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Began his investment career in 1981, first as a Floor Trader and then as an Investment Advisor for a major securities firm. During that time he acquired several securities and options licenses and became registered as a Commodity Trading Advisor (CTA). He also co-founded a venture capital... More
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  • US Budget Impasse...This Is What Happens Next 0 comments
    Oct 23, 2013 11:36 AM

    Oct 14, 2013

    The impact of the US Budget impasse appears to be more important than anticipated, but now with signs of possible compromise on extending funding for government obligations, we must keep a very close eye on sector directions, as technical indicators still show potential for precious metals and select commodities to outperform the stock market. However, one also has to be aware that some indicators appear to have broken support levels suggesting further downside moves, unless they turn out to be head fakes.

    Stock Market

    During the last month, the Dow Jones index has substantially underperformed the broader indexes, such as the Russell 2000, Wilshire 5000 and also Nasdaq 100 and Composite. This is a sign that money is moving from conservative stocks into higher risk stocks and also an indication that we are moving into the latter speculative stage of the investment cycle, but the question is how long can this last?

    Below is a long-term chart the shows the Russell 2000 index divided by the Dow Jones Industrials index. You will note the outperformance of the smaller cap stocks since 1999, but also remember the Dow Jones began a 2 year correction at the beginning of 2000 and was followed by the Russell 2000 a couple of months later. The Dow Industrials index chart below the ratio chart has been shaded in red where the Dow Jones formed potential Head and Shoulders patterns. When those necklines broke, it indicated a significant correction was underway. Currently the Dow has again made a similar pattern, so is this a consolidation or the makings of a top?

    Russell 2000/Dow Jones Ind - Weekly (click on chart to expand)

    (click to enlarge)

    The next chart is fascinating as it represents the 23 year trend of Japan's Nikkei Index divided by the Dow Jones Industrial Average, and it clearly shows that a 5-Wave pattern down is complete. This suggests that going forward the Nikkei Index should outperform the Dow Jones, but I will add a caveat, first the horizontal red resistance line which coincidentally intersects with the long blue downtrend line must be broken to confirm that trend change. Another caveat is, if that resistance and trendline are broken, it doesn't necessarily mean that the Nikkei is going up nor the Dow Jones is going down; you have to watch those specific indexes for a break up or down as well before you can be confident the actual price of the index is moving in the same direction. However, once that line breaks and the Dow Jones breaks the neckline of the H&S pattern indicated in the first chart, I believe it will likely indicate the beginning of a serious bear market (at least on a relative basis) for many years. That would be a position InvestorKey would like to take advantage of through shorting the weaker indexes or sectors when the time comes.

    Nikkei Index/Dow Jones Ind. - Weekly (click on chart to expand)

    (click to enlarge)

    This next chart is simply of the Dow Jones Industrial Average, showing the current upward wedge pattern and the red neckline at 14,700 closing basis of the pattern discussed above that would confirm the breakdown. A similar pattern exists in the S&P 500, Transport and Utilities indexes as well. When the time comes, we will try to recommend a short position earlier if the daily technicals warrant it.

    Dow Jones Industrial Average - Weekly (click on chart to expand)

    (click to enlarge)


    Now lets look at the US Dollar, as confidence in whether it is going up or down will have a big influence on the direction of certain markets. Despite media stating a weak US Dollar is positive for the stock market, correlation analysis does not support that statement, as it is only true for short periods of time, rather it seems to depend where we are in the business cycle. Currently, the long-term chart on the US Dollar below highlights how positive and negative divergences in the True Strength Indicator below the price chart was able to mark the lows and highs. More recently one can see the positive divergence from 2003~2008 and also the near-term negative divergence from 2012~2013 that has triggered the recent correction. You might also note the red uptrendline in the indicator was broken in Aug 2013 which corresponded with the move up in Gold. Also note that the long blue downtrend from 2002 in the USD price has been broken to the upside. So on the one hand a person could be long-term bullish or on the other hand you could be short-term bearish. Again, confirmation of the real trend will likely be determined when the major support line at 79 on $USD is broken, as this support marks a previous low back in 1992 but more importantly also bisects the center of the triangle pattern since 2008. Alternatively, if we break to the upside through 81.5 and 82, one could presume the triangle will breakout to the upside. Interestingly, this triangle pattern timeline seems to coincide nicely with the Wedge pattern on the Dow Jones Index.

    US Dollar - Weekly (click on chart to expand)

    (click to enlarge)

    Precious Metals

    The recent volatility we have experienced in the precious metals due to the politics in the US has been hazardous in establishing a position while using stops. Perhaps the lesson here is to avoid investing during politically significant events or to broaden position pricing when volatility expands. Nonetheless, having re-thought how to enter positions based on the commentary above, it is more prudent in the current trading environment to place entries above or below more significant support/resistance points that match similar points in relative strength ratios of the stock market, currencies and metals.

    In the first chart below, Silver/Gold via the SLV/GLD etfs, still supports my original premise that the correction from 2011~2013 is a cyclical bear market within a secular bull market in the precious metals, hence, that 2 year period is nothing more than an A-B-C corrective wave, and that we have resumed the secular bull market with the June 24/2013 low in precious metals; or in terms of the SLV/GLD ratio chart, that low would by marked by the July 29/2013 low. This entire corrective wave created a declining wedge pattern lasting almost 3 years, and there is even another smaller declining wedge within the larger one, beginning in Nov 2012~Jul 2013 and both patterns have now broken out to the upside. The last remaining hurdle to beginning a more significant move lies at the horizontal resistance line at the 17.4 mark on the ratio. Since mid-Aug 2013 we have corrected in the precious metals and consolidated in this particular ratio, allowing the momentum indicator to correct and gain another head of steam before taking off. We have marked with a red line a tighter point of resistance for a break out on the SLV/GLD ratio and indicator below the chart.

    SLV/GLD - Daily (click on chart to expand)

    (click to enlarge)

    So, we know that Silver is nicely poised to outperform Gold, which by itself is a good indication of a bull market in precious metals, but is it the best place to be invested? Lets look at how Silver compares to Copper via the SLV/JJC (copper subindex) etf's ratio. Again, you can see the correction since 2011 has created a nice downtrend channel with either a 5-wave pattern or A-B-C pattern, depending on where you start the count from. One can also see a 2 1/2 year descending triangle that the ratio broke down from in Apr 2013, suggesting it has lower to go and that copper may outperform silver. At the same time, the indicator below the ratio shows a number of positive divergences developing since the beginning of 2013, including more recently in Sep 2013 and if we have another day, this week, where silver in percentage terms is up significantly more than copper, we will set another divergence that may another confirmation for silver. That might also result in the triangle pattern being negated and instead validating the A-B-C pattern I have discussed previously in my July 29 article this summer. Otherwise, if we break below the 0.50 level on this ratio, then copper may end up being the strongest of the metals; what fundamentals would that foretell?

    SLV/JJC - Silver/Copper Ratio - Daily (click on chart to expand)

    (click to enlarge)

    To Summarize:

    The stock market may continue to make new highs while sectors rotate in turn to complete distribution patterns. Certainly the precious metals continue to flounder while awaiting a resolution to the mess in the US, and many are calling for gold to continue downwards to $1050 per ounce, however we firmly believe that gold and silver have pretty much bottomed and that a resumption of their move up is upon us. That move should be supported with a continuation down in the US Dollar index and move up in certain commodities. Silver is our favored means of participating in the precious metals although we will be adding other commodity ETFs that may perform better.


    Oct 14, 2013

    Peter Vogel




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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