I am rushing this to you ahead of publication schedule as the message is both urgent and important.  The great risk to the world’s economic system is that of a credit contraction.  Western and Asian economies are ill equipped to absorb economic shocks as a result of their level of debt saturation.  No one knows where such a shock will come from, but we have postulated China or even Canada.  Recently Home Capital Group of Canada has suffered a full blown bank run and is in financial duress.  Is this significant?  Most would say no, however when we look at the charts of Canada’s biggest banks we see smoke billowing out.  Something is wrong here.

Gold Silver Ratio-Metalic Credit Spread

The gold silver ratio has recently triggered an early warning signal. It is indicating financial stress in the future, most likely coming in the fall of 2017.  By spiking and exceeding its trend high it is indicating credit troubles ahead.  Note the clear break out of its consolidation triangle and the 30 EMA.  Credit problems clear themselves in the fall and the GSR is indicating there is trouble ahead in the form of a credit contraction.

Note how the GSR provided an early warning of the market top in Oct 2007 and the credit crunch which started before that.  We will see that financial stocks began falling 7 months before the market peaked which is what the GSR was signaling.

Financials vs General Index- Divergence at the top.

Back in 2007 the banks stock index peaked 7 months before the general indexes.  This is what the GSR was indicating. We see it here in the below chart of the banks vs the SPX

Today we see that the bank stocks appear to have peaked 3 months ago and are putting in a divergence to the SPX.  Is this what the GSR today is forecasting?

Next we view what’s going on in Canada.  I am using Bank of Montreal as a proxy for the sector since it is the Blue Blood bank of Canada vs the TSX 60.  What we see here is a clear break from the index.  Is Canada blowing a cold wind of credit contraction our way?

Now let’s look at the major banks of Canada.  We will look first at the weekly chart then the daily.  Note how they all are pretty close to the same. They have all broken down and are transmitting a message in unison that there is something seriously wrong.  Talk about a bull trap, all these charts put in spectacular arching highs after they broke their preceding high print back in 2014.  These are all extraordinarily ugly tops with ensuing violent initial declines . Be sure to look at how the previous tops extended line (blue) interacts with the H&S tops that then developed.  The extended line acts as a neckline in most cases.  Let’s take a look.

The Bank Of Montreal

What a well formed H&S top with its NL placed right at the previous high.  This institution is the Blue Blood Bank of Canada.  This isn’t supposed to happen.  It had a nice double bottom and when it broke its previous high it should have kept going.  This chart shouts out there is trouble brewing beneath the surface.

The 30 EMA is now bending downward and has contained the price action on the way up.  Will it serve the same function on the way down?

The daily has ugly written all over it.  Check out that extended prior top line.  Price is currently flirting with the 150/200 EMA ping ponging up and down.  Note the volume churning action and OBV as well as Accum/Dist indicates heading for the exits.

Bank of Nova Scotia

This bank is also a very well healed institution.  Their is a lot of old family money in Nova Scotia.  A lot of resource financing comes from these people.  But this chart is also announcing something  wrong here.  Note the second top could only just peek above the previous high.  It has built out a clear H&S and has broken it and is in the BT phase underneath a declining 30 EMA of course.

The daily makes it clear that this chart is living on borrowed time.  It could only close above that prior peak for 4 closes before it gave up.  It’s been in BT mode below NL 2 for 14 trading days now..  The candles burning, how long do you think it can defy gravity?

Toronto Dominion Bank

Solid as a rock as they say.  That’s what one imagines when he thinks of TD Bank.  I opened my daughters brokerage account with TD Ameritrade because I view the bank as so solid.  But what we have here is another spectacular failure above the previous high.   This one actually uses the previous high as its neckline, not very original or I guess the ultimate S&R level.  No broadening top on this one just a violent crash down through support.  What’s this all mean?

OMG talk about borrowed time! This chart is simply painful to look at.  For anyone who doesn’t think that 50/200 EMAs are significant show them this chart.  See how those averages have contained price since we started down.  Now tucked up under the 200 EMA, how long until it gives it up?

Canadian Imperial Bank CIBC

Haven’t heard of them?  Where have you been?  CIBC was named the strongest bank in North America and the 3rd strongest bank in the world, by Bloomberg Markets magazine. So they are first stringers obviously, but the chart is saying somethings wrong here too.  Now well below its 200 EMA and all averages in decline mode.  Don’t miss those volume spikes.

150/200 EMA rollover:

So what’s the bottom line here?  I think the language of the market is telling us that a bear market has begun up there in the great white north.  The financial sector is sniffing it out.  When governments become so complacent that they kick out the beams of support from their bubble real estate market by slapping on a 15% foreigners tax these things can unravel quickly.   We got the early warning from the GSR and the financial stocks to these big powerful banks are separating themselves from the TSX index.  This appears to be no “mid-course” slow down this looks to be the real McCoy….er  real Mackenzie.

But there is good news.  The good Prime Minister Mr Trudeau has promised to ease your pain if real estate is collateral damage to any credit crunch by legalizing reefer madness by July.

With Rambus at the mercy of a spotty Internet connection I thought I would put out this mini update on Oil and the PM stocks.

Editor’s Note: Plunger has joined Rambus as associate writer at http://rambus1.com/ Now members have access to two dynamic authors.

GDXJ-

One can see from Rambus’ below charts that it appears the PM stocks are still early on in the decline process.  I would agree, but of course stocks don’t move in a straight uninterrupted line.  Therefore I would suggest we are due for a bit of an upward retracement soon.  I claim this on the following basis: RSI is now significantly oversold and is now putting in a positive divergence (note red line).  Also stochastics are extended to full range and appear to be in the first stage of turning up.  We have reached its measured move as depicted.  Also its reached the boundary of its Bollinger Band, (altough not outside of it).   As a result I covered my short today and actually went long JNUG and some selective shares.  I am looking for no more than a bounce up.  It may look like a BT to the red bear flags Rambus has drawn in the below charts.  I am not advocating others do the same just discussing trading opportunities.

I emphasize I still see the bear in charge of this sector.  At best we get a little bounce here. I acknowledge taking a long position here may be a fools errand, I hope not, but it can be called high risk speculation.

As a reminder, recall I posted the What if question in the weekend report.  What if gold was in for a major decline?  Where bonds broke down and took gold with it?  Recall the measured move for this scenario shows gold just above $1,000 if this were to occur.  Well today we received a little clue that we need to pay attention at least to this scenario. The chart below shows a break of two patterns for gold and bonds.  I am just bringing it to your attention.

Plungers Big Trade-Update.

I hope my analysis of this trade was cogent enough for you to have seen it and you took a position.  Its been a barn burner right from the start.  Today I took a couple of chips off the table.  I sold my DWT.  I have retained my option spreads and short UWT positions which is the bulk of the trade, but I just felt its time to give some of it a rest.

Maybe it was the news that Dennis Gartman made a call to short oil.  That’s usually a pretty good contrary indicator.  If we get a bounce at some point I am going to ride through it with my existing positions as they decay in my favor with time.

Again, this has been a great trade with some of the option spreads delivering over 100% gains in just 2 weeks. DWT is a vehicle that trades with plenty of liquidity and narrow spreads and as of today we have booked a 59% gain in two weeks.  This is a great start, but I see much bigger gains ahead, but the trade has to be managed.  Selling my position in DWT is me managing my trade.

Here is the action coming off that original break of its channel back in early march.  Keep in mind we have caught this one going both ways capturing both legs down, the first one and the second after the back test.  I wasn’t agile enough to catch the run back up.

Here is a close-up of it coming out of that BT H&S.  It is getting a bit over extended.

So here is the bigger picture of the entire move.  The thesis is that we are going to retrace  this entire move or at least a major part of it for two reasons.  #1 we are still in a secular bear market in oil which started in 2008 and is not over and #2 we are entering a recession and demand will slacken among a sea of new production.  But, as I have said it doesn’t go in a straight line.  We have now cleanly broken the rising wedge and are now ripe for a BT.  It doesn’t have to happen, but I am hedging my bets that it will.  Again managing my trade.

Another reason, I am moving some minor chips to safety is today we transited well outside the BB.  Plungers rule is not to expect an index to to stay outside of the BB for more than 2 days.

One last look at oil.  There can be little doubt what is now occurring, but can we expect a back test?

Let’s move on to Commodities.

I have been harping on this so much lately, because I believe it is sending a signal to all of us loud and clear and we better be listening. First off copper is now out of the whispering stage.  It’s talking loudly.  If it breaks the 200 EMA I would consider it in the shouting stage.

And the CRB.  There can be no doubt now this sector is in big trouble.

And of course the uber big picture:  Knights go sit in a dark room and ponder what this chart is saying to us.  Consider the word credit contraction

All the above charts I have shown are very distressful.  For Big Bears like me they have been a big cash register. But, I sense I may be near the end of my run for now. Take a look at the GSR.  We got a downside reversal outside to inside the BB.  That tells me panic among the commodity space might need a bit of a rest.  Maybe it takes shape in the form of just a BT to those neck lines.  That’s why I hedged and took on some of my favorite PM longs.

Daily GSR:(Gold Silver Ratio)  When Gold is stronger than Silver it indicates a Credit Contraction

The weekly:

Just for fun here are some of the favorite in my stable bought today, I am not falling in love here and they will be on a tight leash:

Uranium part I revealed the ultimate bullish fundamentals of the uranium market, but also emphasized the importance of exercising patience. Ultimately bull market fundamentals exist, but the market doesn’t trade on fundamentals, at least in the short and intermediate term. It trades on liquidity, and for now the bid is not there. The sector is in the process of forming a bottom, but it would be unwise to go in whole hog with an entry position just because one can see a bullish eventual outcome. This past week proved that!

So before going any further analyzing the uranium sector I would like to review some investing concepts pertinent to establishing an investment position in such a volatile sector.

Volatility– One should not think of risk as the same as volatility. The two are not one and the same. Just because a stock moves up and down in large percentages does not make it risky. Most don’t understand this and think volatility is risk- it’s not. Volatility is actually the opposite side of the coin as liquidity. Illiquidity generates volatility. Since most think of volatility as risk it mentally blocks them to be able to use volatility as a tool to be used in their favor. Instead, volatility rattles them and often shakes them out of positions.

Using volatility to our advantage, we must be able to ride up and down through a trading range without getting rattled or shaken out and to be able to see it as an advantage for us. This skill set is particularly relevant in the uranium sector since they’re the most volatile stocks in the universe. The uranium sector, more than any other, requires one to be either a contrarian or be a victim.

Contrarianism– Such a misunderstood concept. How many investors love to spout the phrase “I am a contrarian” as if that somehow makes them a genius investor. More often than not it just means they are about to get run over by a truck. You can’t just be a contrarian just of the sake of it. Be one when it makes sense to be one. You must do your homework, you must asses the probabilities of the market being wrong. You can’t just be a dumb ass and think everyone is wrong because you are right.

The way to make the real money is to realize that price may be a liar. Price does not predict as well as everyone thinks. This is where doing your homework comes in since price often doesn’t tell you what you need to know. One should create his own investment thesis, if it is against the crowd, well then I guess that makes you a contrarian. If your trade is not priced into the market that’s where the value ultimately is if you are right. You make an asymmetric bet where the probability has been not been priced in and it’s the pricing in of those probabilities where all of the money is to be made.

Being a contrarian is such a challenge since being ahead of the trend often means being wrong for a while. However, one needs to be seasoned enough to understand the difference of being wrong and not being right-yet. One must develop a sense of how the world is changing. The average person is unable to understand change and instead just extrapolates the current trend.

Trade Sizing– A fundamental concept that separates the amateur with the seasoned investor. Without proper trade sizing one stacks the odds against oneself for an ultimate successful outcome. This is particularly applicable to the uranium sector due to its inherent volatility. Determining the correct size of a position is related to why I caution against making grandstanding bottom calls as it encourages a deep plunge into a sector where one really can’t know for sure if the bottom is in fact in. Better to take an initial position and look for bottoming action.

If a position is too large you will likely get knocked out, whereas if it is right sized you can ride the volatility and hang in there. You will be in a position to press your bet when conditions dictate. You must consider and match your time horizon with your investment thesis. This is particularly applicable with uranium as we know its not yet prime time, but it will be, it’s just a matter of time. The question is in how much time and when will the market begin pricing higher price in? If the thesis requires 5-7 years to run then we need to size our position for this time period. Stated differently your investment horizon must match your idea horizon

This uranium sector is a wile beast. We can use it to make huge returns, but we need to bring our best game to the fight. Equip yourself with the appropriate tools and we can harness the power of this sector.

The Cycle

The uranium sector can fly higher than you can imagine and fall further than one can predict. Due to the inherent volatility the way to make a fortune in the sector is to buy in the bottom of a cycle. The best way to do this is to wait for a bust. We have now seen such bust as was described in part I so we know that we are now in the buy zone. It’s just now a function of refining the entry point.

Uranium- The incredible metal.

Uranium is a super concentrated metal. It is so dense that a one gallon milk carton filled with uranium would weigh 150 pounds. 13 of those milk cartons of uranium produces the same amount of energy as 80,000 barrels of oil. It’s relatively plentiful, with 40 times more of it in the earth’s crust than silver.  In a future powered by electricity uranium is an indispensable metal.

All markets are cyclical… So it helps to know where you are in the cycle-Plunger

I spend a lot of time thinking about how price fits into the big picture. It is why I have expanded Robert Rhea’s psychological phases of markets into a Chartology model. I find it’s an essential element in my tool box which gives insight into where a market is in its cycle. Applying this skill set towards uranium is somewhat problematic since its such a small sector and there are only limited data samples. So I am going to use Cameco as a proxy for the industry in my analysis. Cameco produces 20% of all industry production and is a company which must ultimately survive on its own as it’s not subsidized by a national government. Production from Kazakhstan however, is somewhat artificial as initial exploration and development occurred under the Soviet model where cost was not a prime consideration. Much of the development would not have occurred using a profit and loss discipline. So I think an analysis of the price action of Cameco offers us the best proxy of industry performance.

Uranium Stocks Secular Bull Phases

As Rambus often says nowhere else in the world are you going to get the following insight and analysis. It’s unique and not to be found anywhere else. IMO it’s the principle benefit of what this site delivers. In order to identify the cycles of the uranium market I will adapt some major assumptions which as of yet are unproven. My chief assumption is that we saw a major bear market bottom in late 2016. Later on I will show you the model and analysis which leads me to this tentative conclusion. In Part I we saw the long duration bull markets that have occurred in the uranium price. It is my premise that we are currently in the third secular bull market in uranium and it began in the year 2000. Phase I, the accumulation phase, lasted from 2000 to 2002. Phase II, the mark-up phase, lasted from 2002 to 2007. In phase II Cameco went from under $3 to $48 and whenever sectors have such huge gains it typically requires prolonged periods to consolidate those gains. This consolidation period appears to have taken 10 years in this sector. This is similar to the rise in oil from 1972-1980, undergoing a rise from $2 to $40 requiring a consolidation lasting 24 years before it could break out of its consolidation trading range.

A long term secular bull market typically has several cyclical bull and bear markets within it. Since its top in 2007 CCJ has been in a long term 10 year consolidation of its massive move from 2000-2007. This consolidation has consisted of 2 cyclical bear markets and one cyclical bull market. Strung together this retraced 85% of its move from its 2000 low. A brutal retracement, but recall these are the most volatile stocks in the universe remember? Using this model what lies ahead still is phase III, the blow off or mania phase. Typically in Phase III price breaks through the previous top of phase II and accelerates from there. Capital is drawn into the sector and valuations go to previously unimagined levels. Recall NASDAQ in 2000, or oil in 2008.

Phase II Consolidation (takes form as Cyclical Bear & Bull markets from 2007-2016)

The chart below zooms in on the 10 year consolidation of the massive 2000-2007 move. Here we have 3 clear phases of a bear market. Phase I (Distribution Phase) includes the crash of 2008, but in retrospect the crash was just a temporary diversion of the distribution process. This bear phase actually included a cyclical bull market within it. This all sounds contradictory, however one can see that despite price rocketing upward for 2 years it was really all part of a distribution phase… or phase I. Shares were distributed from informed forward looking investors who understood market cycles to the suckers all lathered up through positive price action.

Cyclical Bear Phase II- This began in early 2011 in what I call a head test or bull trap. Price often spikes pulling in the last bulls prior to a major decline. Note the point of recognition (POR) came early in phase II. POR’s always come in phase II and was particularly violent due to Fukashima. But note that last bar before the gap down occurred before Fukashima. It occurred on 7 March 2011, whereas the earthquake was on 11 March 2011, so the downtrend was already asserting itself, Fukashima just added a big push. As we saw in the gold market in 2013 following the Goldman raid markets typically enter a consolidation after a phase II POR crash. We see this in the 10 point diamond consolidation that lasted 3 years.

Mr. Bear gets devious.

In typical fashion before doing a slice down through the APEX of the diamond Mr Bear delivered a bull trap in the form of a false breakout to the upside of the diamond. After the breakdown we then see a backtest and then  price resumed its bear market decline. Having spent 3 years in a bear market consolidation and then sucking in latent bulls in its bull trap it was now fueled up to resume a relentless 2-year decline. This decline was in fact a measured move impulse coming out of its diamond consolidation. Note the impulse moves entering and exiting the diamond are virtually equal, a vicious 59.5% decline.

Cyclical Bear Phase III- Annihilation

The separation between phases is observed with a counter trend move. Here we see in Jan 2016 a 7 week BMR which relieved downward selling pressure. Now recharged Mr. Bear pulled out all the stops and applied the thumb screws. That’s right, the dreaded capitulation of phase III… the annihilation. This is where severe bear markets end. Non-stop selling crescendos into an annihilation drive. All hope is lost for a turn, liquidity is removed and comical selling asserts itself. Its a pretty ugly affair. We see this in the depicted 8 month annihilation drive where Cameco having already dropped 73% from its highs went into a 44.8% crash. Simply brutal.

A completed Bear Cycle

The above analysis is the main reason I believe the bottom of October 2016 was THE bottom. The price action since October up until today doesn’t convince me that we are in a bull market, however its the fullness of the process leading into the October price level which speaks the most to me.  We simply saw enough to recognize the worse is likely behind us. Certainly we could double back and retest that bottom, as painful as that would be, but if we have  sized our positions corectly we can survive that process.

It is not my intent to mark up the entire uranium sector and provide recommendations. I regard it more important in the early stages to focus on the process instead, that’s why we have covered the ground we have. Once the bull asserts itself we will get larger gains from companies moving projects into production. Discovery companies will delight, but it’s the producers that will deliver the big gains. Therefore that’s my focus and US based companies may be the biggest performers due to the wild card factor.

Cameco

It’s the Big Dog. 20% of the world’s production with 3 of the world’s top mines. Unbelievable grade in a safe jurisdiction. Will no longer do long term contracts at existing prices. If you are in Uranium this should be your core holding. Looks to still be in a bottoming process. Note the 30 W EMA is now tilting down. Give it some time.

Energy Fuels

After CCJ this is my preferred company. US Based production with permits in place. Able to ramp production the most and the fastest of all the companies. This is the spec play to own IMO. But look at the power dive its been in over the past 8 years…Gosh. Appears to be attempting a bottom but the 30 W EMA is rolling over and stochastics are still plunging. Keep watching it and nibble a little down the road. Management tends to deliver surprises with financings when they run out of cash.

Dennison

Its been a dog of the sector. A resource royalty family owns and controls it through the Lundeen family. Rick Rule refuses to get too excited as he told me there is not a rush to own it. Chart wise, maybe we have a double bottom in the making. Keep an eye on it.

Uranium Energy Corp.

Amir’s little US based Uranium play. ISR production, with a thin balance sheet. Fortunately for them they pulled off a decent financing during the pop. But they desperately need a higher uranium price to make it work. They are in a battle with the clock. Tic Tic Tic.
But if you want a US Based super leveraged play you have it all here. Amir is a very well connected capable operator. Don’t ever sell him short. Like the song says, he’s a smooth operator.

Fission

Yesterday’s darling. Just seems like yesterday this was the go-to explorer. Things have cooled down as this Athabaskan play is not as high grade as once thought. But it could be bought out at some point. Like the others more bottoming action with a 30 W EMA that’s rolling over.

GoviEx Uranium

Can you say Bull Flag?  That’s what it looks like we have here. This is Robert Freidland’s little project that he is training his son on. I have met the kid and I thought he was a mini-me arrogant jerk. But that’s what one would expect if you were Freidlands son right? But that doesn’t mean you can’t make a fortune with this company. Ausie based seems to have now finished up its much needed correction.

NexGen Energy

This is currently the go-to discovery play. High grade, and it will be a mine. It’s obviously marching up the ladder of chartology consolidation patterns. Looks ready now to impulse up into its next. Might want to start buying this one right here.

Conclusion

I have discussed the tools to approach this sector. Think about time horizon, position sizing and bottoming action. It does not serve us well to say the bottom is in let’s go whole hog. But having said that I do think we are in a bottoming process. We don’t know how long it will last as there is a certain amount of game theory going on between utilities and producers. Utilities don’t want to believe what suppliers are telling them. Secondary supply is dwindling, while there is still a supply overhang. Will the market slowly discount the positive future fundamentals or will it wake up to the future reality all at once and have utilities all respond to new purchases at the same time? Could it develop into a buyers panic?  That’s the game!

It appears the broad sector is in Weinstein stage I. It has not entered stage II. The big bet is when that moment will come.