Last week the markets began to emit signals providing a certain level of clarity. These signals were particularly evident in the precious metals sector. Looking forward markets now appear slightly less opaque than before.  As a result, I thought it best to engage ourselves in devising a plan for the rest of the year. We will call this … Plunger’s Strategy Session.

As I have mentioned Rambus has been very gracious in giving me free reign in what I write. You must realize I am a little more speculative than Rambus tends to be. I tend to get out a little more in front of my skis than Rambus. This means of course, I have more of a chance to be wrong. I would call myself a macro/technical trader, whereas I would consider Rambus more of a breakout trader. He often takes positions when the market gives a direct signal using the market’s price action as his trigger. Rambus’ method is likely more reliable, than mine however I tend to be more asymmetric, hunting for the big score. Peter Brandt, the legendary wildly successful trader is an example of a breakout trader.

Although, I have some slightly differing views on some market sectors, overall I am remarkably in line with Rambus’ work. This is particularly true with the metals and commodity markets. In fact, when I mention that the market delivered a level of clarity this week, I must note that this was chiefly identified by Rambus himself through his world class analysis of the PM charts. Knights this level of analysis is available no where else on the planet. Understand this.

When I mention I am a macro/technical trader my method is to first identify a macro story and then see the story play out in the charts. This requires a form of inter-market analysis and it is so very important to guard oneself against curve fitting. Frankly I see a lot of that going on where one draws lines to fit ones narrative as opposed to being objective to the markets message. One needs to constantly examine himself not to become subject to this. Let’s call this maintaining ones intellectual integrity. I wake up everyday and ask myself if I have it right, it’s not about parading ones views, it’s about making money. When the market delivers its message that one is wrong, one needs to acknowledge it-fix it and then move on to the next trade.

The Average Investor-No Clue

In my “real” job as a wide body Captain, I get paired on a daily basis with middle aged professionals who have money to invest and frankly have no idea what to do with it. The only ones who exhibit a veneer of certainty of what to do can only spout off boiler plate brokerage sales talk. Got to invest for the long term… The market returned 7% a year over the last 100 years…. If you weren’t in the market for the best XX days your returns would be cut in half… on and on, yada yada. But, when one digs a little deeper the average guy is nervous. He knows there is something wrong out there. He has a deep fear there will be another crash and knows he can’t survive it looking down the road towards retirement. But he has been too programed by the Wall Street marketing machine to do anything about it. So when one pulls down the veneer and gets him to open up about his investable assets he will inevitably say “but what else can I do?” In other words he has no skill-set and no clue on how to think for himself. That’s the purpose of this week’s report to lay out a strategy going forward.

Two weeks ago I presented the historical context we find ourselves in. We are in the end phase of a long term credit cycle. The bubble burst in 2008 and since then the central banks of the world have been attempting to reflate it. In other words the FED & CBs have deferred the resolution of the burst bubble into the future and the future is now. Through their QE programs and credit offering they have pulled demand and economic activity from the future to the present. This has not solved the problem of debt saturation it has only shifted its resolution into the future. “Free” money has only deferred failure into the future and made the ultimate resolution more painful due to the gross distortions in the economy as a result of FED and CB policy.

Market activity over the past week continues to validate the narrative set forth in my last column. In bullet format this is what we saw:

* London and Europe displaying topping action in the modeled timeframe of May-June.
* Gold and Silver markets indicating a downside resolution.
*The Gold-Silver ratio indicating a credit contraction, decreasing credit  availability.
*Credit spreads widening.
*Yield curve flattening.
*Commodities resolving to new lows.
*Speculative sector of stock market losing conviction (QQQ).
*Shift from growth to value.

All of these market actions are consistent with the model presented which is formulated from the past five credit  cycles.

Let’s review the dynamics of the model: Towards the mature end of the credit cycle commodities undergo a blow off mania. This mania is typically fueled by wartime demand, however in the past case it was China’s infrastructure buildout. After the bubble bursts speculation flows into financial markets where it finally reaches a frenzy 9 years later which ends the speculation and results in the post bubble contraction process of deleveraging. Debt at the peak of the cycle has grown so large that an economy cannot grow out of it and balance sheets need to get “reset” to start a new cycle of expansion. This all sounds rather antiseptic in such nutshell form, however recall the wrenching process which this entails. In all cases in the past it required a depression to complete the process. Additionally, world wide power shifts and wars are often all part of the process. So it will be a time for all of us to be smart and agile. We have to think for ourselves.

Are the Markets getting ready to crack?

That’s the opportunity, so here is a short term speculative trade to position oneself for it. Note I did not say the bull market is over. I see the market at the cusp of a short term correction or call it a “shake-out” before going on to a final high later this summer. Recall the model has London and Europe peaking in May-June with the US market peaking in September.  This is what happened in 1929 and I believe we are set up for a similar scenario. Not necessarily a dramatic crash but a clearing of excesses we will call it.

Below we see a daily line chart of the 6 months leading into the crash of 1929. Note the market underwent a shakeout in late May before its run to highs in early September. Look specifically at the following indicators during that shakeout.

1.Price found support off the red dotted S&R line.
2.Price found support at the 150 EMA (30 W EMA)
3.Price found support at the 50 Day BB
4.The CCI reached the -150 level (exceeded it)

After the shakeout we underwent a wild short squeeze which developed into an ugly H&S pattern which resolved itself into the crash of 1929 signaling a deflationary economic event coming over the next few years.

Last week I chronicled that the NDX had undergone a weekly outside reversal to the downside associated with a near term selling exhaustion. The last time this occurred was in March 2000 at the peak of the Dot-Com mania. We can see how the NDX and QQQ has now formed a H&S above its S&R line. It does not become valid until the NL is broken, however that’s the trade. I see evidence that this is the shakeout before the final run to an ultimate high in the NDX in late summer as the model calls for.

My preferred vehicle is the 3X QQQ where we can see the confluence of indicators pointing to a potential price objective of around 85. This is the same set-up we saw in the 1929 chart in the shake out before the final blow off top. If the trade evolves as envisioned I will personally reverse positions and go long to try to catch a run to the upside through August.

GSR confirms Bond Market progressing towards a credit contraction.

The Gold-Silver ratio made a significant move upwards this week. The breakout of the triangle pattern forecast a tightening of credit in the fall market clearing season. This week it moved to confirm the forecast by reaching its previous move high. This serves as another key market signal pointing towards a credit contraction in the fall.

The Treasury curve resumed its flattening this week. This is part of the process of moving towards a possible recession. The spread between low grade corporates and treasuries is starting to open which is consistent with the move in the GSR.  Both of these indications is indicative of early stage credit deterioration. Spread widening combined with weak commodities are the ingredients of liquidity problems going forward into the fall months.
The TLT:JNK chart below shows the ratio confirming an uptrend, meaning a move towards credit deterioration.  Note the break above the 30 EMA and positive stochastics.

You Can’t get rich if you don’t have the cash to deploy when great values come along.

This is why I am sitting on a large pile of liquid funds. Note I didn’t say cash because this past week I deployed most of that cash hoard into the government bond market. That’s right, I put my dry powder into bonds. Bonds should strengthen going into the contraction and I will sell when my objectives are met and the great opportunities present themselves. I split the position into two chunks, half into the Wasatch-Hoisington Treasury Fund and half into the TLT.

The Hoisington TF shows great chartology having put in a nice H&S bottom and is now breaking through resistance. It should be clear sailing up to the 18.75 level. This is a long term maturity 20+ year duration fund managed by Van Hoisington and Lacy Hunt.

The TLT is of course 10-year US Govt treasuries. It has put in a nice double bottom and is now above a rising 30 W EMA and into a symmetry zone of no resistance. It’s a good place to just “hang out” with a jumbo-sized war wagon of cash at the ready.

Gold and PM Market- The Master and Commander

After seeing the charts and analysis Rambus has provided us over the past week I can only say-I am not worthy. Through all the false moves and hype of the sector he has stayed firmly at the helm. Master and Commander comes to my mind as he has remained steady on the tiller. I can’t really improve on his PM charts so I will post his with my comments.

Over at the Gold Tent, Electrum posted an article by Peter Brandt about trend lines. In the article he shows where the curve fitters went wrong. He points out the correct criteria for a break through a trend line.. Peter would know as he has been a breakout trader for 40 years.
He summarizes three criteria for a valid break of a trend line:

Penetration– it must close 3% beyond the trend line.
Volume– Did volume rise notably on the penetration?
Strength – Did it just rise to the line then feebly roll over? If it did then any selling pressure
invalidates the move.

Using these criteria let’s review the following Rambus charts:

Rambus’ work over the past week has clearly shown that these patterns have failed in their prolonged back testing phase.  We can see this in his combo chart which I post below:

In addition to his work let’s update my gold market bottoming system where we will see how the market has deteriorated significantly over the past week.

HUI:GOLD- My #1 chart telling me how the stocks are doing compared to the metal. The stocks should outperform the metal in an uptrend and we see the opposite. In fact this week we violated the previous low- Bearish

Silver:Gold– Once a rally gets going silver should outperform gold. Clearly we see a troubled chart- Bearish

Gold:PPI Here we see the 30 W EMA turning back the ratio trend. Again that’s not what we want to see. We want to see input costs reducing relative to the gold price- Bearish

Advanced Decline Line– This has been a mixed bag until this week. It has now tipped its hat to the downside- Bearish.

I am a reformed gold bug, I want to see gold stocks go up, but I also want to buy near the bottom so I am trying to be objective. Remember we are trying to make money here not be cheerleaders. So where could the HUI actually end up? This is where Rambus and I diverge in our views. His charts are extremely compelling and he is also right…anything can happen no matter how shocking. But I am sticking with my original forecast that the HUI will complete its measured move to 135ish and that will be our bottom. It may even come as early as this fall.

If the model plays out and we get a spreading liquidity problem in the fall rest assured the gold stocks will get hammered. This seems counter intuitive to many but consider that gold is bought as insurance so when the disaster hits the insurance is cashed in. In addition the time to clear gold trades is one day less than other assets so it provides emergency liquidity therefore it is sold first. Once gold is sold to cover the initial disaster claims however,  investment demand may increase for gold which should move the gold price up in non-USD currencies.

So the initial credit “hit” could wash out the gold stocks and then they could begin their relentless rise in a post bubble contraction bull market.

The below line chart of the HUI depicts 136 as a measured move PO based off of the H&S top. Note the retracement was exactly a 50% FIB move. Also we see these head tests or bull traps so often in markets, it’s classic.  It’s Mr. Market’s technique of building up selling power by getting the gold bugs all lathered up again and chasing the shorts out of their positions. For the past 5 months we have been building out a 5 point descending triangle. What we see occurring is each time price rallies it is met with overhead supply at a lower price level. Recall the principle that important patterns tend to build themselves out near significant S&R lines. We see it just broke below the extended NL of the original H&S. Also understand that triangle pattern is coiling energy as time progresses. At some point it will break above or below and release that energy in an impulse move. Evidence suggests that the breakout will be to the downside, thus fulfilling the measured move.

The Matterhorn- It may have been just an aggressive back test.

After reviewing Rambus’ work that’s what it appears to have been, an aggressive back test.  The Matterhorn chart shows this and all the machinations of the past 2 years. Here we see a measured move for gold to the 1057 level, which would be a double bottom. Note also the above HUI PO of 136 would be 36 points above its previous low. This would set-up a classic gold stock/gold positive divergence. It would be even more classic if the stocks were to bottom well ahead of the metal.

The USD

Over the past few weeks I have laid out the case for a bottoming USD. The world’s debt bubble needs to be serviced in USDs and the world is short the dollar. Lower oil prices and the decay of the Euro-Dollar system is creating a shortage of US Dollars. For several years now the dollar has been rising in a post bubble contraction. Market moves don’t occur without consolidations and that is what we have been witnessing over the past two years. Over the past week the Dollar has been attempting to build itself a bottom after putting in a TD13 sequential sell. This is constructive and if it can hold the 96.50 level it should be able to complete its bottom within one month. If not a move all the way down to 93 could still be possible. Eventually the dollar should fulfill its measured move to the 120 level once the contraction takes hold within 2 years.

Commodities

Commodity prices continue to deteriorate. The grains are undergoing some basing action, however the broader commodity complex is in decline. We are reviewing this long term chart, yet again, because it is so important.  Again, its the scariest chart on the planet because of its implications.

We have watched the daily chart over the past three months trace out perfect chartology. Bearish rising wedge getting repelled at the 150 EMA then go onto violate the S&R line which has contained price over the past year. The snap back then gets repelled by its now declining 150 EMA. Note that snap back could only survive above its neckline for 4 short days. It’s impulse move is now releasing the pent-up energy of the entire year long retracement. The early May low offered absolutely no support and it looks as though 164 is dead ahead.

Don’t think of this exercise as simply lines on a chart. Consider that the CRB is made up of 40% liquid fuels and oil trades in dollars. Lower oil and commodity prices means fewer dollars in the world. It adds up to emerging markets blowing up in the contraction. This chart is very important and we have not even considered the impact of a rising USD.

Plungers Big Trade- The Oil Short

I picked Oil as my Big Trade because this year oil is the most important economic indicator. It wraps up FED policy errors and economic sensitivity into one trade. Through “free” money the FED has allowed the fracking industry to blossom and flourish my misprizing capital. We are headed towards higher output here in the USA and the frackers have forward sold production at $50 two years into the future. Its time to pump it.

Meanwhile OPEC lives in La La land. Flood the world not with oil, but with propaganda. Whatever it takes to get its Saudi Aramco IPO off next year. So they are actively ceding market share to frackers and OPEC cheaters. Keep in mind OPEC was created for principally one reason to prevent a free market through production quotas. What happens when the free market asserts itself and prices continue to fall while countries have to pay their bills?  One has to put money on the table to keep the lights on and the revolutions at bay. They are going to pump.

At some point OPEC is going to figure out that its jawboning is not influencing the price and all they have accomplished is to cede market share to frackers and OPEC cheaters. At that point what if OPEC decided to announce it was not going to extend the cuts?  Can you picture the bloodbath?  History repeats, this looks like 1985 all over again and we haven’t even talked about a recession.

It is becoming more apparent that OPEC is not able to control the price of oil due to FED money printing. I believe it is inevitable that at some point they will face reality and protect their franchise.

The oil price is mirroring the dynamic of a ball bouncing down a staircase. The conversion of potential energy into kinetic leads to higher and higher bounces. We currently appear to be at a stretched downside point that should soon lead to a upside reversal. The downside is getting pretty exhausted for now be ready to cover soon.

In the big picture chart of oil below consider a recession combined with a reversal of OPEC policy and one should see that this chart may have $25-$30 oil written all over it.

Shift From Momentum to Value

This is another phase shift element included in our market model that we are witnessing. This does not mean value stocks have to go up right away, it simply means they will out perform growth stocks. It is significant that we see this chart reaching extremes right where the model would call for it to occur. What we see here is a trend change clearly in progress. Time for long suffering value investors get their turn at the wheel.

Special Opportunities- Scandium International

It’s no secret I have an institutional sized position in Scandium Intl. Two years ago after a one-on-one conversation with John Kaiser I recognized the revolutionary and scalable opportunity that exists with this concept. John has constantly put this idea out in front of the public in his weekly Howestreet broadcast. The chart below delivers classic Chartology patterns all the way up. Over the past 3 years the 30 W EMA has been in a steady climb upwards. This past week was a great week from a chart perspective. It sliced down through both its 150 & 200 EMA in one single day, however on low volume. The next day however, it reversed the move on 4 times the upside volume. In markets the most important price of the week is the Friday closing price and here we got a weekly bottom hammer with the body above the 30 EMA. Also note the turn up on the weekly stochastic above the all important 20 level.

Weekly OBV and Acc/Dist both in an uptrend. Again a very healthy looking uptrend.

I use the term “special opportunity”  as I think this developmental project can proceed no matter what the market does. It’s a revolutionary concept providing light weight aluminum alloy to industrial production. This same model played out before in the steel alloy Niobium which revolutionized steel production, so we have been there….done that. This is the same thing except it’s for aluminum. This company is working on a USA listing and will soon start coming on the radar of investors.

Gold Junior Exploration

Despite the bearish configuration of the PM sector there is still selective opportunity in the junior space. The focus of the market is on the few projects that are viable at today’s gold price. These are not pie-in-the-sky projects where we need $1600 gold to make them work, these are projects that are economic due to lower input costs right now. I refer you to Spock’s site where he has focused his efforts to track these specific opportunities.

Companies that are in an uptrend that I follow are as follows:

My takeover candidate is Dalradian Resources (DNA.to). This is on the front burner of activity I would expect some action soon.

Other positive configuration companies are :

AAU, SGB.v,HUM.L, KG.v, ATV.v, NHK.v, AUG.to

Finally, my favored micro-cap junior is Sage Gold. The chartology is superb, which is what initially got my attention. The spike up in late May was due to a brokerage house upgrade and now one can position oneself in the stock at pre-upgrade prices. It’s a buy.

Plunger’s Short Corner

I am introducing a new section called Plunger’s short corner.  Yes, I am already short the oil market and the QQQ, however there’s lot’s more opportunity out there.  This week I offer a quick review of the restaurant industry.  Restaurant spending is the ultimate canary in the coal mine indicator.  When times start to get tough and budgets come under strain disposable income directed towards eating out is the first to go.  Spending in this sector typically turns down up to 2 years ahead of a recession.  For the past year we have seen pressure in the industry and the marginal operations are showing it on their charts.  Here are just a few:

That’s right Knights… it’s getting ugly out there.  If any of these stocks has the slightest bounce lay your line on them.

Conclusion

The average investor has little clue of how to operate in markets. He knows little more than to just repeat Wall Street marketing boilerplate. This is why he gets slammed at market turns and rides bear markets down. He can’t think for himself. Over the past 2 weeks we have reviewed the overall context of where we are in the market cycle and this week have put together a plan of action. We are thinking for ourselves.  It has been Plunger’s Strategy session.

This first chart is a 2 hour look at the INDU which broke out of a blue triangle consolidation pattern in late May with a breakout gap and backtest. Today the INDU is testing its all time highs.

As long as the top rail of the triangle consolidation pattern holds support the impulse move should continue.

The SPX shows the breakout from its triangle consolidation pattern in late May. Support continues to be around the 2400 area. Short term traders need to watch the 20 day ema or the 50 day ema as a place to set your sell/stops.

The RUT is still finding resistance at the top rail of its 6 month trading range. A breakout above that top rail, whenever it occurs, will be very bullish for the small caps.

Below is a daily chart for the $COMPQ which shows the bull market uptrend channel began in February of 2016 which is still intact.

The $NYA, which is a good measure for the health of the overall stock markets, is trading at a new all time high today after breakout out of its blue triangle which formed just above the neckline of a very large H&S bottom.

The daily chart for the XLF, financial sector broke out of its blue triangle 4 days ago and is now trading above the right shoulder of the possible H&S top that many are looking for. So far so good.

Keep a close eye on the $BTK, biotech index, as it’s still testing the top rail of a potential bullish rising wedge if the breakout is to the topside.

My goal with the $SOX trade is to ride it up to the 2000 high around the 1300 area, where at that point we could see an important correction take place.

The weekly chart for oil shows it’s close to making a new low since the breakout which is needed to keep the impulse move going.

The daily line chart for the UNG is showing it’s making a lower low currently.

There is something happening in the commodities complex that has been going on for awhile now that needs to be addressed tonight. A subtle change actually started earlier this year and has been gaining momentum especially in the energy sector. I know for a lot of you, with the weak US dollar, you are thinking, “how could commodities be declining,” which goes against everything you have learned about how the markets are supposed to work. If the markets always behaved like everyone thinks they should then there would be no markets, because everyone can’t be right. That’s the nature of the beast we’re trying to tame.

Tonight I would like to show you some bearish rising wedges which have formed all over the place in the commodities complex. Many of the rising wedges took over a year to build out so that sets up a healthy decline. The bigger the pattern the bigger the move.

This first chart tonight is the ratio combo chart using the TIP:TLT to gauge if we are experiencing inflation or deflation. Earlier this year the ratio in black formed a small topping pattern just below the black dashed trendline, then had a quick backtest, and is now starting to gain momentum to the downside. When the ratio in black is falling it shows deflation. The CRB index along with the GDX are still in a downtrend with the CRB index being weaker than the GDX, as show by the 30 week ema.

Next lets look at some different commodity indexes to see what they may be telling us. This first commodities index we’ll look at is the old CRB index. This bearish rising wedge began to develop way back in early 2016 with the 4th reversal point taking place a year later at the top of the rising wedge. As you can see the 4th reversal point was a H&S top reversal pattern. The breakout came in March with no backtest. There was a small blue bearish rising wedge which formed in the middle of 2015 which was part of that huge impulse leg down.

This next chart for the CRB index I’ve used for many years which shows alot of nice Chartology on it. The CRB index is a good producer of chart patterns and measured moves as shown by the different colored arrows. Note how every important high is lower that the previous high going back to the top in 2008. Our bearish rising wedge doesn’t look so big on this long term chart.

This last chart for the CRB index shows the 75 year history. During the 2015 crash the price action punched through the upper brown shaded support and resistance zone before reversing back up. It looks like the CRB index is either going to put in a double bottom or make a new low that hasn’t been seen since the early 1970’s.

The DBC looks a lot like the CRB index, but it trades with a lot move volume.

This long term weekly chart shows a 5 point triangle reversal pattern which started the infamous crash into the January 2016 low which is the first reversal point in the blue bearish rising wedge. The blue arrows measures the price objective using the expanding triangle as the halfway pattern.

The $GNX commodities index shows a similar bearish rising wedge.

The price objective of a rising wedge is down to the first reversal point at a minimum. This monthly chart for the $GNX shows a very large 10 year falling wedge. The bottom rail of that 10 year falling wedge would mark a great price objective to maybe complete the bear market.

This next stock is the IGE, natural resources etf, which is setup differently than the commodities indexes above. IGE built out a 7 point bearish rising flag with the breakout taking place earlier this year.

The $GYX, industrial metals index, built out an unbalanced H&S top with the backtest looking like its complete. A move down to the brown shaded support and resistance zone at the bottom of the chart would be a good place to look for an important low.

Now I would like to get into the meat and potatoes of this post and look at the energy sector from several different angles. First lets look at the $WTIC which is showing two different rising wedges. This first one is a daily line chart which shows the first reversal point starting at the first reaction high. The backtest was a little sloppy but held.

This is what it looks like on the weekly bar chart.

Awhile back I showed you this weekly chart for the $WTIC which shows how it was morphing into a bigger bearish rising wedge as shown by the red circles. Even without the red circles there are still 4 reversal points with a clean breakout and backtest.

The 10 year daily chart shows how the rising wedge fits into the big picture.

This last chart for WTIC is a 35 year quarterly chart which really puts the bearish rising wedge into perspective. At a minimum the blue rising wedge should reach the previous low, from there its anyone’s guess.

Now lets turn our attention to natural gas which built out a classic H&S top with the left shoulder and head forming inside the bearish rising wedge and the right shoulder forming as the backtest to the bottom rail of the rising wedge, with the height of the left and right shoulders being equal. This is the same setup I was looking for on gold, but it never materialized.

This long term weekly chart for Natural gas shows how the combo bearish rising wedge and H&S top look in the big picture. As you can see Natural gas likes to build out H&S reversal patterns which are generally pretty symmetrical.

Below is the short term daily chart which shows the H&S top in more detail.

This last chart for Natural Gas is a 30 year quarterly chart which shows the complete history. I’ll let you use your own imagination on this chart.

When we first opened up our doors at Rambus Chartology I used to post this chart as the Late Friday Night Chart. Note the 5 point rectangle reversal pattern at the top of the chart. Our first clue that the rectangle was going to break down was the small red 5 point bearish rising wedge. Note the touch of the bottom rail at 2.50, the little pop telling us the bottom rail was still hot, and then the breakout to the downside.

I still have many more chart to show you, but I’m way past time to put this post up. I’ll save the rest of the charts for part 2 for the Weekend Report. It all makes sense when you see the big picture unfolding before your very eyes. All the best…Rambus

Tonight I would like to update some charts for Natural Gas and oil which appear to be building out a topping formation. If these patterns play out there is a lot of room to the downside we can take advantage of. There has been a lot of backing and filling, but it looks like this may be coming to an end and we may finally get the impulse move down.

$NATGAS has been building out a 1 year H&S topping pattern and just recently completed the high for the right shoulder. This daily chart shows a blue 5 point bearish rising flag that broke below the bottom rail today. A backtest to the underside of the 5 point bearish rising flag would come in around the 3.18 area which would represent a low risk entry point to go short natural gas. The possible neckline is still quite a bit lower which would be another low risk entry point if the neckline gives way.

This next chart is a weekly look which shows a classic H&S top forming with the left shoulder and head building out inside the rising wedge, and the right shoulder forming on the backtest to the bottom rail of the rising wedge. Note how long the backtesting process took before it was finally completed. Most folks would have given up and moved on to something else, but sometimes having some patience can be rewarding. Patience would also have been required when the very symmetrical 2 year triple H&S top broke down and began consolidating the first leg down, building out the blue diamond. Each reversal $NATGAS has had since 2012 was accompanied by a H&S reversal pattern. As you can see, if our current H&S top plays out this move down is just getting started.

Lets now look at UNG, natural gas fund, that is the best proxy for either going short or long one of the etf’s for natural gas. This 1 1/2 year daily line chart shows the bearish rising wedge with the smaller blue bearish rising wedge which formed the backtest to the bottom rail. Even after the backtest was completed at 7.85 UNG still didn’t want to go down and traded sideways, creating a double top just below the bottom rail of the black rising wedge. Finally this week the price action is starting to fall breaking below the double top trendline at 7.30. The price objective at a minimum would be down to the first reversal point in the one year bearish rising wedge at the 5.75 area.

This longer term daily chart picks up the price action once the 8 point diamond consolidation pattern broke down. The smaller red consolidation patterns are what you want to see in a strong impulse move down, one forming just below the previous one. The move was so strong you can see a parabolic decline out of the blue diamond.

This weekly chart puts the big picture in perspective which shows the end of a very big rising channel with a H&S top that finally finished off the reversal pattern. The blue diamond is basically a halfway pattern that formed in the middle of that massive decline. At the top of the chart I listed 2 short efts, DGAZ which is a 3 X short etf and KOLD is a 2 X short etf for natural gas.

Now lets turn our attention to the $WTIC, oil index, which had a massive decline into the early 2016 low. Initially it looked like oil was going to build out an inverse H&S bottom, but as time went on the price action failed to move much higher than the neckline and began trading sideways. After nearly a year of sideways chopping action it looks like oil has built out a bearish rising wedge. There are several ways we can draw in the rising wedge, with the first one starting at the 2016 low. It’s not the prettiest rising wedge I’ve ever seen, but it does fit the bill as the backtest found resistance right where one would be looking, the underside of the bottom rail. There was a smaller bearish rising wedge which formed in 2015 which had a breakout followed by a backtest.

The 2nd way we can draw in a rising wedge is by starting the first reversal point, not at the bottom, but at the first reaction high. This rising wedge gives us 5 reversal points which we would need as the rising wedge is forming above the previous low. Note how the price action has interacted with the bottom rail of the one year black rising wedge. The initial backtest I was looking for was a little strong at 49.50. After petering out just above the bottom rail oil declined once again and broke below the bottom rail with another bactest to 50.26 which so far is holding.

This next chart for oil is a 35 year quarterly chart which shows the entire history going all the way back to 1983. For 20 years oil bounced between support at 10.50 and resistance at 40.00. Starting in 2000 oil built out a massive blue bullish rising wedge that when broken to the upside propelled oil up to its all time high at 147. Once the price action took out the old all time high at 40, I labeled the massive trading range from 10.50 to 40.00 as a double bottom which was 276%. I added that 276% to the breakout point above 40 and got a price objective up to 146.

We may be seeing a similar setup, only this time it will be to the downside if our current blue bearish rising wedge plays out as a halfway pattern. I have many more oil charts I could show you but it’s getting late and I need to get this posted. The bottom line is Natural gas and oil may have finally completed their one year plus trading ranges that may offer us a good opportunity go short. All the best…Rambus

It looks like natural gas is finally showing its hand. Below is a weekly chart for $NATGAS which has built out a H&S top with the horizontal thin black dashed line showing the high for the right shoulder which is taken from the high of the left shoulder. As this is an end of day chart today’s price action isn’t on this chart yet which is about 4% below last Thursday’s high.

Last week I showed you this potential H&S top forming on gold which was showing the horizontal thin dashed black line showing the high for the right shoulder around the 1265 area which is the same setup on the natural gas chart above.

Below is a daily chart for GLD which shows the left shoulder and head forming inside the rising wedge with the possible right shoulder forming on the backtest to the underside of the bottom rail of the rising wedge. The horizontal line taken from the top of the left shoulder is also in play in this area. To say this is a critically area for GLD is an understatement.

There is no doubt that the US dollar looks bad right now after breaking below the bottom rail of its 5 point falling wedge last week. Before I give up totally on the US dollar there is one thing I’m going to look for first. When all else fails I like to go back to the initial pattern which was a sideways trading range or a rectangle pattern. I’ve seen in the past that when you have a nice tight rectangle with a breakout above the top rail, there can be one very big shakeout move where the price action will decline back to the center mid dashed line, where final support may reside. If the dashed mid line fails to hold support then there are bigger problems. Below is a weekly chart for the US dollar which shows the price action testing the mid dashed center line.

The $US dollar daily line chart.

The daily chart below shows a potential downtrend channel with 2 blue consolidation patterns. If the blue bearish falling wedge is a halfway pattern to the downside the blue arrows shows a price objective down to the 96.20 area, which is labeled impulse move. The breakout to breakout price objective is a littler lower at 95.45. Those 2 price objectives come in pretty close to the mid dashed center line on the rectangle pattern above.

This weekly chart shows how the downtrend channel fits into the bigger horizontal trading range, which is now testing the dashed mid line. A break below the dashed mid line will most likely lead to a move down to the bottom of the rectangle.

The million dollar question remains, is the 2 year trading range a top or a consolidation pattern to the upside?

Below is a daily chart for the UUP which shows the original 5 point bearish falling wedge. I added a parallel bottom rail to the top rail which shows a possible bull flag if the bottom rail at the 24.85 area holds support.

This next chart for the UUP is the same chart as the one above, but this one shows the 2 smaller blue consolidation patterns that make up the downtrend channel up to this point.. If the lower blue bearish falling wedge is a halfway pattern between the blue bearish rising wedge, the blue arrows show a price objective down to the 24.87 area. Likewise, if the blue bearish falling wedge is a halfway pattern the BO to BO price objective is down to the 24.73 area.

This next chart is a daily look at the USDU, Dollar Index, which has a more balanced makeup of currencies. Monday the price action hit the bottom rail of the falling wedge completing the 5th reversal point. If the falling wedge is going to be a bullish falling wedge, the USDU will have to start rallying and breakout above the top rail. Note the 4 point rectangle consolidation pattern that formed on the left side of the chart. From a Chartology perspective the top rail area should hold support when backtested from above, as shown by the top rail extension line which is now being strongly backtested.

It’s been awhile since we last looked at this 40 year chart for the US dollar that shows a massive falling wedge with a breakout and 2 backtests to the top rail at 92 which is also the neckline extension line taken from the 2000 H&S top. From the 2011 low there still is a series of higher highs and higher lows in place. A break below 92 would change that.

Below is a combo chart which has gold on top and the US dollar on the bottom. Six weeks ago gold hit the top rail at the 1300 area and backed off telling us that the top rail is hot. If the US dollar on the bottom chart can’t hold the 96 area, then there is a very good chance that gold will breakout above the top rail, possibly signaling the bear market is over. To say the 1300 area on gold is important is an understatement.

This next chart is another combo chart which has the US dollar on top and gold on the bottom which shows the inverse correlation these two generally have. The last time we looked at this chart the US dollar was still trading inside the red falling wedge and gold was still trading inside the red rising wedge. The only change I made was on the US dollar chart where I made the bottom rail of its uptrend channel parallel to the top rail. Gold was already in a parallel downtrend channel.

Below is a weekly line combo chart which has the $XEU on top and the US dollar on the bottom. As you can see the XEU on top is showing the blue bullish rising wedge while the US dollar is showing the blue bearish falling wedge. I’ve extended the necklines from the previous H&S patterns, labeled neckline extension line, which can be a place to look for a reversal to occur. The backtest to the neckline extension line on the XEU would come in around the 113.10 area while the neckline extension line on the US dollar would come in around the 96.40 area. Again, the million dollar question remains, is the XEU building out a consolidation pattern to the downside, and is the US dollar building out a consolidation pattern to the upside? Whichever direction these 2 year trading ranges breakout will have a big impact on many markets.

This last chart for tonight is a ratio combo chart which has the US dollar to the XJY on top, and gold on the bottom. Keep in mind we’ve been following these major trend channels since late last year before gold hit its top rail at 1305 and declined, so up to this point they have been following the script to a tee. The big question is, will they continue to follow the script to a tee? As you can see the ratio chart on top is building out a blue falling wedge while gold has built out a blue rising wedge.

It’s not everyday that you find charts like this at a very critical juncture which can change the major trend in a big way. Up to this point nothing is broken yet in regards to the big picture, but that could change in a heartbeat.

The Dollar is now at the currency equivalent of The Little Big Horn. Stay tuned.

All the best…Rambus

There is a pattern forming on gold which wasn’t there yesterday. With yesterday’s big move up and no follow through to the upside today there is a potential H&S top building out. Many times I will use a neckline symmetry line which is taken from the neckline and moved up to the top of the left shoulder to show the possible high for the right shoulder. There is another technique I use where I will use a horizontal line from the top of the left shoulder that can sometimes show the height for the right shoulder. Today’s high at 1265 matches the high for the left shoulder. I’ve been showing the possible neckline as a S&R line, but now after yesterday’s move it’s looking more like a possible neckline. The breakout will come into play around the 1220 area which will confirm the H&S top.

There is another technique I’ve shown you in the past that has to do with a wedge pattern. I’ve been showing you that gold has broken out of a bearish rising wedge with a breakout gap and a backtest today to the underside of the bottom rail. This technique I use shows how the left shoulder and head form inside the wedge and the backtest to the underside of the rising wedge forms the right shoulder. It ‘s still very early yet, but these two techniques show a strong possibility that gold may well be forming a H&S top.

Below is the PM combo chart which is showing yesterdays move may have been a strong backtest to the bottom rail of the triangle consolidation patterns as today’s price action closed below the bottom trendline. There were also several apex backtests which held resistance.

Yesterday I speculated on whether the gap opening was an exhaustion gap or a breakaway gap. With the price action trading back below the bottom rail of the triangle consolidation patterns it looks like we may have seen an exhaustion gap.

Based on that the possible exhaustion gap in play I’m going to jump back in and take an initial small position in the Kamikaze stocks. For most investors that’s almost an impossible thing to do, sell out one day and buy back in the next. Yesterday was called, shaking the bush day, to get the shorts to cover with what now looks like a strong backtest in place. Again this trade is not for everyone as the volatility is extreme in both directions. Only risk capital is used trading the Kamikaze stocks JNUG JDST DSLV and DGLD.

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.

Below is a daily chart for the UUP which shows the price action testing the bottom rail of the falling wedge. There are 5 completed reversal points which technically, at the moment, makes the falling wedge a reversal pattern to the downside if the bottom rail gives way.

The weekly chart shows the backtest to the top rail of the nearly 2 year trading range which is critical support that needs to hold.

UUP long term weekly chart: