Plunger’s Market Thesis : Is it 1937 Again ?

I hadn’t planned on submitting anything this weekend, however in light of Friday’s action I felt it may be useful.  After Friday’s smashing in the commodities and precious metals market many investors are now rattled and may have bailed from the sector already.  It is not my purpose to recommend  holding or selling, however I would like to lay out for you what is going on beneath the surface…the process that the markets are undergoing.

First off one should see Friday’s action as only short term noise.  It is my view that it was triggered by the markets reaction to the Trump tariffs and the fear of it hurting global trade.  Here we see the gap down action in the CRB.  It chose to stop at the 150 EMA and its lower Bollinger Band:

The action of late in the CRB has been pretty bearish to the downside with its gap off of the top followed by a failed bear flag right under the 50 EMA.  Even though the upside move is still intact, I for one, am on the lookout for the top in commodities for now.

One could say that the move down in gold and silver was collateral damage due to the drop in commodities.  That’s a reasonable assessment, however there could be a more sinister element involved which entails a paper smash of the gold market.  We have seen numerous cases of this in the past and it looks likely that’s what this was also.  But if you are resistant to believing this stuff happens, that’s fine also as what you should know is that as these price dives occur, physical metal is being taken out of the market and being delivered to stronger hands.  These hands will not be shaken in the future as they are the hands of central banks which are not involved in the gold price suppression scheme.  As .999 gold gets bought up and refined into .9999 metric it goes into deep storage and it wont be available for export sales.   These gold tonnages cannot be replaced at today’s prices.  Stated differently,  the physical supply bought up in these high volume gold smashes gets taken out of the market and moves to entities where it will serve as the collateral to the national currencies of the future.

Below we see the daily gold chart and its smash down from just under the overhead resistance of the 200 EMA.  It certainly looks grim and may very well continue down, however one can see in the second chart below the weekly view which shows an intact uptrend.

Below is the weekly showing the bull market uptrend still intact, however price remains below a now downward sloping 30 EMA sitting right at trendline support.

Silver

Silver has shown recent relative strength to gold, however it has trailed gold in turning up to the upside.  You can see in the chart below it needs to break above the forming NL.  The smash Friday put this process back on hold.

Bottom Line PM:

The metals and the PM stocks appeared at the cusp of a break upward before Friday’s smash.  After Friday’s whacking many gold newsletter writers have now advised their subscribers to sell and seek safety.  They may be proven right, however nothing has changed in my view.  The forces of a bull market continue to coalesce.  Selling out ones position in this sector is an error in my view.  Weak hands are letting go their positions right now, I prefer to hold onto quality companies.

Connecting the Dots and solving Mr. Market’s puzzle.

Above we see the chart view, however what I really want to show you is the big picture.  The underlying strategic process that is occurring underneath the surface of these markets.  It is the story that IS NOT being told.  It is the essential story,  the underlying process that is driving these markets.  If you understand this you have a chance of not only capturing the next major uptrend, but also protecting yourself from the next bear market.

It is said that Americans have the attention span of a major league baseball season.   I am not even sure investors can keep a thought in their head for that long.  So to think that the average investor can formulate an investment theme and comprehend it unfolding over several years may be too tall an order.  But that’s what we have to do if we are to understand and ride the trend change which is occurring right now.

The End of the Super Cycle and the Post Bubble Contraction

The world has been in a secular expansion since the late 1940’s.  This credit cycle began with public and private balance sheets at low debt levels.  We are now in a fully mature end of cycle, where these balance sheets must be ratcheted down.  This process entails a post bubble contraction of credit.  Typically the process unfolds over a period of 20 years. This is what we now face and historically it is an environment bullish for gold and gold stocks.

The 1937 Bear Market- You heard it here first

Since late last year, I have pointed out that the current bull market resembled the bull market from 1932-1937.  I heard of no other source making this claim until now.  The 32-37 bull market is the only bull with declining volume throughout its lifespan, just like our current 9 year bull has shown.  The 32-37 bull was driven by a perception that the government was going to spend us out of a depression, a close cousin to today’s various QE programs.  It has been my hypothesis that since the current bull has such a close resemblance to the 32-37 bull that it may end in similar fashion.

Well, this month Robert Prechtor wrote several pages in his monthly EW letter laying out a similar scenario regarding the 1937 bear market which ensued.  Welcome to the same conclusions we have arrived at Robert, I believe we are in good company.  So let’s compare today’s market with what occurred in 1937.

First off let me say I have reviewed Rambus’ charts of the overall stock market averages.  I see how the long term uptrends remain intact and viewed from a long term perspective they continue to appear in upward trajectories.  What I show below is an internal view of the averages and what the movement of the averages this year seem to be telegraphing according to DOW Theory principles.

Update on DOW/TRAN

Above one sees the process of correcting the JAN/FEB flash decline which I have termed the “Slaughter of the Volitility Traders”.  It came off of the upside buyers capitulation of Dec-Jan.  The top occurred within the context of bitcoin blowing out on the upside and in the timeframe of typical bubble tops of the past. (Turn of the year tops 1973, 1989 Nikki, 2000 USA & others)   After the crashette bottom the market underwent a failing rally and violated the closing lows in late March & early April for the transports.  This triggered a secondary reaction classification to the move.  If both market indexes violate the Mar/Apr lows it will deliver a Dow Theory Bear Market signal to the market.   The only way to eradicate the secondary reaction classification is for both averages to go on to new highs.  The market has been attempting this, however it has been struggling in this endeavor.   Over the past week the averages may have put in a false BO above their rising channel depicted by the blue lines.  My interpretation is that this channel is a bear flag, to be taken out to the down side.  We will see.

A rolling top, similar to the 1937 rolling top?

Here is where it gets interesting.  When we compare the process of what we discussed above to what happened in the rolling top of 1937.

Above we see the top of early March.  It’s a broad H&S with a very strong RS bounce after a 14.7% drop to form its NL.  It then squeezed out all of the shorts with a 2 month rally finishing up in early August.  What then followed was nothing less than total rapid annihilation. Over the next 2 months market participants were violently smashed with little means to exit the market.  The market then went on to lose 50% over the next 12 months.

Could this happen today?  I can’t say, but recall this bull market of the past 9 years resembles the 1932-1937 bull market more than any bull over the past 120 years. After the top the 37 bear underwent an initial 14% decline.  We saw a 12.3% decline in our current initial sell off and it has been struggling to ever since to recover the highs.  For those holding out for the averages to resume their upward climb I remind you of Inspector Callahan’s line…. Do you fell lucky?… Well do you?

The Post Bubble Contraction Progresses

Grinding away in the back ground the post bubble contraction continues its process.  Historically as rates rise, credit stress occurs at the periphery of the economic system. Eventually economic problems get transmitted towards the economic center of the financial capital of the reserve currency.

We see this now starting to occur.  As the FED rises rates the weaker periphery currencies and economies start to blow up.  Over the past month we now see this occurring in the Italian bond market the Argentine currency and Brazilian and Turkish stock market among others and it’s spreading.

Brazil

Turkey

Rising rates spells trouble for credit expansion.  However even though nominal rates are rising, real rates remain negative which over time is fuel for a gold bull market. Remember at this part of the cycle the FED rises rates until something blows up.  We are now starting to see this occur as emerging currencies and markets implode and the shock gets transmitted towards the center.  Eventually the flow of funds will desire safety and will seek out the most liquid of assets: gold and treasury bills of the senior currency.  The USD captures the flows and starts its rise. At that time it will be game on in the PM space.

This is the big picture process that is occurring now beneath the surface.  It’s the slow motion process that the average investor does not have the attention span to keep in his head.

Risks to early stage bull market in gold and silver

So we now can see the process actually taking hold.  Now that it is beginning to occur can we now start to deploy in size in ones gold portfolio?   This is hard to say, since historically the mining stocks take a hit in the initial stage of a stock market decline.  They decline in sympathy as they are equities and they act as a source of liquidity to draw on.  Once the initial decline is over however,  the bull market can resume.  In the last crisis of 2008 this period lasted about 2-3 months. Next time is anyones guess.  Remember markets learn, maybe next time it lasts much shorter, if at all.

The Dow and Transports: Looking from across the room

Looking at the above DOW/TRAN chart from an 18 month duration perspective one can see the current consolidation between the blue lines as a possible bear flag.  It can continue to consolidate,  but if it breaks below the flag by late summer the 1937 analogy presents itself front and center. We will remain objective and let the market speak its language…we’re listening.

Conclusion

The daily action in the general averages attract the eyes of the average investor.  He sees the Russell and Nasdaq going to new highs giving him comfort and validation of the constant stream of bullishness he hears on CNBC.  The FANGMAN stocks capture his imagination and dreams.  He has no ability to see beneath the surface and piece together the market puzzle as we have done today.  This is what is important and it’s unfolding before our very eyes.  May you live in interesting times.

…………………………..

Editor’s Note : Plunger is the resident Market Historian and an Associate Writer at Rambus Chartology. His views based on Dow Theory and a lifelong study of Market History are welcomed by Rambus , even as sometimes they may be in opposition to Rambus’ Charts .

 

TSLA Update…

About three or four weeks ago TSLA was getting a lot of negative feedback from the fundamentals perspective so I showed some charts from the Chartology perspective to see how things would play. Would the fundamentals win out or would the Chartology win.

This first chart is a short term daily look which shows the rectangle that was building out with price action trading at the bottom rail when I posted this chart. I gave two price objectives based on the height of the rectangle. If the rectangle broke to the downside the minimum price objective we could expect would be 246 and if the rectangle was going to be consolidation pattern to the upside the minimum price objective we could expect was at 345 which was hit today.

This is where it starts to get interesting. Below is a two year daily chart which shows the rectangle on the daily chart above is part of a much bigger consolidation pattern a bullish expanding falling wedge. Notice the breakout gap which occurred this morning and the big volume over the last five days that coincided with the breakout from the blue rectangle and now the bullish expanding falling wedge.

Bullish expanding falling wedges are one of the hardest patterns to spot in real time as they make lower lows and lower highs. On the positive side when you do spot one of these patterns they can be very bullish because many investors are stopped out just before the bullish move begins. A backtest to the top rail would come in to play around the 338 area.

This long term monthly chart shows the entire history of TSLA. When I presented the potential bullish case vs the bearish fundamental case, I suggested that the top rail of the four year flat top triangle should hold support as it acted as strong resistance for four years. At the time the price action was trading slightly below the top rail so I labeled the backtest as a strong backtest which happens from time to time.

Below is the weekly chart we were looking at which shows the 2016 bull market uptrend channel. When I posted this chart I expanded the top of the flat top triangle to encompass the two shorter highs which gave me the brown shaded support and resistance zone. Previous resistance once broken to the upside should turn into support which was the case.

The psychology of why this happens is that everyone who bought TSLA below the S&R zone are making money and feel positive about their investments. So when the price action declines down to the S&R zone they are still ahead on their investment and hold on to their position which cause support to hold. On the other hand if the price action started to trade significantly below the S&R zone then the investors will become concerned and will start looking for a place to exit their trade on any strength changing the bullish trend to a bearish one.

You may have noticed I got most of our trades updated on the sidebar this past weekend. While I have TSLA highlighted here I’m going to move the sell/stop up to 312.13 on a close below the 30 week ema. In the Wednesday Report I’m going to post the ten big cap stocks we bought on June 1st which I put into one post. In order to show each individual stock I will have to post each one separately and then move it to the sidebar. Each trade on the sidebar will show the entire history of the stock from the first buy point to the current update.

Late Friday Night Chart…History Chart of the End of the World

I have only one chart to show you tonight which I call the “History Chart of the End of the World,” which I  built out in 2013. I usually show this chart a couple of times a year just to keep the big picture in perspective. This long term monthly chart shows all the earth shattering events that felt like the end of the world when they occurred and I can personally attest to that fact because I was in the markets in each one of those events.

The crash into the 2009 low was the last time we had anything that really felt like it would be a life changing event similar to the 1929 crash. As you can see, that end of the world event in 2009, formed the fourth reversal point in that 10 year blue triangle consolidation pattern. The last slightly little thing to put a scare into investors was the BREXIT vote in early 2016 that turned out to be a non event. Most have already forgotten about it, but for several weeks it was big news.

What I want to show you tonight is what has been happening in the last six months or so. First let me explain how I got the long term uptrend channel. If you notice the top and bottom rails only have one hit on them so how could they form the top and bottom rails? When I originally built this chart I used the center dashed midline because of all the touches it had mostly form below. The center dashed midline was initially broken to the upside in 1995 and was backtested several times before starting the parabolic rise into the 2000 bull market top that finally ended the bubble phase of that secular bull market.

That center dashed midline was tested from above during the LTCM, Long Term Capital Management crash, which some of you may recall. Then during the bear market that began at the 2000 high, green falling wedge, the COMPQ initially found support on the center dashed midline that produce a several month rally. Even after the 9/11 end of that  world event, we saw a small rally off the center dashed midline. The 2000 bear market ended one year later in September of 2002. Note how the center dashed midline then held resistance from September of 2003 until October of 2007, red bear channel, which ended up being the bull market top which led to the 2009 crash low.

So from a Chartology perspective that center dashed midline carries a lot of weight because of all the touches it has. As you know the stock markets have been correcting since January of this year, about six months or so. The reason I’m showing you this chart tonight is because of the price action over the last six months as shown by the green circle. I’ve explained to you many times how an important trendline can be broken, first with the initial hit and small selloff and then a rally that breaks out above that important trendline and then one final backtest from above to finish off the breaking out and backtesting process.

Note the price action on the thumbnail on the right sidebar, especially the last six monthly bars. Now look at the price action inside the green circle. If I’m correct in the interpretation of the center dashed midline then the COMPQ is in the process of breaking out above that very important trendline. This month is still very young yet, but if we see the price action trading above the center dashed midline come the end of June then part two of the breaking out process will be completed. I would expect the breakout rally to be fairly shallow similar to the initial breakout in 1995 and then the backtesting process to begin from above.

The breakout in 1995 of the center dashed midline took five years to complete the bubble phase of that secular bull market. There is no way to know what the stock markets will do, but if the COMPQ breaks out above the center dashed midline this year in 2018 and it takes roughly five years to reach the top rail that would put the top around the 2023 area. Again there is no way to know, but if that were the case then this secular bull market that began in 2009 would be 14 years old in 2023 which is a bit on the short side as far as time is concerned. We could also expect to see at least one very hard shakeout that will feel like the end of the world, like the 1998 LTCM scare.

The bottom line is that there is no way to know what the future holds, but we have a game plan in place to help guide us in our investment journey into the future. As long as the game plan is woking we don’t need to fix it, but to allow it to show us the way until something significantly changes it. Have a great weekend. All the best…Rambus

Late Friday Night Charts…It Ain’t Broke

There are some big H&S bottoms on several of the US stock market indexes that I have maybe only shown you once around the time the necklines were broken. When I first discovered them I wasn’t sure they would play out so I just kept them on the back burner to see what would happen.

I’ve mentioned recently how important it is to have a game plan to follow so you know that  when the charts change, then your game plan needs to be adjusted to the new information the charts are showing. Sometimes just a little adjustment is all that is needed and as long as your game plan keeps play out you just go with it until something changes.

These big H&S bottoms are a piece of the bigger puzzle for the game plan I’ve been showing you which suggests we are in a secular bull market that began at the 2009 crash low. The old expression, “If it aint broke don’t fix it,” applies to these H&S bottoms. As long as they keep working they are what they are. One thing these H&S bottoms have in common is they broke out above their necklines in late 2016. I know many of you will think I’ve lost my mind, but keep in mind that I’ve been following the price action for about a year and a half.

This first massive H&S bottom is for the INDU. The left shoulder was formed during the bear market low in 2002. The head was formed at the 2009 crash low and the right shoulder low formed during that tough correction in 2015. The breakout occurred in late 2016 and the INDU hasn’t looked back since. The price objective for that H&S bottom is well over 40,000 if it continues to plays out.

This next chart for the INDU really isn’t a H&S bottom, but I labeled it that way because of the symmetry of the left and right shoulders being fractals.The neckline is really a support and resistance line.  I first built this chart during the 2015 correction as the right shoulder was forming what looked like a fractal to the left shoulder. It was uncanny how both the left and right shoulders looked at the time. The right shoulder fractal broke symmetry at the very last moment when the price action reversed up off the neckline symmetry line for the last time. In 2007 the price action broke below the neckline symmetry line. The red circles are the exact same size and the breakout above the big neckline came in December of 2016.

This next chart for the NYA I also built out during the 2015 correction which was also showing a fractal left and right shoulder which was even more pronounced than the one on the INDU. To see the beautiful fractal symmetry follow the price action starting with #1 on the left shoulder then look at #1 on the right shoulder. Then follow the price action from #2 to # 3 so on and so forth until you get to reversal point #6 down to the neckline symmetry line. In 2007 the price action broke below the neckline symmetry line and in February of 2016 the price action bounced off of the neckline symmetry line that started the two year bull run until January of this year. The breakout of the big neckline took place in January of 2017. As long as the neckline holds support the big game plan is still in play.

This last chart for tonight shows a massive double headed H&S bottom on the COMPQ. The symmetry is really quite good. Again the breakout above the big neckline took place in late 2016. Since today is the first day of trading for a new month it will be interesting to see if today’s gap will be closed or will we look back and see a break away gap by the end of the month. See thumbnail on the right side of the chart.

These massive H&S bottoms have been working since late 2016 which is right at a year and a half. Will they keep working out is any bodies guess, but as long as they keep playing out this part of the big game plan is still in place. “If it aint broke don’t fix it.” Have a great weekend. All the best…Rambus

 

GLD Update…Ping Pong

I recently posted this daily chart for the GLD which shows a rising wedge with a similar top to the one that formed back in 2016. I mentioned we could see a ping pong move between the bottom rail of the rising wedge and the bottom black dashed trendline for the top around the 124 area. Today we are getting the backtest. If the bulls can takeout the black dashed S&R line that would be showing some bullish price action. Then if they can rally the GLD above the top rail of the rising wedge that would complete the 5th reversal point and we would then have a 5 point bullish rising wedge reversal pattern to the upside. Today’s price action is also closing some of that huge breakout gap.

Dow Transportation Average Update…A Tell

Last week we looked at this rectangle trading range that was building out on the Transportation Average. Today the price action is in the process of trying to breakout above the top rail. Today’s rally has also completed the 5th reversal point making this rectangle a reversal pattern to the upside. Since this rectangle formed below the previous high we needed to see a reversal pattern, with an odd number of reversal points, to reverse the small move down.

We’ve also been following this long term weekly chart which is showing some beautiful Chartology starting with the very symmetrical H&S bottom with the head forming at the 2016 low that started the 2016 uptrend channel. In 2017 the Transportation Average built out the bullish rising wedge which broke out to the upside. Since January of this year the Transportation average has been experiencing a correction or consolidation phase. There are two distinct patterns you can see. The first one is the blue triangle which has formed on the bottom rail of the 2016 uptrend channel. The second pattern is the red 5 point rectangle reversal pattern which also has formed on the bottom rail of the 2016 uptrend channel. IYT is a 1 X long etf if anyone is interested in trading the Transportation Average.