General in WW II

 

www.tacticalinvestor.com

Oil

Feb 13, 2010

"Security is the chief enemy of mortals." - William Shakespeare, 1564-1616, British Poet, Playwright, Actor

Oil recently mounted a strong short term rally and traded as high as 77 but pulled back just as fast. This inability to hold above 74 suggests that it is still in a consolidative/corrective phase; unless it trades above 74 on a weekly basis the odds favour a pull back to the 63-66 ranges.

The intermediate pattern is still bullish and suggests that by summer oil could be trading significantly higher. The first sign of much higher prices to come will be for oil to trade past 78 for 3 days in a row or close above 84 on a weekly basis. Thus going into the summer season we could be looking at higher prices and a depressed stock market.

As long as oil remains below 74, the trend will remain negative. Currently, we have weekly and daily sell signals in effect. The daily signal is moving closer to the buy zone and a new buy signal should lead to a rapid upward move in a relatively short period of time; if this occurs we will definitely issue a long trade in our VIP futures service. However, as of yet we have no buy, so do not jump into this market, unless you are opening up long term positions. A weekly buy signal would be a very good early indication that oil is getting ready to trade well past the 93-95 ranges and possibly past 100.00

Finally oil has been trading in a channel formation that ranges from 66 to 84 for almost 8 months; the longer the channel the more explosive the move. The only problem is that channel formations do not give clues as to which direction the move is going to occur. For that we need to use other tools and that's where multi time frame analysis, daily and weekly signals, etc., come into play. Preliminary indications suggest that the next big move is going to occur towards the upside. A daily buy signal would give an early warning of this break out, while weekly buy would indicate that the breakout is gathering steam and that oil is getting ready to challenge the 90 plus ranges.

From a long term perspective any price below 65 is great play to open up new positions in oil related stocks.

Markets; time to dance or Drop

Feb 8, 2010

Patience is power; with time and patience the mulberry leaf becomes a silk gown.
Chinese Proverbs, Sayings of Chinese Origin

The following content has been extracted from the Feb 2, 2010 Market update that was sent out to subscribers.

The number of new highs has moved up slightly but the 20 day moving average of new lows is still leading although the market has mounted a very strong rally over the past 2 days. Another revealing factor is that the 100 day and 1 year moving average of new lows are virtually unchanged from last week’s numbers. This action clearly indicates that all is not well in the markets as the internal structure is weakening.

In one week the Dow was able to take out 10400 and 10200 and the interesting part is that both price points were taken out on volume of over 7 billion share.  If the Dow remains below 10,200 today it will have traded below 10,200 for 3 days and will now issue a stronger signal that it is ready to mount a decent to steep correction. The break below 10,200 is significant for it was the bottom of a channel formation that took shape from Nov 2009. A break below a channel formation, especially when the markets are extremely overbought usually produces a strong move in the downward direction. Market update Jan 26, 2010.

The Dow traded as low as 10050 and Dow futures traded as low as 9994 and then bounced back very strongly. The break below 10,200 turned the trend negative but the Dow needs to stay below this level. Trends are determined by key price points and for a trend to remain valid the market must remain below that price point.  Thus if the Dow trades past 10,200 for 3 days in a row it will neutralize the previous signal. It will not however, negate the fact that breaking below a channel formation after a strong run up usually produces a strong downward move; it will only delay the action.  We have further signs that all is not well in the markets. MMM a stock that rallied strongly with Dow actually closed lower on Monday, and today it closed unchanged; in the past two days, the Dow has tacked on over 200 points.  If you look at the banking sector many former higher flyers are also not performing all that well. 

The Dow dropped from 10729 to 10000 in a very short period of time; the intensity of this pull back was extreme. The markets had not experienced anything like this since March of last year.  Thus this pull back has fooled many players to adopt the old strategy of buying on the dip. We also have a large group of traders that sat out of the market for a very long time, and they probably view this large pull back (large only because it took place so fast) as a buying opportunity. This is more like a trap than a buying opportunity.  The safest position is to be on the sidelines until a very strong sell signal or another buy signal is generated. To let out enough steam and move the risk to reward ratio in our favour, the Dow would have to at the minimum shed 1500-1800 points, and so far it barely shed 700 points.

Despite the strong rally, the Dow has mounted in the last two days, the volume has not even hit the 6 billion mark; on Monday volume barely hit the 4.7 billion share mark, and today it came in at 5.47 billion. On the 21st and 22nd of January when the market sold off, volume spiked on both days and surged past the 7 billion mark. If you need one thing and one thing only to remind you of the very dangerous structure of this market then remember this. The Dow put in 22 new highs (this is a huge number) in a period of just a few months and not even once did the volume surge to the 6.8 billion mark let alone the 7 billion mark. Yet when the market sold off, for two consecutive days in a row, the volume surged over 7 billion shares. Remember this for it is a very important development. Long term the market is clearly treading on a very shaky ground. 

We would like subscribers to remember just how fast the Dow dropped from 10729 to 10050; this is just the prelude of what lies in store. If the markets should surge to test their old highs or maybe even put in new highs do not let this move up fool you. Pay attention to the volume and to the divergences. 

The Dow utilities broke down one month before the markets, and so they appear to have resumed their leadership role. If the Dow should rally to new highs, a failure by the utilities to match them and surge to new highs before the Dow would be another clear signal that the markets are heading into a danger zone. Copper another leading economic indicator is trading well of its highs and the Baltic dry index has put in a double top formation. 

If the Dow rallies to test its old highs without pulling back to the 9200-9400 ranges then it will be setting itself up for an extreme correction. This rapid move down was simply not enough to let out all the steam this market has built up and a strong rally now will result in a move similar to one that took place in the bond markets between Dec 2008 and July 2009. Bonds shed over 20% in 6 months, for bonds this is a massive move, so for stocks a comparable move would be in the 40% plus ranges.

Volatility readings have surged to yet another new high indicating that violent moves are going to continue to plague this market. Look how fast this market pulled back and look how fast it reversed. The moves though have still been one sided in nature (mostly to the upside) for the most part, but the next move will be for the majority of the swings to occur on the downside.

Finally, if the current daily sell is neutralized and a buy signal is issued on the daily charts, we will send out an interim update as it could be an early signal that the Dow is going to re test its old highs.  Right now we still have a daily sell signal, in effect; the weekly while closer to the sell zone has not generated a sell signal yet. 

Conclusion

If you take the very short term view you are going to get frustrated with the concepts of patience and discipline, but understand that one needs to look further out and check to see if everything is clear before jumping in.  Big gains are not made by taking the very short term view. For several months in a row we stated that palladium was an incredible buy (several times we went out and called it a screaming buy) and from Oct 2008 to March of 2009 it did virtually nothing.  Short term traders were bored by this talk but those that waited and held did very well. The same can be said for the markets; we spoke of the markets putting a bottom, well in advance of them putting in the final bottom. In fact, when we issued our targets for Dow 10,500 in Feb 2009; at that time the market was taking a beating, and we looked like bloody fools for stating that it was going to eventually rally to the 10,500 ranges.   We have run into this same situation over and over and from each encounter, we have discovered the same principle always applies.  Those who have no patience or discipline end up giving up all their gains and then some. Do not join this crowd for they are always looking for new members.

The daily trend is still down and all long term indicators are clearly stating that the risk to reward ratio is not in our favor when it comes to opening up long positions. Only very short term indicators are giving off some bullish readings and these indicators change direction very fast.  We got a small taste of how fast the markets can move downwards when the selling started.  The Dow has been trying to trade to the 10700 ranges since Nov 2009, but in just a few days the Dow dropped from 10700 back to its Nov 2009 levels. It took a few days to drive the markets back to the starting point.

Market internals are also suggesting all is not well in the markets going forward as is the volume.  Therefore, despite the urge to jump into the markets, we urge long term investors to sit on the sidelines and maybe ease into a few put positions as a hedge.. Once a full fledged/Strong sell signal is generated you can start to purchase puts more aggressively.

A full fledged sell is a sell signal from our smart money indicator. A very strong sell signal would be a sell signal generated on the weekly time frames. Right now we have a daily sell signal, in effect, only.

Looking further down the line (7-12 months ahead) there are going to be many opportunities in the commodity's sector as the world’s central governments are going to continue to destroy their currencies. Furthermore, supplies of many key commodities are declining across the board.  The precious metals sector is certainly going to shine strongly over the long term as central bankers are creating new money at a mind numbing rate. Many countries will have to restrict their mining activities because of electricity shortages; this is yet another factor that will come to play when the dust finally settles down. There are so many overwhelming reasons to support a very strong sustained rally in the commodities sector (especially in the Energy and Precious metals sub sectors) that we would have to write a whole article just to cover them; however, when it comes to the general markets there is very little to support a long term rally. In fact one would have to really push ones imagination in an attempt to find evidence that supports a long term rally in the markets.

Thus patience is warranted for many sectors that have rallied since March 09 are rotten to the core and will crumble once reality sets in.

.An ounce of patience is worth a pound of brains.
Dutch Proverbs, Sayings of Dutch Origin

 

www.tacticalinvestor.com

The Dollar

Feb 5, 2010

When you get into a tight place and everything goes against you, till it seems as though you could not hold on a minute longer, never give up then, for that is just the place and time that the tide will turn. - Harriet Beecher Stowe (1811-1896) American Novelist, Antislavery Campaigner

This is one topic we spoke of extensively over the past few months and we are going to list excerpts from some past updates with emphasis on the Dec 16th market update.

The dollar is testing a 2 year support zone, and as long as it can stay above this level on a monthly basis the outlook will remain bullish.

The dollar is also putting in a falling wedge formation which is normally bullish. It also continues to issue new positive divergence signals almost on a weekly basis.  There is also a very large short position in the dollar, so a strong move up will most likely produce a short squeeze which could lead to a domino effect. We notice that the move towards extremes is hitting almost every asset class.  We have yet to witness an extreme event which has not produced a counter move in the opposite direction that is just as strong if not stronger.

To signal that the outlook is changing the Dollar now needs to trade past the 75.80-76.00 ranges for at least 5 days in a row.  If the dollar manages to do this it will be in a position to trade to 80.  Market update Nov 24, 2009.

We have been stating that the dollar is due to for a turnaround when almost everyone has been calling for its demise. Long term we agree, but in the short to intermediate time frames we feel that the dollar is going to give one last dying gasp. No beast ever gives up and dies without putting up a tough fight and the dollar is a very huge beast

The dollar has broken out of falling wedge (bullish pattern) and the euro has broken down from a rising wedge (bearish pattern). One of the most glaring bullish factors that we feel almost everyone has missed is the action that has taken place in the Gold markets.  Gold surged to put in a series of new highs as the dollar broke down.

In the past 24 months, the dollar put in what we consider to be 3 important new lows. We are going to list the lows below in chronological order.

Date
Close 
Low of the day
Gold

March 17, 2008
71.30
70.80
Gold traded as high a 1014 on this day

April 22, 2008
71.54
71.05
Gold traded as high as 922

July 15, 2008
72.35
71.55
Gold traded as high as 986

Gold broke past its 1980 highs of roughly 850 several months ago.  When Gold traded past its March 17, 2008 high of 1014 should not have the dollar at least tested the low it put on that day.  Gold then went on to trade past the 1100 mark and then past the 1200 mark and by now one would have expected the dollar to crack wide open and at the very least trade below 71.30.  Strangely the dollar did not even trade below 74.50 and on a monthly basis it never closed below 75.

This is the single most glaring discrepancy we have noticed and yet no one is talking about it. The Gold bugs and even the main stream media now rants and raves about how everyone is jumping into Gold. They even mention central bankers who are supposedly busy purchasing gold.  Let’s stop here for a second. Were not central bankers selling Gold when it was trading in the 300-700 ranges?  Yes, everyone claims these guys are dumb and stupid, however, we think they are actually very devious buggers. They have generation’s worth of knowledge when it comes to currency manipulation. They are probably buying gold to trick the majority into thinking that Gold is going to roar upward without a correction.  After all it does not cost them anything to buy Gold does it? All they have to do is print more money.

Gold traded 21% above its March 17, 2008 high. It traded as high as 1227 before pulling back. Logically that means that the dollar should have traded at least 3-5% lower than its March 17 low. Instead it actually traded 4% higher. The above data clearly indicates that something is wrong and that the dollar instead of taking a beating was actually putting up a very strong fight.  Look how fast Gold pulled back when the dollar mounted a small rally. What do you think will occur when and if it trades to and possibly past the 80 mark?

If the above factor is not enough to make you ponder, consider the following factors

Psychologicallyevery Tom, Dick and Harry thinks that the dollar is toast, that investing in commodities (primarily Gold) and competing currencies are the best options available to them.  It is now estimated that close to 99% of traders think that the dollar is dead.  Remember that extremism always brings about the opposite result no matter how good the investment might look; in this case it would be a dollar rally.  Gold used to be viewed as a contrarian investment but if you look about now, its anything but contrarian and its increasingly becoming a main stream idea.  Markets are forward looking beasts and we think in the short to intermediate time frames the markets have already priced in the worst when it comes to the dollar.

Conclusion

The dollar is hated universally and the distaste for it now is at historic highs.  Mass psychology usually states that when something is hated so much and that the only logical place for the investment to trend is downwards, exactly the opposite occurs, and instead it mounts a very strong rally.

A strong dollar rally will most likely put a damper on the market's ability to rally strongly, produce a pullback in the commodities sector with the possibility of a very strong pull back in the precious metal's sector, bonds will drop (rising interest rates equate to lower bond prices), etc. The fate of the dollar is definitely going to be a key factor in determining what several markets will or won’t do next year.

The dollar could either give a very strong confirmation that it is going to trade to and past 80 by closing above77.50 on a weekly basis or it can do this in two stages.  It can trade past 76.43 on a weekly basis and then trade past 77.50 for 3 days in a row.  The second path is slightly more bullish and could be warning that the dollar is going to trade past 82.00.

Every asset class has rallied in the face of a lower dollar, thus a strong rally in the dollar could prove detrimental to the entire market.  Market update Dec 16, 2009

Thus individuals should not smugly gloat over the dollar’s demise, for they might be missing the real trouble that is taking place in their own backyard.  This problem facing the EU is another reason why the dollar could potentially mount a stronger rally than most expect and why it might even potentially surpass all our posted targets. When the ship is sinking panic takes over and people jump before they look.  Thus if anything out there makes investors feel skittish about the Euro, it could potentially trigger a mad rush for the exits. Are we saying this is definitely going to occur? No we are not but given the large deficits 5 members in the EU are running; it’s safe to say that all is not well and that the situation could take a turn for the worse very rapidly. Greece could turn out to be another Iceland, if they do not get their act together very very fast. Market update Jan 5th, 2010

So how do things look going forward?

First the pattern changed slightly indicating that the dollar had to close above 78.50 on a weekly basis instead of 77.50; it did this with relative ease. It almost traded to 80 before pulling back.  A close above 81 on a monthly basis will be a very strong signal for the dollar; it could potentially trade to new high and spike as high as 90; they key word to focus on is potential.. Adding more firepower to the dollar is the current turbulent situation facing the EU zone.  The fact that all the big EU players have come out and stated that they are not going to help Greece reveals some important data from a mass psychology perspective.

If you are not going to do something you do not have to keep repeating it. Secondly not everyone needs to come out and say the same thing at the same time. Thirdly, if you can handle the problem then all you have to do is shut up and follow it with actions; actions speak louder than words. So far everything has been done in reverse order. Our conclusion is that Greece is in serious trouble and the politicians there do not want to really implement the necessary painful cuts as it could mean the loss of their jobs. France and Germany already know this, but they are making it look like Greece is on its own.  If Greece gets a helping hand, the other beggars will start to line up. The next on the list could be Italy followed by Ireland, Spain and Portugal.  If the big players help it will have a negative impact on the Euro, if they don’t help and one of the member’s defaults the outcome could be 10 times as worse.

If this situation continues Germany might just decide to pull out of the EU, and if they pull out the EU is basically dead. At this point, this is a very dramatic move, and we are not stating it’s going to happen, but individuals are getting tired of helping other countries when they are having a tough time back home. The days of handouts are coming to an end. We now have several phases in action.

The devalue or die currency battle.

Take care of your problems or rot away stage (basically survival of the fittest stage)

The protectionism era, where nations start imposing huge tariffs to make local products competitive with imported products; this will be true, especially with Chinese made products.

In terms of the dollar, we have a daily and a weekly buy signal in effect. Thus the current outlook on the dollar still remains rather bullish. On the Euro, we have a weekly sell and a daily sell signal in effect and so the outlook remains bearish. It could potentially trade all the way down to the 125 ranges.  If the dollar should issue a monthly buy signal, the outlook for the dollar will turn extremely bullish, and it will be a sign that Gold could potentially correct/consolidate for the next 7-9 months before mounting another strong rally.  This in turn will increase the odds that the entire commodity’s sector is going to experience a rather strong pull back. The current action in Copper and the oil markets indicates that all is not well and the other sectors could soon follow their lead.

Do not focus on just one tree but make sure you keep your eyes on the forest too and vice versa.

There is genius in persistence. It conquers all opposers. It gives confidence. It annihilates obstacles. Everybody believes in a determined man. People know that when he undertakes a thing, the battle is half won, for his rule is to accomplish whatever he sets out to do. Orison Swett Marden (1850-1924), American Author, Founder of Success Magazine

 

www.tacticalinvestor.com

Overseas investments and the Dollar

Technorati Tags: Overseas Investments and the dollar by Sol Palha of the tactical investor

Jan 26, 2010

“For purposes of action nothing is more useful than narrowness of thought combined with energy of will.”

Henri Frederic Amiel.1821-1881, Swiss Philosopher, Poet, Critic

The theme for the past few years has been to diversify into overseas markets. This theme has been taken too far. Money has flowed into these markets at stunning rates (especially china) and if the dollar should surprise everyone by mounting a strong rally, the biggest markets to get hit will be the developing markets. The theme being pumped now in these markets is that this is where the growth is (long term yes, but in the intermediate time frames these markets are more than ready to mount a strong correction). This mantra is especially true of China, where several sectors are simultaneously experiencing bubble like formations.

China is already facing a real estate bubble in many parts of the country. There are many so called super malls where in some cases more than 50% of the shops are boarded up because of lack of traffic. Too many stores and not enough consumers; the next to get hit will be the residential real estate sector.

Another bubble in the making could be the railway bubble. It has spent billions of dollars on laying high speed tracks throughout the country and will continue to do so at a break neck pace. However, commuters are not embracing these new trains for the cost is incredibly high, thus the investment is not going to pay for itself for a long time to come.

The masses are being driven to Gold and real estate with the belief that prices can and will only go up.  We could go on and on but that’s not the point. The point of this story is to pay close attention to the dollar.  Pay attention to these two levels for they could provide very early clues as to how high the dollar is going to rally.

A weekly close above 78.50 could be the very first strong signal of a stronger than expected rally. Even the worst investments, never trade in one direction forever; there are always counter rallies. The strength of the rally is determined by two factors

1. How fast and far it pulled back. In the dollars case the correction was very hard and extreme
2. How despised this investment is. In the dollar’s case it is almost despised universally.

We now live in a time of extremes; one extreme move leads to another and each move seems to build up in intensity. We are only harping about this topic so much because of the far reaching implications a strong dollar rally could have in the months to come. 

The only real competitor right now to the dollar is the Euro and the Euro could be in trouble.  Moody’s recently made the following comments on two key members.

The Portuguese and Greek economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said. While the two countries can still avoid such a scenario, their window of opportunity ’’will not be open indefinitely,’’ Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22.  Full Story

In our opinion they should be adding Spain, Italy and Ireland to the equation and we are sure several more members are going to be running into trouble soon. 

Saving the euro from a Greek tragedy
EU finance ministers are pressing their indebted and riot-prone Balkan member to embrace a massive austerity plan and plug its debilitating deficit. But with markets skeptical and the appetite for more bailouts at a low, there are deepening concerns that a Greek meltdown could deal a severe blow to the very European idea of a common currency, and set off a domino effect through Italy, Spain, and Portugal. The EU's economy commissioner Joaquin Almunia warned of a domino effect, saying Greece's debt crisis is already hurting other indebted countries that use the euro as nervous bond markets hike borrowing costs on fears that Greece could default or demand an unprecedented bailout from reluctant EU states.

"The fate of one is the fate of all," he said. "This situation in Greece is having effects in other countries." Eurozone nations are trying desperately to patch up the cracks, promising Monday to do more to run their economies in a uniform way and accepting possible warnings when they go astray -- a major shift for sovereign nations that are not keen to see more EU oversight.
But Greece is the real litmus test.

If Greece can't deliver the cuts it is promising and risks not being able to repay its debt, it will likely seek a bailout from EU members to rescue it from a crisis of its own making, where failure to curb a bloated public sector and endemic corruption have dragged down economic growth. Finland's Finance Minister Jyrki Katainen bluntly said that would be asking too much. The Greeks couldn't expect "any outside help" and "it's purely up to them how well they will treat this crisis," he told reporters. Full story

Conclusion

The current rally in the dollar and the fact that it could potentially trade much higher, in no way negates the fact that the dollar is in a long term downtrend. In the future it might not be a simple game of “as the dollar falls all competing currencies must rise”; going forward competing nations are going to have to provide a reason for investors to jump into their currencies. Resource based nations such as Australia and Canada will be in a position to do this but the Euro might find itself in a much harder place going forward. In Asian continent the Yuan also makes for a good long term investment.

In the end, the ultimate currency is still Gold.  Sadly most do not even view it as an alternate currency; to most it’s just another metal, albeit a pricier one and therein lies the opportunity. For the longer the masses ignore it the higher it will trade, for a day will come when they will stampede into the precious metal sector. 

“I did not wish to take a cabin passage, but rather to go before the mast and on the deck of the world, for there I could best see the moonlight amid the mountains. I do not wish to go below now.”

Henry David Thoreau, 1817-1862, American Essayist, Poet, Naturalist

Gold

Jan 26, 2010 

 

"If Columbus had turned back, no one would have blamed him. Of course, no one would have remembered him either." ~ Source Unknown

We provided many reasons in the last few articles for the potential for the dollar to rally strongly and for Gold to possibly mount a rather strong correction. We did however, forget to mention the following data in our articles, even though we spoke of this to our subscribers. This is data is very relevant even as when combined with the prior facts mentioned in the previous articles clearly illustrates that all is not well.

The first massive anomaly was the fact that while Gold went on to put in a series of all time new highs, the dollar instead of putting in a series of all time new lows, actually was trading roughly 4% higher from its all time low when Gold hit 1227. The second anomaly is revealed in the following charts.

While Gold went on to put in a series of new all time highs, the XAU, HUI and GDX instead of matching bullion highs failed to trade to new highs. At the very least the Gold bugs Index (HUI) should have put in 1-2 new highs. The fact that all 3 failed to put in a series of new highs is a very powerful intra market negative divergence signal, and such signals generally lead to strong corrections.

The dollar on the other hand, instead of trading below its March 2008 lows actually traded 4% higher, the majority are still against the dollar (though this stance is softening slightly now) and think it's going to continue falling with no counter move in between and if that's not enough we have the above developments.

Conclusion

There are so many facts that clearly validate that Gold should continue to rise and the dollar should sink into the dust. However, the worst news for now has been priced into the dollar and when too many people start to take an extreme view, a turnaround is usually close at hand. Given the fact that the Dollar has mounted an impressive rally in the last few weeks and that there are so many large discrepancies surrounding Gold's surge to new highs, caution is warranted.

The correction in Gold will only gather steam if a weekly sell signal is generated. So far, it has generated a daily sells signal and if a weekly sell signal is not generated then Gold will most likely trade no lower than 990.

Investors should keep the following facts in mind that even though the odds are rather high that the dollar is going to mount a strong rally, the long term picture for the dollar is still rather bleak. We are not long term dollar bulls, and we have not changed our long term views on the precious metal's sector. Over the long term, we still remain very bullish on this sector.

"The mode in which the inevitable comes to pass is through effort." ~ Oliver Wendell Holmes, 1809-1894, American Author, Wit, Poet

The Euro/Dollar Dance

Jan 22, 2010

Technorati Tags: The Euro and the dollar by Sol Palha. Dollar is set to mount a strong rally,while Euro is going to mount a strong correction

Imagination is more important than knowledge. For knowledge is limited to all we now know and understand, while imagination embraces the entire world, and all there ever will be to know and understand.

Albert Einstein ,1879-1955, German-born American Physicist

In the last two weeks of December we made the following comments

In the short to intermediate time frames, we would like to point to several new factors, which suggest that Gold could potentially pull back more, the dollar could mount a stronger than expected rally which should lead to a rather strong pull back in the Euro and other competing currencies. Certainly, the dollars rapid move from 74.57 to a high of 78.50 has caught a lot of traders with their trousers down. Full Article

And on the 16th of December we made the following comments

In the short to intermediate time frames the dollar is projected to mount a rally; it has already mounted a rather decent rally from its lows. Gold and most competing currencies are expected to pull back. We mentioned this in our recent article “The Gold bull; time for a breather or? ”. Since then Gold has already shed 100 bucks and the Euro has dropped from a high of 151.37 to 145.33 in a few days, a huge move for any currency. The sentiment against the dollar is extremely negative and has hit an extreme note; extreme movements always produce countermoves that are equally extreme if not stronger. Thus the dollar could potentially mount a very strong rally surprising even the most bullish of optimists. Full Article

In fact in December alone we published 3 articles on Gold, the Euro and the dollar a rare anomaly as we normally do not publish more than one article per month on a given topic. Since then the Euro has pulled back tremendously; from low to high it has shed over 7%. This is a huge move when one considers that it has taken place in less than 30 days. The dollar from low to high has tacked on over 6% and Gold has shed roughly 137 dollars.

So where do we stand now?

The dollar is very close to hitting a critical point; it needs to close above 78.50 on a weekly basis. A weekly close above 78.50 will be the first sign that the dollar is getting ready to potentially mount a much stronger rally. We stated in previous articles and repeatedly warned our subscribers that a stronger dollar would eventually affect the equity markets. Initially, the Markets ignored the strength in the dollar and traded higher in tandem with it, but now the tide has turned and the action of the last 3 days, indicates that the markets are long overdue a correction.

The Euro demonstrated further weakness by being unable to re test the 146 ranges; instead after trading as high as 145, it reversed course and traded as low as 140 before stablising.

A monthly close over 81 and a weekly buy signal from our indicators (weekly buy signals are based on 4-6 years worth of data, with each bar representing one week’s worth of data) would be one of the strongest signals, we could get in terms of the dollar mounting a stronger than expected rally.

On the same token a weekly sell signal with a monthly close below 140 for the Euro would be a very strong indication that the Euro could trade down to the 130 ranges and possibly spike as low as 125 before attempting to put in a bottom.

If Gold trades below 1080 for 2-3 days in a row, it should lead to a test of the 980-990 ranges. A weekly close below the 950-970 ranges would be the first sign that Gold could potentially mount a much stronger correction than most are expecting.

The Euro is facing a host of problems and rather than repeating them all we have attached an extract from the Jan 5th market update titled “Euro woes” that was sent out to our subscribers that covers this topic in detail.

Euro Woes

The European Union established the growth and stability pact which imposed the following two conditions on all members

1. Deficit spending cannot exceed 3% of the GDP
2. Total Government debt should not exceed 60% of GDP

The table below clearly illustrates that many of the members are blatantly ignoring these rules.

Country
Budget Deficit as % of GDP
Debt as % of GDP

Greece
-12.7%
113%

Portugal
-9.6%
53%

Italy
-5.0%
115%

Ireland
-12.2%
65%

Spain’s budget deficit could reach 90% of GDP by 2011, currently it is roughly at 60% and rising, so we have yet another contender to join the list of troubled nations. S&P has already downgraded Spain’s sovereign AAA credit rating. In fact, at this point Germany is the only country in the EU that deserves the AAA rating, the rest all face varying degrees of trouble.

Germany the head honcho is in no mood to lend money or help its fellow members as they have their own problems. Now a strong currency makes it hard for struggling countries to make their exports attractive by devaluing their currency. Under the one currency umbrella, they no longer have this option. For example, Italy had a history of systematically devaluing the lira when faced with tough economic conditions; this option is no longer available. Thus the next step is to simply openly flaunt the rules. If no punishment is forthcoming for breaking these rules, then there is nothing to stop other members from joining the party.

Thus there is a very good chance that something could crack here and that the Euro might not end up being as safe as so many make it to be. While the US has problems, the problems facing the EU are starting to look even more daunting. Look at the table above all 4 nations are openly flaunting the rules laid by the growth and stability pact, actually when we add Spain to the list, the count rises to 5.

This situation is going to create rifts in the EU as weaker nations now have to adhere to a fixed standard without having any flexibility to adjust monetary policy based on their own needs; the only option then is to openly flaunt these rules. This in turn is going to aggravate the larger stronger players such as Germany and France, which could possibly lead to one of the following outcomes.

Some members could be kicked out (very dramatic move and not likely right now)

Members could start to openly revolt against these rules and make demands to ease them or ask for lengthy time extensions before coming into compliance.

Finally, the richer members might be forced into bailing out their weaker neighbours.

Either of the developments could have a very strong negative impact on the Euro. So when we look out the window it appears what we stated many times in the past might become a reality. “Every currency is rotten” and the rats are jumping from one sinking ship to another. We are also very close to entering competitive devaluation stage or what we have coined as “the devalue or die era”, where every nation in order to gain an exporting edge starts to devalue its currency.

Thus individuals should not smugly gloat over the dollar’s demise, for they might be missing the real trouble that is taking place in their own backyard. This problem facing the EU is another reason why the dollar could potentially mount a stronger rally than most expect and why it might even potentially surpass all our posted targets. When the ship is sinking panic takes over and people jump before they look. Thus if anything out there makes investors feel skittish about the Euro, it could potentially trigger a mad rush for the exits. Are we saying this is definitely going to occur? No we are not but given the large deficits 5 members in the EU are running; it’s safe to say that all is not well and that the situation could take a turn for the worse very rapidly. Greece could turn out to be another Iceland, if they do not get their act together very very fast.

Very important final factor

The US dollar for all its current woes is at least backed by the full faith of the US government; the Euro in contrast is backed by nothing. No one nation backs it, it's backed by a group of nations whose economic conditions could/might force them to eventually abandon the Euro (strong examples right now are Greece and Italy, Spain and Portugal are not far behind). Going forward the currency markets are going to become increasingly complex and entangled. This is the reason why we have pushed our subscribers over the years to make sure they have a core position in bullion (Palladium, Silver and Gold).

Conclusion

The potential for the dollar to mount a very strong rally increases with the passage of each, especially in light of the recent negative developments in Greece. A breakdown in Greece could trigger a domino effect by first affecting other weak countries such as Italy, Ireland, Spain and Portugal. A strong rally in the dollar by default is going to lead a strong pull back in the Euro and this could in turn lead to a much stronger than expected pull back in Gold.

However, the bright spot is that a strong pull back in Gold should be viewed as a tremendous buying opportunity if it comes to pass. The long term trend of the dollar is still down and is not likely to change but it could produce a lot of acid for those betting against in the short to intermediate time frames. The long term in the Gold is up and the pattern is projecting much higher prices in the future, though in the short term the volatility is going to give short term traders a headache. The Euro on the other hand is the one where potentially things could fall apart. Several members are in trouble and thus one has to be open to the potential that the Euro could fall apart. The key word to focus on is potential.

Remember, if you ever need a helping hand, you'll find one at the end of your arm ... As you grow older you will discover that you have two hands. One for helping yourself, the other for helping others.

Audrey Hepburn

Related articles
The Dollar, Euro and Gold
The Gold Bull; time for a breather or?
Bonds and Gold

Bond and Gold, 16 Dec 2009

 

 

"By nature man hates change; seldom will he quit his old home till it has actually fallen around his ears." ~ Thomas Carlyle, 1795-1881, Scottish Philosopher, Author

The Fed has been keeping interest rates very low hoping that both business and consumers will start to spend money they don't have as they used to in the past. In reality, consumers continue to borrow less. Consumer borrowing has dropped for 9 months in a row. The above chart of the 30 year bond indicates that long term yields have been slowly rising. The bond market determines long term rates and not the Feds. Rising rates tend to favour a stronger dollar as higher interest rates make a currency more attractive. And a rising dollar will lead to drop in the value of Gold and many other commodities out there. The dollar is on the verge of crossing a very important threshold, and if it manages to do this then all competing currencies, commodities in general are going to experience large downward moves. Over the long run, a rising rate environment is bullish for Gold; we are, however talking about the short to intermediate term outlook. The dollar has already traded past 75.80 for 5 days in a row so the first confirmation is in place for a possible move to the 80-82 ranges.

The strength in the dollar is not going to be along term development. It will resume its long term down trend and those that use this strength to open positions in bullion and commodities related stocks will do well. As the dollar loses its value, these investments will over inflate and more than compensate for the drop in the value of the dollar. The dollar has lost roughly 40% of its value to date and in the same time Gold has risen roughly 400% from its low and Silver roughly 500%.

Additional factors to consider

The current action in the Gold markets has a lot to do with speculation (traders actually speculating via paper instruments such as derivatives and futures and not by purchasing actual gold bullion); once again, reminiscent of the top oil set in July of 2008. A lot of the current action also has to do with many big gold producers such as ABX finally deciding that its time to close their hedge books. Why now, why not earlier when Gold was trading at say 400 or 500 or for even 800 an ounce. The same question can be poised to central bankers. Why are they buying now when they were almost giving gold for free a few years ago? They are not as stupid as most Gold bugs make them out to be. Remember they have decades of experience when it comes to fleecing individuals and manipulating the currency. Perhaps we should view this action from a contrarian perspective and sell when they buy and buy when they sell.

John Paulson, the guy who made a fortune by betting against the housing industry has decided late in the game that its time to take a huge stake in Gold. His firm has a 12% stake in AU (Ashanti mining) which amounts to over 40 million shares. They also own over 30 million shares in KGC. Paulson also owns over 31 million shares in GLD making him the single largest share holder. He is so bullish he plans on opening up a Gold fund and deploying 250 million of his own money. History illustrates that individuals that strike it big once rarely are able to land a big score again. These chaps fail to understand that luck had a big role to play in their win.

Rising prices, dropping demand, excessive bullishness, and a whole bunch of speculators flocking into the market are usually the perfect recipe for a top.

Conclusion

In the short to intermediate time frames the dollar is projected to mount a rally; it has already mounted a rather decent rally from its lows. Gold and most competing currencies are expected to pull back. We mentioned this in our recent article "The Gold bull; time for a breather or?." Since then Gold has already shed 100 bucks and the Euro has dropped from a high of 151.37 to 145.33 in a few days, a huge move for any currency. The sentiment against the dollar is extremely negative and has hit an extreme note; extreme movements always produce countermoves that are equally extreme if not stronger. Thus the dollar could potentially mount a very strong rally surprising even the most bullish of optimists.

We will examine the dollar- Gold relationship more closely in a follow up article scheduled to be published this week. Gold put in several new all time highs and thus the dollar should have at least put in one if not several new all time lows; this did not occur and it has to be viewed as strong negative development for Gold, at least in the short to intermediate time frames (3-6 months).

Short term to intermediate term outlook

Impulsive traders who jumped in at bought Gold in the 1100-1200 ranges could take quite a wallop in the short term, if the dollar mounts a strong rally. If, for some reason the Chinese stop providing a floor for Gold in the 900-1000 ranges, then Gold could drift even lower. While the long term up trend is still in force for Gold, painful corrections can occur on the shorter term time frames. All this should be viewed as good news for if it comes to pass it will provide the astute investor with yet another lovely buying opportunity. If Gold breaks below the 1080-1100 ranges for several days in a row (3-5), it should lead to a test of the 980-1000 ranges. Ultimately, the correction in the Gold market will be based on how strongly the dollar rallies.

Almost all the sovereign funds took profits on the money they had invested in the financial sector and presumably these profits are still being held in dollar. Holding onto cash is indirectly going long the dollar. Perhaps these chaps are cashing out now, waiting for the dollar to rally and for Gold to pull back.

Long term outlook

Even though the dollar could potentially mount a strong rally in the short to intermediate time frames, its long term outlook has not changed. It's projected to put in a series of all time new lows and could lose up to 60% of its current value before some sort of bottom takes hold or a new currency is issued.

In the 70's the money supply was increased by roughly 12%-14% and to combat inflation the Fed's raised interest rates all the way up to 20% ranges. Helicopter Ben has increased the money supply by a stunning 120%. How high will they have to raise rates eventually to rein inflation? We suspect that rates could one day be trading well past the 20% ranges and might even surge past the 25% ranges. The only reason we are not seeing strong signs of inflation is because the banks are holding all the money that the Fed has lent them. Eventually, this money will find its way to the streets and that's when things will start to heat up. How will this economy deal with such high rates? Forget about rates in the 20% ranges, a move to 10% will have a huge impact and those that did not take the time to prepare could be in for one massive shock. We still think that what we have seen up to now is only a prelude of what lies ahead in the future. We stated before that the next 2-4 years are going to bring about unprecedented levels of change. Gold thrives in such an environment, so the long term outlook remains very bullish for the precious metals sector.

"Learn from the first and be better for the next" ~ Uyen Mai

TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

www.tacticalinvestor.com