Technician Charles Nenner: Stock Market Still Correcting−S&P 1325 A Critical Level

JIM: Joining me on the program is Charles Nenner of Charles Nenner Research, and Charles, let’s take it from the top, beginning with the S&P and the markets. On the day you and I are speaking, the markets are pulling back; we’re down 1 to 2 percent depending on the index for the week.

You’ve been out of the S&P at around 1400, and let’s talk about a critical level that you are watching, which is 1325. Let’s talk about that. [18:11]

CHARLES: Yes. That’s our short term price target on the downside. If it holds, then we could see another bounce and we might go back in the market. If it breaks, then we’re in for a longer period of correction. I think it’s going to hold. I don’t think we go much above the highs that we've seen this year, and we're going to make a distribution top which means it’s going to take a while before we finish the top. [18:32]

JIM: Charles, if we do not break below 1325, do we just sort of remain in a trading range in between let’s say 1325 and where we are today, just consolidate here, or do you think eventually it breaks down?

CHARLES: Yes. It eventually breaks down. But if we hold to the 1325, especially if the NASDAQ doesn't give a sell signal, that’s the NASDAQ 100 not breaking below 2600, I think we go back to the highs on all the markets. And we're forming a top. It’s going to take a while, but I think that if 1325 holds, we’re going back in. [19:05]

JIM: Let’s move on to a topic that has been perplexing for many, especially after we've seen a long period of run-up, which is the gold and silver market. On the day you and I are speaking, gold is still positive for the year, barely holding on to positive gains; likewise, with silver. You think that the precious metals still continue on a sell signal and you’re downside target which for a lot of gold bulls and silver bulls some would find disturbing, but your downside target for gold is 1359 and downside target for silver is 23. [19:43]

CHARLES: Yeah. I published today those numbers. I said if they’re not confirmed, which means instead we get a little bit more downside, they’re going to be confirmed. Right now it’s just on the edge, so we cannot talk about it, but if we go another 20, 30 dollars lower then those downside targets are confirmed. We got out of gold at 1900. I said “we”; not everybody went out, especially also not the people that take my research because everybody was so bullish and it’s interesting that -- and I wrote about it today that people they say, “it’s okay, I can handle a correction.” Because I always like go out of markets when the cycle tops and see what happens. The chances are that it’s very good to be out. 

So people were holding on to it and holding on to it and what you see now is in theory it sounded good, but in practical life the losses are becoming too big and now they’re selling anyway and at hundreds of dollars below where we went out. So I always tell people I don’t think anybody is strong enough to say I’m in there for the long run and I can handle a big correction of 20, 30 percent because experience teaches us that in the end when the losses are too big, those people are going to sell anyway. So they might as well sell when our cycle is topping and be safe. [20:52]

JIM: Charles, for eleven or twelve years, we've seen the price of gold go up every single year, non-stop. We've had a positive gain for gold. It almost became too easy; you held on to it. And I think people forget that if you go back to let’s say the last gold bull market, and I know that you do a lot of cycle work, but if I was to go back into the seventies when we had that first big run-up from $35 an ounce to $200, for almost a two-year period gold went from 200 to 100. Is this a cycle similar to that? [21:26]

CHARLES: No. No. I think the bull market will continue for a couple of years and I’m not worried about this being the end of the bull market. It’s just a normal correction which you have in bull markets when everybody is bullish and everybody bought gold, there’s nobody else to buy it so it cannot go higher. So we use the cycles in order to establish when it’s a high and at a low, and that keeps you actually out of trouble, so we think we’re going to have a nice entry point, but not yet. [21:50]

JIM: Now, also breaking down as you have a sell signal on copper with downside price target of $3.49. We're roughly at $3.72-$3.73. Is that your ultimate low or is that an intermediate low? [22:07]

CHARLES: No. No. That’s short term. When we were about 4.00 on copper then we said this is a major top. I think it’s making a major top, and one of the reasons is that the economy is going to roll over and be weak again. So that’s why you see crude and copper and other metals being in a correction. So I think longer term it’s not the place to be. [22:25]

JIM: Now let’s talk about the energy markets. We've seen crude prices pull back and I think you still have a sell on crude oil, but natural gas has picked up certainly. What are the critical levels for oil that you see, and likewise with natural gas? [22:42]

CHARLES: Well, I said that we saw 95 low a couple of times this week, also today I think for crude. And we were looking for I think 93.50. I said if 93.50 breaks, you made your trouble, it could go as low as 68; but of course, it’s a little mature. [22:57]

JIM: Now let’s move on to bonds because if I look at TLT, TLT is year to date we're down about one percent in terms of total return. The yield is below 3 percent. If we use that as a proxy for let’s say bonds or the long bond, you still think we have one more rally in place? [23:17]

CHARLES: Yeah. We have one more rally in place which we're playing on the long side. I agree with everybody who says there is not much value in bonds. It’s just a matter of timing. So I think we have another one or two or maybe three months on the upside and that will end the major bull market in the bonds. And then you have a total reversal for the next 30 years. It will start slowly but interest rates will start going up. The United States will get in trouble; the economy’s going to be weak; people don’t trust it anymore. You’re going to have in 2014 trouble with the dollar. And I think that will move interest rates up. And one of the problems is that there’s a lot of debt in the United States -- short term debt. And when the rates move up, there’s going to even be more trouble. 

So I see a lot of trouble ahead. It’s just a matter of timing. And I think that’s why interest rates are moving up. Not so much because the economy is going to be weak or there is going to be a huge inflation, but because people really don’t want to invest in the United States anymore. [24:07]

JIM: You know, when I look at the bond markets globally, there’s been what we call the safety trade. I mean if you were in Treasuries last year, you made a lot of money. The scare over the debt crisis, what was going on in Europe, Treasuries were a big beneficiary. It seems like that’s taking place in Germany right now. German Bund yields are down to about 1.5 percent; we had the elections last week where Europe seems to be going in a little different direction. Let’s talk about the Bunds and how low does it get and does it eventually turn around, likewise, as US Treasuries do? [24:42]

CHARLES: Well, I’m taking to you from Amsterdam. I can tell you people are very depressed. I came from the United States a week ago; I’m really amazed at how depressed they are over here. And also the economy is very depressed, therefore the recession probably goes to depression. And with all the scares that are out there, so it’s no wonder people want to go into Bunds. The interesting thing is that once interest rates are going up in the United States, you know, related to the reasons I talked about and since the difference between all the bond markets cannot be too huge so also the interest rates in Europe have to go up. And that’s really going to be a catastrophe. [25:13]

JIM: I guess the question that comes to mind, Charles, is with all these difficulties that they have, austerity, the growing budget deficits and many of these peripheral countries have had difficulty meeting the austerity measures, does the euro hold? [25:28]

CHARLES: If some weak countries are going to leave the euro pact, then it could even be bullish for the euro because then people have more trust for the euro. What we see in the markets is everything is relative. Nobody wants to have its own currency; no country wants it. So if the euro holds up, it’s because they don’t like the dollar. But in the case that the weak countries will leave the euro, then I think it’s bullish for the euro. [25:52]

JIM: So the countries that are really the problem countries leave and what’s left is a stronger euro. It’s almost like restructuring where the company comes back stronger. [26:01]

CHARLES: Absolutely.

JIM: You also have some sells on the Australian dollar and the Canadian dollar. Is this reflective of what’s going on with let’s say the natural resource trade and what’s happening with the weakness in natural resources? [26:17]

CHARLES: Yeah. It’s totally correct. And also the gold prices go down. And there’s not too much trust in the economy and interest rates were lowered in Australia, so there’s a lot of reasons people are not so much into the Australian dollar at the moment. I still think it’s a good currency, but if you want to see what we do, just go to our website, go to Charles Nenner Research and see how those cycles look on the euro and Australian dollar. And as long as cycles are not showing a bottom, there’s simply no reason to buy. And we can come up with all kinds of reasons why something goes up or down, but in the end it’s just the cycle that predicts how people feel. If they think, well, things are not so bad, let’s stop buying a currency. And if they think things could be worse, they’re selling the currency. [26:57]

JIM: I want to come back to the bond market. And the reason I want to do that, Charles, is there has been inflows by the public into bonds since 2009. In fact, in the month of April, we were setting record levels. So you still see that the bond market has room to rally, but more critically, once you reach that rally high -- and this is something I think investors don’t think about -- historically, these long movements in bonds are decades long. And you talked about a 30-year cycle, just as we've had a 30-year cycle on the way down, we begin climbing that mountain again and we have a 30-year upward cycle with rising interest rates, which I think is going to put a lot of stress on a lot of governments given the levels of debt. [27:41]

CHARLES: We are looking at a TBT's iShares that actually goes up if the bond market goes down. And I wrote a while ago that only if you think that rates will never go up anymore can you lose on this trade. And if you think, you know, even if you don’t want to look at what we’re doing and you don’t want to time the market, it doesn't matter if you buy them. And after a couple of months it doesn't matter. So I think soon TBT is a great investment because you and I, probably and everybody is convinced that one time interest rates will start going up and the TBT will start going up. [28:11]

JIM: So if you were to stand before a group of investors right now, from the way you see the markets playing out, what would you be doing right now? Would you be offensive? [28:23]

CHARLES: Well, first of all, I would explain how you’re always being lured into the wrong markets. So a lot of small investors are now piling up their losses on the gold market and the next bubble to burst is the bond market. So the first bubble they were in was the housing market, and then it was the stock market and then it was the gold market and now, like you said, correctly, so everybody is in the bond market. And again it’s a bubble because if the Fed wouldn’t be doing what it wouldn't be doing, then interest rates would be much higher. 

So first of all, I’ve said you have to understand that most people when they rush in in a certain investment, that’s mostly the end of it. And like I said, take a look at all those bubbles and agree with me that these low interest rates on the 10 year are not going to continue, so don’t get lured away because if interest rates are going up to 7, 8, 9 percent plus inflation and you only get 1.8, 1.9 if you go into the 10-year bond now, for the rest of your life you’re going to be in major trouble. [29:16]

JIM: And so coming back to gold. Even though you expect lower gold and silver prices, this is nothing more than a long overdue correction and that the bull market should continue; would that be correct?

CHARLES: That’s correct. The only problem is if those metals go lower and everybody starts being afraid and everybody is going to miss the bottom again, and that usually is because they didn’t go out at the top and they’re just hoping it goes back in and nobody is strong enough to buy at the bottom. So that’s why what we do with the cycle is very important where once again, we're out at 1900; we’re sitting aside, we've seen the massacre over here, so we don’t get emotionally involved, we’re not losing money and once we see the low we're strong enough to go and buy again. [29:55]

JIM: Well, Charles, you've been always dead on accurate and I appreciate you coming on the program. If our listeners would like to follow more about the work that you do, how could they do so please?

CHARLES: The easiest thing is to go to Google, put in Charles Nenner. You get to Charles Research Center and there, after you see how we work, it says “contact” and you can say, I request to see the research for a while and you can judge for yourself. [30:20]

JIM: All right. We've been speaking with Charles Nenner of Charles Nenner Research. Charles, thanks for joining us on the program. Always doing great work and thanks for coming on.

CHARLES: You’re welcome. [30:30]