Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Gold, Part Deux (by Gary Tanashian)

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No names mentioned, but for much of the rise out of the summer someone has been forwarding me analysis by a technical person talking about an explosion in gold to 2000+ sometime in February, which would be the final blow off to this bull phase.  Now, the analyst is considering going short.  It was all about nominal price, which if followed to the exclusion of the big picture, would turn the would-be sound money advocate into nothing but a momentum trader. 

Gold bugs who have been root root rooting for the home team along side silver bugs, copper bugs, oil bugs and stock tout bugs are right about now getting past nervous and on to revisions.  It is the wash, rinse, repeat cycle my friends; look like a champ while the trend lasts and then revise…

Here is the chart from the gold article that inspired the following comments as it was reproduced at SeekingAlpha, haven for contrarian analysis.  From NFTRH118, some of the comments [with my thoughts]:

“Good luck with your USD longs – you'll need it! All fiat currencies return to their
natural worth. Paper.”
[USD longs will be put to good use]

“I think you have to say what you really mean. I think you don't want to say that fear has
entered your investment analysis. Remembering that fear is an emotion, and emotion is
an investor's worst enemy.”
[Fear always enters my analysis when you are brave]

“Technically; this isn't even anywhere near a correction – and we're $300 bucks up on
this point last year.”
[From your lips to God’s ears, but…]

“Agreed. Silver supply is VERY tight. It has been reported by Sprott that they have finally
been delivered their physical silver, for their newly created PSLV after waiting since
purchase in early Autumn.”
[What do I know, I am usually wrong on silver. :-)]

“If you think Gold's correcting, how much? -10 -15% decline isn't even a Seasonality
shocker, you shouldn't be "playing" Gold if you don't already know that.”
[I hear ya]

And my personal favorite, from a Seeking Alpha contributor (writer) who once
approached me with a deal to ‘follow’ me if I will ‘follow’ her. I declined, as this
appeared to be in conflict with her self-proclaimed devotion to ‘meritocracy’.

“In any case, this latest bout of Dollah! Dollah! Dollah! Baby Gaming has been
especially disturbing because it's been so transparently contrived. Listen to any of the
Gold Baiters and Haters as they mouth their scripts right now. They can hardly read
them without flushing bright red, stammering, and having their voices go up two octaves.
They're like abject amateurs in a high-school play. Or – as we've said before – yapping
little Chihuahuas.”

The chart, for those keeping score at home?  MACD weekly triggered down from over bought.  RSI on the way down from over bought but still well above support at around 50.  And STO having bearishly declined below 80.  Good stuff, because we are finally getting rid of the momo's, pumpers and 'to da moon' flight captains.

Gold

I am always more bullish in gold when the company thins out, and that is what is happening now.  The gold-silver ratio has a chance to really do some damage and get the precious metals herds scattering first and with any luck, the entire casino rushing for the exits before too long.  But for now, precious metals bulls are pretty much alone in the house of pain.

The most obnoxious outcome for me personally would be that policy makers win, are able to create a lasting economic rebound out of nothing but debt issuance and money creation.  It would be obnoxious because it would be created out of dishonesty and would imply that powerful people can manage the formerly free market at will.  Of course, I do not expect this to happen, but patience may be required in trying to rein in the pig.  If history repeats, the GSR will act as something of a credit spread, as Bob Hoye would say.  It would indicate the contraction in the spread between the speculative party and conservative, sound thinking.

The GSR, if it is indeed bottoming and turning up, should take down all parties with the first to be taken down, the gold sector, eventually becoming the first to recover.  Just like out of the 2008 destruction.  

Here's the updated chart showing a fattened pig, vulnerable to a would-be rise in the GSR.  On a risk vs. reward basis, the gold stocks are the best bet going forward.  But until near term events sort out, the going would be rough there as well and protection of positions is the way to go.  In my opinion, 2011 stands a chance to be epic, but it is not going to be as easy as 2010.  Put your thinking caps on and remember that the loudest voices at any given moment are probably the ones telling you to do the opposite of what might be in your best interest.  http://www.biiwii.blogspot.com

Gsr

Miners Continue Their Steady Descent

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I have truly enjoyed trading GDX, the precious metals miners, recently. Unlike the grotesquely-manipulated SPY, IWM, and QQQQ, the GDX seems to be obeying the laws of rational economics and slowly but surely melting down.

I have been quite vocal about my bearishness on GDX (ducking tomatoes and chortles every step of the way), but I think this security could see $48 before finding any real stability. It's already fallen 15% since December 7th, and that means I think it has about another 13% to go.

0114-gdx

Pattern Festival (by Springheel Jack)

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I'm posting six charts again today, so I'll have broken my usual limit of five for the third consecutive day. However after what might be best described as a major channel and pattern drought in December, we now have decent tradeable short term patterns seemingly everywhere, and even with six charts daily I've been excluding a lot of the very interesting charts outside ES, NQ, oil, copper, EURUSD & GBPUSD. I'll try to post some of those in a holiday post on Monday.

First ES today. I was leaning short near the close yesterday but the INTC earnings shortly afterwards changed the picture considerably. We now have a rectangle that has formed on ES with an upside target of 1292.5 and a 68% probability of breaking up. Together with the still unmet IHS target at 1292 on ES the picture is looking fairly bullish and I'm leaning long. Within the rectangle ES is a buy at 1276.5 and a sell at 1284, though for obvious reasons it is a safer long than short:

The picture on NQ is more complex. The rising wedge had broken down when the INTC earning's were released yesterday and then NQ broke back up into the wedge. Since then it has broken down again and we may see NQ retreat to strong trendline support currently slightly under 2290. I've marked in a shorter term megaphone that may well confine price moves today until it breaks up or down. An hourly close above the upper green trendline would be very bullish:

I posted some ambitious upside targets on EURUSD and GBPUSD yesterday morning and they both delivered the expected big rises to my target areas. The move on EURUSD particularly looks very impulsive and I am now working on the assumption that EURUSD has made a major interim low, though we'll have to see EURUSD break above 1.35 to confirm that. Short term I'm expecting some retracement that I'd expect to see bottom in the 1.31 to 1.33 area. An odd pattern has formed on EURUSD that I and others have seen before and could be an previously unidentified bottoming pattern. I'm provisionally christening this pattern the 'resting bat' reversal pattern as it looks somewhat like a bat's head with two long ears. Credit to my friend Bloodwine for coming up with the bat's head description:

GBPUSD rose to just under 1.59 to the potential big IHS neckline and has since pulled back. This is an obvious area to see some retracement as well so I'm looking for some retracement into the 1.55 to 1.57 area to make the right shoulder and then, if USD has really made a major top, a move to the IHS target at 1.644:

I posted a speculative IHS on copper yesterday morning and sketched out a potential path to make a right shoulder on that potential pattern. Since then copper has been forming that RS within a decent quality declining channel, and I'm looking for an hourly close above that channel to signal when the RS has bottomed. The IHS target is an ambitious 460 and that would be a very nice move to catch if this plays out:

Oil made a perfect channel touch and bounce when and where I predicted yesterday, and bounced to make a double top with negative divergence on the hourly RSI. It then retreated to form an H&S pattern with a target at 89.2 and has broken downwards. I'm expecting that target to be made unless oil can break back above the pattern neckline at 90.8:

While I've been writing ES is showing signs that it may break down from the rectangle, which is unexpected, though these rectangles do break down 32% of the time. The downside target is 1268.25 though the probability of making the downward breakout target would only be 63%. I'd be inclined to watch the support levels on NQ for a decent level to buy the dip if we see an hourly close below the ES rectangle. I currently have NQ megaphone (declining) support at 2295.5 and (rising) trendline support at 2286.

Group Think (by Runedge)

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The problem with group think is that thinking is not allowed.  It should really be called group acceptance. The larger the group the harder the tendency for someone to disagree.  Right now the group is massive. The group think I am referring to is with the Fed, the Bernanke put and how the Fed will "just print more money and bail out the banks."

I have yet to read the Art Of War (have owned it for about 15 years now) but somewhere in there I am sure it talks about giving your enemy more credit and not simply labeling them as stupid or inferior.  The Fed is a smart group of people, albeit lacking in practical real world business sense.  The banks are benefitting for sure from playing the role of broker as the Fed expands its balance sheet.  How else can the Fed buy treasuries though?  We know they are monetizing the debt but at least by working through the primary dealers they can say they are not monetizing the debt.

There are three ways to grow nominal GDP

M (money supply)  x  V (velocity) = Q (output)  x  P (price inflation)

1 – Increase the money supply

2 – Increase the velocity of money

3 – Increase inflation

Let's use an example of a place called Fantasy Land (fitting for our current situation).

A farmer sells $50 in corn to a neighbor.  The farmer then spends $30 to get their tractor fixed from another neighbor and spends $20 on a bottle of moonshine at the local "packy." 

The GDP of this fine community is $100 assuming their is no inflation (hence the name Fantasy Land). Using the above formula we have:

Money Supply ($50) X Velocity (2, how many times the money was turned) = Inflation (0%) X Output ($100)

Getting back to Fantasy Land, excuse me the US economy, banks are not lending and people are not spending.  There is NO demand, so there is no velocity.  Money is not turning over.  Small business surveys continually state that their top concern is not lack of credit, but rather lack of customers.

So the Fed must grow the monetary base (even though Banana Ben has said they are not creating money). Look at the two charts below of money supply and velocity.  They have offset one another causing no real GDP growth, only nominal.

 

Screen shot 2011-01-09 at 3.14.24 PM

 

Screen shot 2011-01-13 at 7.58.05 PM

 

The Fed through QE is trying to make money so cheap it creates demand through inflation expectations (that car will be more expensive next month so I'll buy it today) and overall demand (I'll remodel that basement because Home Depot has zero interest rates for 18 months).  

Problem is it's not working.  Demand is not there.  The Fed is hoping QE will raise stock prices, which obviously has worked and give people a sense of wealth, a desire to spend.  It's also caused yield chasing and the use of massive leverage (leverage is now back to LEH levels which is truly astonishing).  

Commodities have been a great trade and people have piled in.  The result is rising input costs which cannot be passed along because there is no demand.  As input costs rise margins are compressed. Expect higher layoffs as firms do all they can to manage the bottom line.   Bernanke's efforts seems to be choking any demand left in the economy. 

Input costs have risen,  treasury yields have risen, gas at the pump has risen and now the USD has begun to catch a bid.  The market looks forward to QE3 but honestly Banana Ben may not have the opportunity to see that happen.  The debt ceiling will be reached in less than 8 weeks and in a recent survey 70% of Americans do not want it raised.  Sure Congress can do what they want, they have done so for years. But, the last election has taught many that if they want to keep their jobs they better listen.  The bond market may be telling them the credit card is stopped.  We see what's happening in the municipal bond market.  

A former Atlanta Fed President has publicly called out the Fed, their QE and their solvency.  Dallas Fed President Fischer has also publicly cast his no vote for further QE beyond June.

Just recently two regional Fed manufacturing surveys were revised downward.  QE is not working other than wealth effect which is not driving demand.  Bernanke is not a dumb man. He lacks business sense for sure but at some point the Bernanke put will expire.  To think the Fed will always be there is a clear sign group think is wrong again.

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