Fortunes will be won or lost based on which of these monetary events take hold in the next few years. At the moment, there is precious little truth that can be gleaned from the charts. Yet, many important charts are developing in a way that will enable intelligent analysts and traders to get the answers in a timely enough fashion so that they can position themselves on the “right side” of what will happen in the long term. Some of these charts will be highlighted tonight.
Monetary Inflation or Debt Liquidation Deflation (or Goldilocks)
The ratio chart below shows the relative strength of gold compared to the CRB index which is a basket of commodities. From the mid-1990’s until 2006, the ratio has had important long term resistance at 1.6. However, there was a “breakout” and sharp uptrend that ensued and accelerated into a parabolic move in January of this year, where the ratio topped out at about 2.55. This consistent and accelerating 2 year old trend was overdue for a correction, and the parabolic shape of the final bullish move suggested that the following overdue correction would be a sharp one. Yet since the 2nd half of 2008, the bullish trend has resumed and a move of the ratio above 2.55 would signal a resumption of the long term bull market in gold versus commodities. The inflationary scenario would prevail.
Short term, the chart is overbought and a correction appears due.
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Whether the inflation or deflation scenario will occur will be dependent on how gold acts above 5, or below 0. Note the importance of both of these technical levels in the weekly chart, below. If chartwatchers were watching the 5 area, they would have been well served to hold on for the “whipsaw” (Whipsaw - an apparent breakthrough a technical level, followed by a sharp move to the opposite direction designed to fool amateurs). If gold breaks through 5 to the downside, then the deflation scenario will be in play for the long term future. If gold breaks through the 0 level, that would signal the continuation of the long term bull market in real money along with the inflation scenario.
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Similarly, below you see the important technical level which appears to have held for the HUI gold bugs index. The technical level, indicated by the horizontal line, becomes even more important than it has in the past.
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The bull market in commodities was clearly accompanied by a bull market in the stocks of the nations that produce them. The emerging market ETF (symbol: EEM) appeared to have good support at a share when we last spoke last month. It broke down decisively and then went parabolic downward. Such a parabolic move implied that when it was over, there would be a sharp correction to the upside. The beginnings of that may have been seen in today’s action where the ETF rallied over 8% from yesterday’s close, taking back yesterday’s loss and then some. If a meaningful year-end rally can be conjured up and coupled with the inflation scenario suggested above in this election year, then emerging markets should be a prime beneficiary. This oversold slingshot can rally and remain intact in an even more meaningful way. If we close below this week’s low, then all bets are off.
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Finally, today’s action in the S&P 500 is similarly meaningful. Just look at the length and decisiveness of the “tail” near the psychological important 1200 level. If the index can remain above 1200, we could get our year end election rally. If the index closes 3 to 4 days below the October of 2005 lows, then the one year old market swoon will probably be just the tip of the bear market iceberg.
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