August 7th, 2008

Emerging Right-Shoulder plus What about SLV?

Will the market ever pick a direction and stick to it for more than a few weeks? A couple of days ago with the 2.87% pop we were all giddy but after the past today’s 1.79% shellacking we’re morose. My Market Timing Indicator says it won’t, at least not unless it can successfully reach about the 1350-76 on the S&P and I don’t think that’s going to be anytime soon given the background noise.

Since hitting an intra-day low of 1200 on July 15, the Index is carving out the right hand shoulder of the extended head-and-shoulder top formation I’ve been writing about for some time. The process could take another several of weeks (to Labor Day?) before the move back down to test the neckline by then around 1195. Something really positive might turn up and the index could bounce up against one or more of the moving averages that are working their way down. I just don’t think so as shown in this update of an S&P 500 chart you don’t see too many places:

Nothing works out as easily and as beautifully as this might so …. we shouldn’t be complacent but should remain alert to a surprise of one sort or another from out of nowhere to put all these projections to shame. Remember back a year ago – who of us ever imagined a subprime mortgage crises and the financial system collapse that followed in its wake?

The one thing that disappoints me right now, though, is the action in precious metals. I have significant silver and some gold positions, as some of you who’ve been regular readers here probably know, and they’ve turned in very disappointing performances recently. The talking heads characterize the action as “rolling over” saying it’s due to the surprising strengthening of the $US – the same factor that’s influenced oil prices favorably. Here’s the SLV chart:

I might agree with the strengthening $US arguement if it weren’t for two factors:

  • After breaking out of a consolidation pattern, like the upward-sloping triangle from the day SLV trading began, many stocks develop a secondary consolidation just above the trendline. In the case of SLV, that pattern is turning into a wedge that began in February at around $20. I’ve inserted a circle during which time the decline should end and, if they do, the price should resume its upward surge.
  • The fundamental explanation behind this reversal could be inflation becoming visible. Doesn’t it surprise you that the money the government is spending propping up the economy and the financial institutions haven’t yet been reflected in government reported inflation rates. The higher energy costs never seemed to work their way through to prices other than gas and heating oil. Interest rates are still unchanged and no attempts have been made by the Fed to sop up the excess liquidity.

All these emergency measures have to come home to roost at some point. We will have to pay the piper sooner or later for the financial crises bailouts and the “guns and butter” strategy of the Bush Administration over the past 7 years. And the election may trigger the bill being presented – leading to the SLV surge.

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