Tonight I would just like to look at some random PM charts, in no special order, to get a feel of where we are in the near to long term look.  As you know the PM complex finally broke down from their two month consolidation patterns which is part of a bigger 10 month consolidation pattern. In most cases the consolidation patterns have a down slopping look to them that tells me the price action wants to head lower. In a normal downtrend a consolidation pattern will form sideways like a triangle or rectangle or will slope up against the downtrend such as a bear flag that has a higher high and higher low before it gives way to the downside.

Lets start with a four month 2 hour chart for the GDX that shows the downtrend that has been in place since the March high. After breaking out from the five point bearish expanding rising wedge GDX went on to form two small red consolidation patterns that make up the bigger blue bearish falling wedge. The blue arrows measures each half of the big impulse move down with the blue bearish falling wedge in the middle. There is a good chance we may see a backtest back to the underside of the blue falling wedge before the price action moves lower.

The one year chart for the GDX begins to show you the bigger picture which is so important to grasp. Our current downtrend channel has almost the exact same angle as the downtrend channel on the left side of the chart.

This next 2 1/2 year daily chart for the GDX starts to paint the big picture that we’ve been focusing in on since the possible 4th reversal point on the big blue bearish falling flag. The little red falling wedge is the same pattern as shown on the charts above. The big blue falling flag shows you the fight between the bulls and the bears and how the bears have been able to take the price action lower regardless of all the fundamental reasons why the PM stocks should be going up.

This last chart for the GDX shows you the very long term weekly look that has the massive H&s top reversal pattern in place that has led to our current price. You can see the blue falling flag that is now 10 months in the making with our little red falling wedge that I showed you on the first chart above. You can see this week was the breakout week for the little red falling wedge. This helps us in confirming the all important downtrend is still in place. I’m sure you’ve heard the expression, it’s always easier try to trade in the same direction as the major trend. This chart shows you why. We were only able to capture just small profits during each of the little counter trend rallies you see on this chart. You had to be very nimble to get in and get out without taking a big loss. If you hesitated the GDX showed no mercy on you. Our best trade was when we were able to short into the downtrend in the first few days of December of 2012 and exiting our shorts in August of 2013. The main trend was our friend.

Next I would like to show you some long term charts for gold we’ve been following for some time now as nothing has broken the downtrend that has been in place since the September 2011 high. This first chart shows what would happen if our current blue triangle works out as a halfway pattern to the downside. Keep in mind gold has a lot of work to do yet but as long as it keeps making lower lows and lower highs this chart gives us something to follow.

Below is a long term monthly chart for gold that shows a massive H&S top forming. If the red triangle breaks to the downside that move will complete the massive H&S top. The symmetry is absolutely beautiful as shown by the neckline symmetry rails. I know few believe gold could produce such a move down but few thought that gold would ever get this low back in 2011. Whatever everyone wants nobody gets.

About four years ago the Aden Sisters posted a chart similar to this one I built after reading their article on gold. Keep in mind this was before the 2011 high in gold. This is a time cycle chart that goes all the way back to the early 1960’s which shows an eight year low followed by an eleven year high. This is my version of their chart they showed in their public article. As you can see the top in 2011 came in a few months earlier than what the vertical blue ling shows but for an eleven year cycle high I thought it was dead on the money. What this time cycle chart is now showing us is that the next important 8 year cycle low should come in around February of 2017. Keep in mind it doesn’t give a price just the time component. So the expected important low in 2017 can be anywhere on the chart. Maybe lower than the current price action or higher depending on what gold does over the next three years or so. At any rate I found this chart to be very fascinating as it takes in such a long period of time and it did call the latest top in gold to within about four months or so. This chart also ties into my big picture analysis that is showing there is still plenty of room for gold to move lower over the coming months. All the best…Rambus

First I want to acknowledge how frustrating the markets have been over the last several months for most of you. There has been no clear cut trend in which one can just take a position and not get caught up in the chopping action the markets have been giving us. As I have said in the past the hardest part of trading is to get your initial position to stick before your sell/stop gets hit. If your a bear it’s two steps down and one step up and if your a bull it’s two steps forward and one step back. It’s that one step after you take your initial position that usually gets you if you don’t buy the exact high or low.

As of right now there is nothing broken in any of our portfolios as the consolidation patterns keep in building out. This is the frustration that most of you are feeling right now as there is no direction, one day up and the next day down. This is the how markets work. They will frustrate you until you can’t stand it anymore then you will sell out to save your sanity. Believe me there is nothing wrong with saving ones sanity as that is the most important feature for playing in the markets. The markets are hard enough to play when your sane but impossible if your emotions get in the way. I wish I had a magic wand I could wave to make it all better but I don’t and I don’t know anyone that does. So the game goes on until one side wins the battle and then we get a move we can actually hold onto for awhile.

Lets start with a daily chart for the Dow Jones that has been consolidation or topping since the first of the year. It has completed 5 reversal points so far making it a reversal pattern at this time. The only problem is the price action bouncing off the bottom rail that could be a 6th reversal point if the price reaches the top rail. At that point it would be a consolidation pattern if it was to break through the top rail of the rising wedge. As of this moment the rising wedge is a reversal pattern because it has completed 5 reversal points so that is what we have to go on until something changes.

This very long term monthly chart for the Dow shows it’s trading at the top blue rail of a huge expanding triangle that starts back in 2000. As you can see the price action is squeezing right into the apex of the top blue rail of the expanding triangle and the bottom rail of the rising wedge. This is either a great shorting opportunity or if the price action can break above the top rail of the massive blue expanding triangle, a great buy. The jury is still out on this one yet.

Below is a very long term chart for the Dow that goes all the way back to the 40’s. You can see the inverted roof pattern that formed during the big bear market of the 70’s. This chart does a good job of showing how an impulse move, on any time scale, plays out.  Note the secular bull market that started in the early 40’s and ran all the way up to 1966 where the secular bear market began. You can see how long it took to work off the bull market run, black rectangle, before the Dow was ready for the next major impulse move higher that would take it to the 2000 top where our current consolation pattern is forming. The million dollar question we have to ask ourselves is the blue expanding triangle finishing up with the 14 year consolidation pattern or is there still more work that needs to be done to work off the excesses from the previous secular bull market? Again you can see how critically important the price action is that is trading at the top blue rail of the 14 year consolidation pattern.

Below is a 5 year chart of the Dow that shows an important intermediate term  top was made in April of each year. Will this year be any different?

Lets now take a look at the Russel 2000 that is trading up to the top blue rail of its expanding rising wedge formation. As you can see there was a top in 2000, then seven years later another top in 2007 and now we are at the top rail seven years later in 2014. I don’t want to sound like a broken record but this area does look like a good place to try a short trade. As we know there are no guarantees. If we do see a correction I would expect the first line of support to come in around the previous tops at 865 or so.

Of all of the stock market indexes the SPX has the most bullish look to it as it has already broken out of its expanding flat top triangle. The only thing lacking to make this chart super bullish is there is no backtest yet. A backtest down to the 1550 area, the old highs, would be a great buying opportunity if the SPX does a backtest.

The monthly chart for the SPX shows its been trading in a rising wedge formation since the bear market low in 2009. There is also a bit of a negative divergence taking place similar to the 2000 and 2007 tops.

The quarterly chart for the SPX shows it has broken out of its expanding flat top triangle but no backtest so far. As you can see in the 70’s bear market the SPX did have a clean breakout and backtest before it started its secular bull market.

A lot of folks believe China is the cure all for just about everything out there. If China gets moving to the upside commodities will be soaring once again. China is supposed to be buying up all the available gold out there that should be bullish for the price of gold. As you can see on this chart below China has been in the doldrums since it put in its parabolic run in 2007. This is exactly how a stock looks after a parabolic blow off phase. After the initial decline from the parabolic top the SSEC had a counter trend rally back up to 3548 where it has been drifting lower for more than 5 years. There is nothing bullish about this chart.

Does gold share the same fate as the SSEC after its parabolic run?

The last chart for tonight is the long term look at silver that we’ve been following for sometime now. Part of the frustration you are feeling with silver is the major support rail its been testing that has a good chance to be a neckline of a major H&S top. Big important trendlines like that don’t give up easily. As you can see this month of May has cracked the neckline but not decisively yet. There is still a week and a half of trading yet before this monthly chart shows the closing price. This is either the best buying opportunity or the greatest short of a lifetime right here and now. You know how I’m positioned. All the best…Rambus

We’ve been focusing in on the shorter term charts for the precious metal complex for some time now which is important but we also need to keep a very close eye on the bigger picture as that over rides the shorter term charts. You really have to know the big picture and then work your way back to the shorter term time frames that help confirm what the long terms are saying. Unless your a very short term trader then the long term charts won’t impact your trades that much. By looking at the long term charts they can still give you some clues you can use to help make a decision on where one might look for important support or resistance zones that don’t show up on the minute charts. So for me looking at all the different time frames helps paint a much clearer picture that one can use to trade any time fame they choose. Perspective.

Lets start with a weekly chart of gold that shows the final rally phase into the 2011 all time high at 1920. From that all time high gold has been in a confirmed downtrend after breaking below the bottom rail of the blue 6 point rectangle consolidation. Please note the 6th reversal point on the 22 month blue rectangle at the top of the chart. That was the exact point that started the big impulse move low that took the price action from 1800 to the June bottom at 1175. That huge impulse leg down also took out the bottom rail if the 22 month rectangle in April of last year. That impulse move took about 11 months from start to finish about half the time it took to build the 22 month blue rectangle. There is one really important aspect to that 11 month impulse move down that is the basic principal of a tending market. If you follow every little squiggle from the 6th reversal point on the blue 22 month rectangle to where the impulse leg ended at 1175 you will see gold made a  lower low and lower high, at every minor low, during that 11 month decline. Folks this isn’t rocket science but it’s an important fundamental aspect of Chartology. As you can see from the June low made last year gold has been chopping out another consolidation pattern. You can see there is the beginning of the 4th reversal point that could be comparable to the 6th reversal point on that blue 22 month rectangle. There is still a lot of work to do but the potential is setting up that could lead to one last huge impulse  move lower before it’s all said and done. If the trendline on the RSI at the top of the chart breaks down that could very well be a strong signal that the next impulse move lower is getting underway. Nothing is definite yet but there are a lot of things to watch to help confirm the big picture that is so important to understand. When you have a game plan you want to see things unfold in a way that fits what what you are seeing. As long as things keep progressing the way they are supposed to don’t fight every little wiggle that will be sure to try and throw you off your game plan.

This next chart is the long term monthly chart that shows how important the 10 month ema has been on both sides of the gold move. On the way up it always held support until the 2008 crash. Then during the topping process in 2011 and 2012 is when it started to breakdown again. Sine the second high in 2012 it is back to now hold resistance, just the opposite during the bull market years when it held support. You can see last month gold spiked above the 10 month ema but quickly reversed and closed the month back below it. So far the month of May has tested it once at 1315 and has bounced off. The bear market has shown lower highs and lower lows  which is a downtrend. There is no way of getting around it, you have to have higher highs and higher lows to begin a trend reversal and until we see that the downtrend remains intact regardless of all the reasons in the world why gold should be putting in a bottom right here. At some point it will and we’ll see it happen in real time but that time is not yet here.

Below is another long term chart of gold I’ve been following through the years that shows all the beautiful chart patterns that formed during the bull market years. This chart shows how the secular bull market could stay intact if the price action doesn’t take out our latest consolidation pattern low, the big blue expanding falling wedge. This chart shows the price of gold could fall pretty low and still be in the confines of the big blue expanding falling wedge, as a consolidation pattern.

This last chart is for those that think gold didn’t have a parabolic rise off the 2001 low to the 2011 high. Again on the bull side of the chart you can see higher highs and higher lows and on the right of the chart you can see just the opposite lower highs and lower lows. Simple but very powerful.

Lets now take a look at silver that shows a similar look to gold but is in a weaker state. You can also see it topped out first in 2011 and has been creating lower highs and lower lows ever since. Note the top brown shaded support and resistance zone that has held support since it broke down in April of 2011. If you look below the top brown shaded support and resistance zone there isn’t a whole of support until silver reaches its old bottom made in 2008.

Below is a chart that is very similar to the gold chart I showed you above.

We’ve been following this next long term look at silver for six months or more that is showing us the big picture in a way that no one else is looking at. If you showed this chart to a goldbug he would shoot you on the spot and ask questions later. This chart is blasphemy of the highest degree if you can only look in one direction. The symmetry is absolutely beautiful from the two shoulders being of equal size and the neckline symmetry rail showing us exactly the height for the right shoulder. If this H&S top plays out as expected it will have a price objective down to the lower brown shaded support and resistance zone around the 2008 crash low. When you watch these big patterns play out in real time it seems like an eternity for things to play out. But since I posted this possibility over 6 months or so ago silver has been progressing along according to what I laid out with nothing to tell me this pattern is broken.

The last chart I would like to show you for silver it its own parabolic run similar to gold’s. Here I’m using fanlines that show support on the way down. Note how decisively fanline #1 was broken to the downside during that April 2011 massive breakout. Silver has been holding support since the June low made last year at flanline #2. If you look real close you can see silver is now breaking below fanline #2 ever so lightly but it is cracking. Depending where silver finds support once it lets go it could find support on fanline #3 around the 12,60 area.

I know how hard it is for most to follow the longer term charts but that’s where the really important information lies. Through the years this is where I have found the confidence to make the biggest return on my investments bar none. Over trading usually gets you into trouble even if you have had a good string of luck but eventually your luck runs out and you are left sitting on the sidelines. As I have stated so many times before , these types of setups don’t come around very often but when they do you have to be ready to take full advantage of the situation once it presents itself.

All the best…Rambus.

Before we look at some charts tonight I would like to follow up on a post Sir SA Viking did at the Chartology Forum today about not trading in the first 30 minutes of a new trading day. He is absolutely correct. If you’ve been trading in the markets for any length of time then you have heard the expression that the first 30 minutes of trading is for amateurs. The reason for this old adage is because a lot of amateurs will trade on the previous days price action and have to get in a trade no matter what. Many times you will see the smart money fade the open after the first half hour of trading trapping the new guys that just had to buy. The only time I will trade in the first half hour is when we have a nice profit and the price action is close to a price objective that was laid out previous.  I will usually try to sell in the first 15 minutes if possible.

I also want to talk about using sell/stops. I personally never use sell/stops as it shows the specialist, the market maker, where all the treasure is buried. They will then run the sell/stops, taking in that new inventory of stock, with the purpose of selling it higher. I’m between a rock and a hard spot using sell/stops for our members as I know many need to know where to exit if things go wrong even if it’s a fake out before the breakout. As I’m watching the market very close each day I personally don’t need them. I’ve stated this before that I may not elect to execute a sell/stop if it is hit because it’s for those that need it. If I do decide to execute a sell/stop I will always tell you for future reference.

If you remember our sell/stop was hit this week on our DUST trade by about .15 cents or so and then the price action reversed back up. That was a perfect example of running the sell/stops and then reversing the move once the stops were hit. I wish there was a better way to do this but it is what it is. It’s all part of the game.

Precious Metals

The first chart I would like to show you tonight is the one I posted today on the GDX. So far this downtrend has four separate chart patterns in it. The top is comprised of the blue 5pt bearish expanding rising wedge reversal pattern. The second pattern is the red bear flag. The third pattern is the red bearish rising wedge and the fourth and most important chart pattern is the potential blue bearish falling wedge which should be a halfway pattern to the downside.

This longer term daily chart for the GDX shows how small the bearish falling wedge is on the chart below, in red. As you know I’ve been looking at this possible 4th reversal point on the much bigger blue falling flag as the reversal point to get us back down to the bottom of the blue falling flag. The little red bearish falling wedge should get us down to the previous low at reversal point #3. At this moment this is our primary price objective. Keep in mind that I’m also looking at the blue falling flag as a halfway pattern. Note the blue bearish expanding rising wedge at the top of the chart and the fourth reversal point. That 4th reversal point marked the beginning of that big impulse move down to reversal point #1 on our blue falling flag. If we have just put in the 4th reversal point, in the blue falling flag, then we should see a similar move that matched the first leg down out of the 4 point  point bearish expanding rising wedge down to the 11.40 area or so. This is the potential huge reward I’m looking at right now. I can tell it’s not going to be easy as you are already finding out by this little consolidation area we’ve been in for several weeks now. The price objective down to the 11.40 area is not a pipe dream. This is how markets work. They build a top or bottom and then have an impulse move followed by a consolidation pattern. We’ve been in our latest consolidation pattern for 10 months so far as it’s correcting that big impulse move down from that 4th reversal point in the blue bearish expanding rising wedge at the top of the chart.

Lets now look at the daily chart for gold I’ve been showing you that shows how an uptrend and downtrend work. The blue arrows on the left side of the chart shows a beautiful uptrend where each minor low is higher than the previous low. Since the top was put, top red arrow, just the opposite has been happening. As you can see gold has been creating lower lows down to the current price action at the 1265 area. Gold has made three attempts to break below the 1265 area that would then confirm a new low which would also confirm the continuation of the downtrend channel. You can see how violent the price action is becoming between the upper and lower brown shaded support and resistance zones. The bulls and the bears are fighting it out for control of the trend. How long this battle goes on is anyone’s guess but the sideways trading range, rectangle, is trying to finish up its fourth reversal point that we have to see at a minimum to create a consolidation pattern. Now that we have more information we just need to follow the price action for more clues as to when a breakout may occur. It could happen tomorrow or next week or when it just good and ready to show its hand. There is no doubt we’ll be on top of it when its ready to move.

Big Cap Tech

I will be spending more time covering this sector and others in the General Markets as it appears
a clear trend is developing . As Most Members know , I have never met a Trend I didn’t like .

Let us turn our attention to a few big cap tech stocks, recent darlings that aren’t looking very hot anymore.

The first chart is a weekly look at AZMN that is showing a very well defined H&S top complete with a breakout and backtest.

EBAY has been chopping out an 11 point blue rectangle for well over a year now. You can see it had a symmetry false breakout from the bottom rail and then one through the top rail that may have been the exhaustion move where it finally ran out of gas. Remember an even number of reversal points equals a consolidation pattern and an odd number of reversal points equals a reversal pattern. As you can see EBAY is strongly testing the bottom rail right now. A solid break will create a very large top reversal pattern.

The daily chart for GOOGL shows us a double H&S top that isn’t one of the prettiest H&S tops I’ve ever seen but it’s making lower highs and lower lows which is creating a downtrend. It will be interesting to see how GOOGL deals with that huge gap, brown shaded area.

This long term weekly look at GOOGL shows how I’ve following this stock through the years. What is the most important thing to understand is where the H&S top, I showed you on the daily chart above, has formed on the weekly chart below. If there was ever a place to look for a H&S top reversal pattern this chart shows that place in spades.

NFLX has been a high flyer but it to looks like it’s building out a H&S topping pattern. Note the beautiful H&S top that was made in 2011 and the decline that followed.

The last time I posted this chart for PCLN was when it was breaking out from the H&S consolidation pattern back at the beginning of 2013. You never know what kind of price rise you’ll get only that it should be a good one when a stock breaks out of a fairly large consolidation pattern. This chart also shows you a perfect example of how support and resistance works. Notice the eight point blue rectangle that formed back in 2011. Once the price action broke above the top blue rail it then reversed its role from, what had been resistance to then support as shown by the double headed H&S consolidation pattern. That is perfect Chartology 101.

I think some of these charts above are showing you why the NDX 100 is trading way below the Dow and SPX. These big guys led on the way up and are now going to lead on the way down. There are many more examples I could show you but I think these big cap tech stocks paints a pretty good picture of what is going on below the surface.

This is the why behind our recent addition of SQQQ , the 3X Bear Big Cap Tech ETF to our Model Portfolio

Stay Tuned

All the best…Rambus

Before we look at the weekend charts I would like to quickly go over our three portfolios as some of you think I maybe not managing the risk portion correctly. As you know we have three portfolios made up of three different types of stocks. The Junior Portfolio is for the small cap PM stocks. The Model Portfolio is made up of the bigger cap stocks that can be precious metals stocks or stock market stocks or etf.s. The Kamikaze Portfolio is the speculative portion of the three portfolios , in which we generally trade the 3 X etf’s.

Right now the Junior Portfolio is 100% cash waiting to be invested when the time is right. If you recall we caught part of the December to the March rally where we were 100% invested. After the March top we went to 100% cash with a small profit.

The Model Portfolio has one small position in TZA that represents less the 10% invested. Again this portfolio was 100% invested up into the March high where we went to 100% cash.

The Kamikaze Portfolio is the speculative area of the three portfolios as it can move very fast in either direction. As it’s the speculative area of the three portfolios this is where we have been trading until we get a better feel of when the next impulse move is getting ready to get underway. The Kamikaze Portfolio is worth roughly 358,460 ( up from the initial $100,000 in August 2012) Presently 143,870 is invested which is well below 50%. There is still a large cash position that we can use when the time is right to either do a little hedging or add to our existing short positions if that is the case.

I just wanted to bring this to your attention so you know we have a very large cash position just sitting on the sideline waiting for the right opportunity to be deployed. The Junior Portfolio and the Model Portfolio are basically in cash with the Kamikaze Portfolio only about 40% invested or so. I don’t know what your idea of risk management is but I think our current situation represents a pretty conservative approach. Each portfolio is equally important to me but  it’s just that the time is not quite right to get fully invested like we were in the December to March rally that petered out and left those long holding the bag with lower price for the most part.

Everyone has their own risk tolerance . Only you can decide for yourself what is right for you. You may want to structure your portfolio differently than how I’ve structured mine. You may only want to trade the more conservative Model Portfolio with a small blend of Juniors and Kamikaze stocks. You may only want to trade the Model Portfolio using a few juniors as the speculative part of your overall portfolio. You should definitely take some time to structure your portfolio that matches your personality and then have the discipline to manage it properly. You are ultimately responsible for what you buy and sell based on how you structure your own portfolio. This will help you down the road when you are on your own one day , armed with a Bachelors Degree in Chartology .

What About the Stock Markets ?

One more note before the charts .

By Popular Request I will be instituting a new Portfolio in the Near Future devoted to the General Stock Market and Sectors ETFs

Lets now look at some charts related to our current short positions in the precious metals complex.

The BPGDM gave a sell signal on May 1st that is still in play even after Friday’s rally. This indicator can give some whipsaws so I only use it as part of the bigger overall picture.

What About Gold ?

Below is the daily gold chart we’ve been following that shows what simple uptrends and downtrends tend to look like. The uptrend that started at the December low shows each short term low was higher than the previous short term low, blue arrows. This is a classic uptrend. Now on the right side of chart you can see how the red arrows have been showing the way lower with lower highs in place. Gold has attempted to put in a lower low at the brown shaded support and resistance zone but has failed to break through so far. This is setting up a horizontal trading range between the two brown shaded support and resistance zone with 1325 at top and 1265 at the bottom. A move to the top of the trading range around the 1325 area, that stalls out, could be the beginning of the 4th reversal point in a rectangle type of trading range. As you can see the price action is ping ponging pretty fast between the top and bottom support and resistance zones. Also this trading range is forming below the previous high which increases the likelyhood that the price action will break lower when the trading range is finished building out.

Now , I would like to draw to your attention a six month time cycle bottoms chart that has been doing a pretty good job of showing us when to look for a reversal of some duration. It really nailed the bottoms when gold went on its parabolic run after the 2008 crash low to its bull market high at 1920. There was one inverted bottom that turned out to be a high in 2012 but since then it has been working pretty good for calling for a low. I’ve tweaked it just a tad since the June low last year as it seems to be coming in several weeks early, (red 6 month time cycles) . Keep in mind this doesn’t give us a price objective only a time objective where we can expect a counter trend move to begin. Right now the red 6 month time cycle bottom comes into play in the last week of June. Again we don’t know where the price will be only to expect a low. A perfect setup would be to see gold fall over the next two months that would coincide with the late June six month time cycle low. That would be in a perfect world.

This next chart is a long term monthly chart that I call my reverse symmetry chart , using the 10 month ema. The brown shaded areas shows how the previous highs, that were made during the bull market run, should now act as initial support in a bear market. As you can see the initial collapse took the price action all the way down to the 3rd brown shaded support zone which has held support since the June low last year. You can also see how gold spiked above the 10 month ema last month but closed back below the 10 month ema by months end. Right now the 10 month ema comes in at 1315. If gold eventually breaks below the 3rd brown shaded support and  zone the next area of support will be the 985 to the 1054 area, 4th brown shaded support zone.

One last chart for gold that shows the bull market uptrend channel that was broken to the downside last June in the breakout move out of the blue 22 month rectangle. Also notice the backtest to the bottom black rail of the uptrend channel when the PM complex had that small counter trend rally off of the June low to the August high. So far since gold topped out in September of 2011 it has made a series of lower highs regardless of all the reasons it has bottomed or should be rallying. The first real clue that the trend has changed will be when gold can put in a higher low and a higher high, until then it is what it is.

Turning our Attention to Silver , Gold’s Little Unstable Brother (Affectionately know to some members at the Chartology Forum as Bob

…What about Bob ?…

The daily chart for silver shows the price action over the last year or so that shows the original Diamond that morphed into a bigger diamond which now has completed the required even number of reversal points creating a consolidation pattern ot the downside. The only problem now is that silver can now rally back up to the top rail creating a 7th reversal point. If the price action breaks above the top rail of the Diamond or triangle it would then be a reversal pattern to the upside. That is only speculation at this time as we have 6 reversal points completed and that is what we have to go on until something changes. As you can see the apex of the smaller internal dashed Diamond did hold resistance during the breakout from the blue rectangle.

This next chart for silver shows it’s downtrend channel that has been in place for three years now. There is no law that says silver can’t have a 5th and 6th reversal point similar to the 6 point 22 month rectangle that formed just above the red triangle. Again all we know for sure is that silver penetrated the bottom red rail last week but rallied back inside the red triangle negating the breakout for the time being.

This last chart for silver is a long term monthly line chart that shows an interesting setup. Note the long term uptrend channel that peaked out in April of 2011. You can see the blue downtrend channel that has been in affect since that all time high. Note the bottom rail of the major uptrend channel and the price action since the low made last June. I have shown you in the past how a breakout can take on 5 separate moves before it’s completed. First you have the initial hit of the bottom rail, point 1. Next you get a bounce that doesn’t carry to far above the bottom rail, point 2. Next you have the sharp decline that actually breaks the bottom rail, point 3. Then you have the small counter trend rally back to the underside of the bottom rail of the uptrend channel, point 4, the backtest. Then you have point 5 which completes the breakout process and is the beginning of the next impulse move lower. So far this is what we are seeing in the big picture.

I would like to wrap up this Weekend Report by looking at some JDST charts.

JDST is the 3 X Inverse ETF for tracking the Junior Miners .

What About the Juniors ?

The first chart is a 2 hour bar chart that shows the brown shaded support and resistance zone that has held support since it was broken to the upside in March. As you can see it has been severely tested from the topside many times since but so far its held. So far so good for JDSTers .

Below is another 2 hour chart that shows JDST has been in an uptrend channel or rising flag after breaking out from the blue 5 point bullish falling flag that reversed its downtrend from the December high. As you can see the price action has been bouncing along the bottom blue rail of the potential rising flag formation for over a week or so. So far noting is broken yet. That could change tomorrow with a breakout gap to the downside but at the close of trading of Friday it’s still making higher lows and higher highs which is an uptrend.

This last chart for JDST shows a strongly slanted inverse H&S bottom that is still in play even though the price action has been backtesting the neckline for close to three weeks now. This kind of price action is what wears out most investors as it tries their patience.

I just want you to understand that I feel your frustration when a stock trades in a very tight trading range where one day it’s up a lot the next day down a lot so on and so fourth until it eventually wears you out. You have to deal with false breakouts from time time as well. Welcome to the world of speculating in the markets where nothing is 100% for sure. It’s just the nature of the beast to fool as many folks as possible and on every time scale. I wish there was something I could tell you to make it feel better but everyday is a new day with a new set of challenges that weren’t there previously. So stay strong and manage your risk to the best of your ability until things finally come together to produce an impulse move where the real money will be made.

What about that ?

All the best…Rambus

In today’s Weekend Report I’m going to post a ton of charts so you can see what I’m seeing and why the Kamikaze Portfolio is fully invested in the 3 X short the precious metals complex etf’s.  Before we look at the charts we need to discuss why it’s so important to hold your ground during this impulse move lower. I don’t know how many times its been posted at the forum but the great trader Jessie Livermore said “The real money he made was identifying the big trend and SITTING TIGHT!!!” That means you don’t try to trade every little wiggle the market throws at you. When you try to do that you will eventually find yourself on the outside looking in. If you are an experienced trader that’s a different story but for most folks trading in and out of an impulse move is a loosing proposition as some of you are already finding out.

We took our initial positions on the 3 X short the PM complex on March 21 which is just one month ago. We have made close to 40% on our JDST trade and 25% on DUST. During that time we had a counter trend rally that took back alot of the profits we had made but there was nothing broken from a Chartology perspective. We still had some nice gains but not as nice as they were. Since that ten day correction to the upside we are now back to where we were before the correction began up about 40% on JDST and 25% or so on DUST.

The point I’m trying to make is that markets go up and down period. There is no way of getting around that. One has to have faith in whatever system they follow the markets with or they will get scared out of a potential life changing trade because you let your emotions get in the way. You have to be able to feel the pain and not get shaken out every time the market goes against you for a period of time as long as your trading system is saying stay the course. The Chartology has been telling me to stay the course, short the PM complex, unlike our short move into the stock markets reversal weeks ago. In that case the Chartology said to exit the short positions because the price action was breaking back above critical resistance. If that short position, in the stock market had been correct, we would still be short looking for lower prices.

I’ve been showing you countless H&S topping patterns in the PM sector from the long term to the short term, like right now, that are giving us important clues that the long to intermediate term trend is down. Now, the short term trend looks like it’s getting ready to exert itself again within the context of the intermediate and long term trends. All three will be in sync once more.

I hope you have the time to catch SA Viking’s post at the forum on how the Kamikaze stocks are doing. The point here is that DUST is up 23% and JDST is up 42% since the top of our latest 2 week correction. In order for you to have gotten those results you would have have to buy the exact bottom and sold the exact top which is virtually impossible to do. By sitting tight we were able to catch those percentage gains in our Kamikaze Portfolio which we were able to add to our existing gains. In other words we are right back to where we were before the two week correction started with our original positions and the new positions we’ve added last week based on new clues that are surfacing.

OK lets look at some charts that are giving us some important clues that the short term trend is getting close to getting underway again after a two week correction. Believe it or not there are still some precious metals stocks that are working on their massive H&S topping patterns unlike most that have already broken down long ago.

Lets start with MUX that is a favorite PM stock , held in high esteem because of its founder. The daily chart shows a nice H&S top that broke down three days ago and had been backtesting the neckline. When the December rally started MUX looked like it was going to fly high as there was a triple bottom in place, red arrows. This is one reason you always hear me talk about follow the price action. As you can see MUX was trading above the previous peaks and had built an nice tight blue rectangle that looked like another big move was just getting underway again. But like so many PM stocks and indexes I’ve shown you, this was a false breakout move, or bull trap. How many gold bugs do you think are still holding on, that bought that three month counter trend rally off the December low to the March high, that don’t have a clue what is happening.

The weekly chart for MUX shows it has come down a long way but it still hasn’t broken below its neckline on its own massive H&S top. Use log scale with these smaller price stocks.

EXK is another favorite PM stocks that usually does pretty good in a bull market. But we’re not in a bull market anymore so it’s no different from all the other PM stocks. A bear market takes no prisoners. It has a nice double H&S top that is waiting for the lower neckline to be broken before it gives the all clear.

The weekly chart for EXK shows three patterns in play right now. If you look to the far right hand side of the chart you will see our little H&S top, on the daily chart above as the fourth reversal point in the blue triangle that will be the right shoulder of its own massive H&S top.

NGD is another PM stock that is still waiting for its turn to breakout from a big H&S top formation. Its very beautiful as shown by the neckline symmetry rail.

The monthly chart for NGD shows a massive H&S top very similar to all the other massive H&S tops on the precious metals stocks. This one is just taking a little longer to breakout but it’s there for all to see.

The daily look at GSS shows a very nice blue rectangle with a H&S top at the fourth reversal point. Notice how the center dashed blue mid line has worked as support and resistance during the formation of the rectangle.

The weekly looks shows our our potential blue rectangle fits into the bigger picture. Note our little H&S top as the last reversal point in that blue rectangle.

PAAS was one of the strongest PM stocks off of the December low but it actually bottomed a bit earlier than most as it bottomed in October. It built out a beautiful blue 5 point bullish rising wedge reversal pattern. As you can see PAAS has a 5 point bullish rising wedge as a reversal pattern off the bottom with a rally that followed and now we can see a H&S top reversal pattern. You can classify that as a bear market rally.

The weekly chart for PAAS shows the long term downtrend channel that started way back in 2011 that was the starting point for many of the PM stocks bear markets. You can see where our little daily H&S top has formed at the revised top black rail of the downtrend channel. I say revised because if your were to follow the price action, in real time starting at the top in 2011, you will see your original top rail would have connected two other tops in the downtrend channel, the red bear flag and the little double top. They worked out fine at the time but our latest counter trend rally was stronger than the others so it pouched the top rail up a little bit where you can now see where our current H&S top should mark the next reversal point in that downtrend channel.

We’ve been following this very long term downtrend on NEM for sometime now. The last time we looked at this chart we were waiting to see which way a small red rising wedge was going to break. As you can see it broke to the downside and the price action is sitting on the bottom red rail of a triangle consolidation pattern. If you don’t like the blue triangle I can make a case for a H&S top. Take your pick.

The long term monthly chart for NEM shows no signs of a bottom or reversal pattern.

We’ve been following this H&S top on ABX that has been forming out toward the apex of a rising wedge for quite awhile now. This H&S top continues to mature as it now looks like it’s going to be a double H&S top. Note the neckline symmetry rail that is showing us the height for the right shoulder. If that is the case it will ensure a break of the bottom blue rail of the rising wedge which we will then be able to call a bearish rising wedge.

The weekly chart shows the critical placement of the blue rising wedge. Will it be a halfway pattern to the downside. Stay tuned.

HMY had a decent rally off the December low with a nice inverse H&S bottom that reversed the downtrend. As you can see it’s building out a H&S top that should reverse the three month the counter trend rally from the December low.

The monthly chart for HMY shows it’s probably the weakest big cap precious metals stock out there. It has formed a massive rectangle reversal pattern that I’ve been personally following for years. I put that red circle, at the top of the chart, when it failed to rally all the way up to the top. It was a subtly warning that this stock maybe in trouble. I had no idea the kind of trouble HMY would have but its got serious issues. Note the breakout from the horizontal rail that shows the 2005 and 2008 lows. If you look real close you will see it had a small bounce and then broke through to the downside. The same thing happened at the 2000 low at 3.40. It got a four month bounce and then fell through the 2000 low. It has recently rallied back up to the 2000 low which should now work as resistance which is the case so far. This is one sick puppy.

SAND is another PM stock that built an inverse H&S bottom at the December low and had a nice counter trend rally to the March high. As you can see with so many of the PM stocks it toO has built out a H&S top and broke out with a nice breakout gap reversing the uptrend that began in December.

Again as with so many charts I’ve shown you in this Weekend Report, our little H&S tops that have been forming since the counter trend rally off of the December low, are forming at a critical area on the charts. Here you can see how the counter trend rally that started off of the December low is now finishing up with the small H&S top that I showed you on the daily chart above but is also forming the right shoulder.

PLG.To has just broken down from a H&S top that is reversing the counter trend rally made off the December low.

Lets look at one last stock, FSM that is building out a rather large H&S topping pattern on the daily chart. As you can see it had a very nice rally off of the December low that took the price action back up to the previous high.

The weekly chart shows the blue rectangle and our little H&S top as the fourth reversal point.

If you understand Chartology like I do you would be bearish on the PM complex. These charts can’t make it anymore clear what has taken place in the long term, intermediate term and now the short term. You either believe what the charts are telling you or you don’t. Trends like this don’t reverse overnight it takes time and price to reverse a major trend. The big trend reversed basically three years ago already which few want to believe. We’ve just experienced a three month counter trend rally that ran from the December low to the March high. All these smaller H&S tops on the daily charts are telling you the counter trend rally is over.

If you think trading in a bull market is easier then you’re so wrong. The only thing different in trading a bear market or bull market is that you have more trading instruments on the bull side but it’s not any easier. Just take this long term chart for the HUI and invert it, turning it upside down. You will see one helluva bull market with a huge H&S base.

It’s up to you on how you want to play this move, it’s a personal choice. All I can do is show you in real time when I buy and sell these stocks. The rest is up to you if you want to follow along. Trading in the stock markets can be a life changing pursuit that can change your life forever if you know what you’re doing. They have changed my life in ways I never knew possible but I never gave up when the going got tough. It takes time and study to become comfortable with your decisions in the markets but the decisions you make are ultimately yours to live with. All the best…Rambus

It’s official. Silver has put in its fourth reversal point this week when it touched the bottom rail of its nine month triangle at 19.22. As you can see on the chart below silver has gotten a small bounce off the bottom blue rail. This is exactly what we want to see on the initial hit. This shows us the bottom rail is hot and we now know exactly where the bottom rail goes. Before Tuesday’s touch of the bottom rail it could have been drawn in several different ways. Now the big question is how far does this bounce go? There are four lines of resistance silver has to overcome to breakout to the topside. You have both red rails of the bear flag, the top rail of the rectangle and then the top rail of the big blue triangle. You can tell this triangle is maturing as the price action is starting to trade out into the apex. Normally you”d like to see a breakout at about 2/3’s the length of the triangle.

I don’t think there isn’t anyone out there that is looking at this massive H&S top, for silver and gold for that matter, except me and members of Rambus Chartology. It really is a very beautiful and symmetrical H&S top complete with the unbalanced double top that made the head after the parabolic run into April of 2011. That unbalanced double top is pretty common with blow off moves. There is also the neckline symmetry rail that so far has shown us the height for the right shoulder.

I hope everyone enjoys their Easter break. All the best…Rambus

In this Weekend Report I would like to look under the hood of some of the precious metals stocks indexes to see what is really taking place. We’ll look at a bunch of PM stocks to get a feel for where we are in the short, intermediate and long term pictures. When one just observes an index you really don’t get to see, in detail, the stocks that make up that index that could be showing some important clues to the overall big picture. For instance, there are just three or four of the biggest of the big cap precious metals stocks that account for a large percentage move for say the HUI. There are many more stocks in the index but they don’t carry as much weight.

Before we look at some of the precious metals stocks I want to show you a combo chart that puts everything into perspective and gives you a feel for where we are in the intermediate term time frame. This combo chart has the HUI on top, GLD in the middle and SLV on the bottom. First I want you to look at the left hand side of the chart where you see that the HUI and silver each formed a blue triangle while gold formed a bullish rising wedge. Each consolidation pattern took the same amount of time to build and all three broke out together, first purple vertical dashed line. Note the impulse move out of the blue patterns that show SLV leading the way higher as GLD and the HUI had a backtest while SLV didn’t. Here’s where it gets interesting. As you can see SLV rallied straight up to its bull market top way ahead of the HUI and gold that were lagging behind, second thin purple vertical dashed line. After a few months of consolidation it was gold’s turn to go parabolic and make its bull market high in September of 2011. The heavy purple dashed line shows where all three topped out together with the HUI and gold making their bull market highs while SLV was already in correction by falling way short of reaching its bull market top that it made back in April.

What was so frustrating for those of us that were holding precious metals stocks is that they hardly moved when gold and silver had their parabolic moves higher. As you can see the HUI did in fact make its bull market high at the same time gold did but the HUI had no parabolic move up. As you can see it was more of a slightly rising horizontal type move. That had to be one of the worst times to be a gold bug, to see gold and silver go parabolic and the precious metals stocks hardly budging. I’ll post this chart here so you can see the blue consolidation patterns on the left side of the chart then we’ll discuss the red consolidation patterns on the right side of the chart.

Let’s not fast forward to the heavy red dashed vertical line that shows how the HUI was the first of the three to really show weakness by breaking below its horizontal black dashed line first. The precious metals stocks were leading he way down. It took about another 12 weeks or so before GLD and SLV joined the party to the downside when they finally broke out of their nearly 22 month consolidation patterns with a breakout gap. As with the blue consolidation patterns on the left side of the chart our current red consolidation patterns all bottomed at the same time, late June of 2013, and have been chopping out their respective chart patterns ever since. As you can see all three are working on their fourth reversal points right now. Even though the HUI is building out a falling flag formation, which will be pretty bearish if it breaks through the bottom rail, the SLV is trading the closest to its bottom rail of its red triangle. This chart gives you the big picture look and lets you know where we stand and what to look for.

One last comment before we move on. As you know reverse symmetry plays a big role in how I interpret the price action. Until something changes, I’m viewing the blue consolidation patterns, that formed on the left side of the chart with the price action going up, equal to the red triangles on the right side of the chart with the price action going down as reverse symmetry. Since the bull market top in 2011 you can see a series of lower lows and lower highs all the way down to our current price which is just the complete opposite of what we seen in the bull market years. Until we can see a higher low and a higher high the downtrend remains intact.

Lets take a quick peek at our red consolidation patterns starting with the HUI. Here we see the blue falling flag that is working on its fourth reversal point down. As you can see we had an important test of horizontal resistance last week at the 236 area. Also note the big impulse move down that has led to the formation of our current consolidation pattern that I will view as a halfway pattern if the bottom rail is broken to the downside. The HUI should show a similar move that led into our current blue falling flag when the price action leaves, thus this pattern will show up between the two impulse legs down.

Below is gold’s blue triangle that is showing the most strength right now between the three. It to is working on its fourth reversal point to the downside. Keep in mind these potential consolidation patterns won’t be complete until their bottom rails are decisively broken to the downside. I expect there will be a very big down day once the possible breakouts occurs that will leaves no doubt as to what just happened.

Below is silver’s potential blue triangle that is trading the closest to the bottom blue rail. The 18.50 area on the bottom blue rail will be critical support.

Lets now put our blue consolidation patterns in perspective so you can see how they fit into the big picture. This first chart is for the HUI, which is a long term weekly line chart, that goes all the way back to the beginning of the bull market. Keep in mind a line chart only uses the closing price so the patterns will look slightly different. There is a lot of good information on this chart that we can use to help us understand where we are in the big picture. First notice all the blue consolidation patterns that formed during the bull market years, one on top of the other. That’s a bull market folks. Next notice our massive H&S top that reversed the bull market and has led to our current price. We are now reversing symmetry down and what I believe is our first consolidation pattern to the downside with its blue counterpart on the left side of the chart. Next lets look at the fanlines which is a chart pattern. The rule of thumb is when the 3rd fanline is broken to the downside is when you get your big move. Note fanline #1 and #2 that have the green circle around where the fanline and the neckline intersect. Once that area was broken to the downside the HUI wasted little time declining in earnest. Some of our long term subscribers may remember this chart as I was showing it as we were watching the neckline and fanline #2 breaking down. A daily bar chart will show there was a small backtest to the underside of the neckline before the impulse move began.

Lets now look at gold’s potential triangle and how it may fit into the bigger picture. Gold’s potential triangle has formed on top of the neckline extension rail that is taken off of the 2008 H&S consolidation pattern in which I extended all the way to the right hand side of the chart. Are we seeing reverse symmetry with our current red triangle vs the red bullish rising wedge that formed in the uptrend on opposite side of the chart?

If someone can look at this weekly chart for silver and tell me silver is in an uptrend I would have to call them crazy. Just look at the price action on the left side of the chart when silver was going parabolic creating a series of higher highs and higher lows all the way up to its bull market top. Now compare that price action to the right hand side of the chart since silver topped out just under 50 in April of 2011. Silver has now completed three years of its bear market, this month, by creating lower lows and lower highs. This is basic elementary Chartology. Maybe something will happen to create a new higher high and higher low but until that happens the major trend is down and that is the best direction to trade unless you’re a day trader. It’s always the easiest to trade in the same direction of the major trend as it can fix a mistake if you bought at the wrong time. Just the opposite in a bull market.

So far we looked at the HUI, gold and silver potential consolidation patterns on the short term to longer term look charts. Now we need to look under the hood and see what some of the precious metals stocks are showing us to help bolster these possible consolidation patterns as having some validity. What we have forming on some of the precious metals stocks are several different consolidation patterns ranging from triangles. expanding triangles, rectangles and rising wedges

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Editors Note :

This Portion of tonight’s Weekend Report engaging the Chartology of 10 Individual Stocks is for Subscribers .

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In Summary

There are many more charts I could post but I think you get the picture of what I’m trying to show you. By looking under the hood you can get a totally different perspective than just looking at an index. These charts give me the confidence to hang on to our game play when I know many are in doubt. So far nothing is broken from a Chartology perspective which is why we are still short. Until something changes, this is the way I will stay and hopefully we will be able to catch another big impulse move down. I believed we are positioned very well especially if these fourth reversal points hold on these nine month consolidation patterns.

All the best…Rambus

We’re going to do something a little different for the Weekend Report this week. I would like to give the spotlight to Sir Plunger for his most excellent work on the Phase 3 for the PM stocks bear market. It deserves to be read by the members of Rambus Chartology and the general public at large. I just want to thank you Sir Plunger for all the time, research, and energy it takes to put together something like your Phase 3 bear market outlook for the precious metals stocks .

As most of you know , Plunger is our resident expert on market history .
He has devoted himself recently to the study of Bear markets in general
and now has zeroed in on our presently ongoing precious metals bear .

This Essay was penned this weekend and posted at our members forum .

I trust you all will find this as fascinating and provocative as have I .

Warning : This essay contains disturbing material and is not for the feint of heart

Rambus

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This essay builds on my previous bear market studies by drilling down into the third and final phase of a bear market. I recommend reviewing the three phases of a bear market in my previous posts.

Dow theorist, Robert Rhea is credited with developing the concept of the three psychological phases of both bull and bear markets back in the 1930’s. I have attempted to advance his work by applying chartology and thereby assigning price patterns to these phases. I have discovered that deep bear markets undergo similar progressions and similar patterns to each other. Following the progression of these patterns along with studying the prevailing psychology gives us clues as to where a bear market is in its life cycle. The value of this should be obvious and by knowing where we are in this bear market we enable ourselves to position our portfolios for generational sized gains at the bottom. This essay develops the second half of the study of Chartology… the psychology part.

Three Phases of a Bear Market

The Route to Phase III

The conclusions of this study come from a review of the major bear markets of the past 150 years. It is original work as not much wall street brain power has been devoted towards bear markets since wall street exists for one reason only, and that is to distribute product. (plus skimming through HFT) With this as their purpose it is convenient for them to pretend that bear markets never really happen, or at least it seems that way when one reads their material. Its hard to sell product in a bear market, so bear markets are glossed over. This of course opens great opportunity for reality based market students willing to study markets and their cycles. I have observed that the price patterns of a bear market progress through a methodical sequence of patterns just like the psychological phases do. The beginning of the bear is characterized by a topping pattern. It can be any pattern, but typically it is a H&S, or sometimes a rising wedge followed by a failure and a prolonged back test of the breakdown pattern. Review the Bear Market Models essay and one can see these patterns. Next comes a prolonged decline down the slope of hope where the public thinks lower prices are providing them a buying opportunity since it is simply just a “correction”. A bear market rally (BMR) may get ignited along the way which serves to reinforce the belief that the previous bull market remains intact. Eventually however, the price decline reaches a point of recognition (POR) where the public as a whole collectively recognizes that it is not just a correction but something more, quite likely a bear market. The POR is often associated with a news event or some type of catalyst that accelerates the existing downtrend. The POR ALWAYS comes in phase II and typically is coincident with a crash. The crash is due to the simultaneous reversal of expectations of the average investor.

Once the crash is over the market enters a prolonged consolidation. The consolidation can take various forms and is often very complex, thus reflecting the general confusion present in the market. The post POR consolidation is often a robust battle between bulls and bears and quite often resolves itself with the ignition of a bear market rally (BMR). The BMR is the expression of the hope and belief that the bear market is over therefore it is more than just short covering as it includes elements of organic buying. Its duration typically lasts from 5-12 weeks, but burns out and finally succumbs to gravity and rejoins the downward trend of the cyclical bear. Eventually, this process of failed rallies takes its toll on the investor and the price action degrades to the point where all hope is abandoned. It may take a number of BMRs to complete this process of investor exhaustion and disillusionment. Once finally achieved, the market can now enter its phase III and in a deep bear market it is no less than an annihilation. In a nutshell here is the typical bear market roadmap: Market top-downward slide-BMR-POR w/crash- Consolidation- BMR- Consolidation departure-Phase III annihilation -final bottom. That’s the route a major bear market takes and its psychology reflects the price action all the way down. Here is our current Precious Metals bear market, its route reflects all these classic mile markers and it is my contention that we are about to enter Phase III….The Annihilation

Bear Market Models

The Horror.

Recall in the movie Apocalypse Now, when Col Kurtz (Marlon Brando) dramatically utters in the final scene….The Horror, …the Horror! That’s the image of phase III in a major bear market. Colonel Kurtz devastatingly describes the horrors of war, dismembering children’s arms and stacking them in a pile, the trauma that drove a hardened veteran as he, insane. This is the horror that happens to investors in phase III. Life savings shredded, dreams abandoned, college students called home for want of tuition, retirements ruined, …the horror. Phase III is a treacherous final slide that takes no prisoners. It devours anyone who even thinks they can maintain their buy and hold stance, since the price action crushes them, extinguishing any flickering hope of eventual gain they may have still harbored. The dreams of fabulous opportunity they once had at the top, finally snuffed out due to the series of false bottoms collapsing along the way in the long downward slide. With all hope of future gain now gone the investor aggressively moves to salvage what is left in a last ditch defensive reaction. Previously in phase II investors have cutely executed Warren Buffet’s advice of buying when others are fearful and now stare into the abyss as the fear of others now turns to their own horror. When the price action accelerates downward into phase III the pain becomes too great and the final capitulation is characterized as despair fueled by lost hope. For those who may think this is hyperbole, please review the phase III price action in the Bear Market Model series. The destruction wrought by a phase III collapse is truly breath taking. By the end of phase II in March of 1932 the DOW had already declined 77%. It would seem reasonable at this point to think the market near a bottom, enough damage had been done. Certainly, buying in anticipation of a rise would seem a lock, even prudent. If acted on, however one would have suffered a 55% further collapse in phase III over the next 3 months before the bottom was finally reached. That’s the destructive power of a phase III. The 1932 series is a valid model, since today’s HUI had declined a similar 69%, and the GDXJ 81% at their phase II lows in December. Even though todays psychology is very negative it has not yet progressed to that which prevails at phase III bottoms, that of black pessimism. So could the HUI/GDXJ get cut in half from today’s levels in an upcoming phase III even after these horrific declines? Quoting Nancy Pelosi: “are you serious”?

Please Click on chart 2X to Enlarge

Phase III Flush

The visual picture of phase III can be compared to flushing a toilet. At the top of the bull the lever was pulled and we have been watching the water swirl around the rim for 30 months and it has now finally reached the lower ends of the bowl. Investor hope keeps prices elevated just as centrifugal force keeps the water in the upper half of the bowl, finally reaching the bottom the rotation of the water accelerates as gravity overtakes the swirling centrifugal force and it finally goes straight down the hole. This visual picture is analogous to phase III action within a bear market. Phase III has no BMR, since there is no longer any hope to fuel it. Phase III is not about hope it is about liquidation. And it is that liquidation that leads to accelerated price decline. The 3 month sell off between March 1932 and the bottom encompassed a larger decline than the epic 1929 crash itself. Gold stocks are particularly vulnerable to rapid declines. In August of 1974, it took just 16 trading days to cut the Barrons gold mining index in half. Homestake dropped from 70 to 30 in what was called the Schaefer panic when the popular newsletter writer abandoned his advocacy of the sector. In Phase III, market shocks as these, can roil the sector pummeling even solid quality stocks. The downward spiral continues with no relief in sight with no rallies to allow an escape. The market desperately seeks any form of liquidity it can find therefore it now lowers its crosshairs on the blue chips since the junior and mid-tier sectors have long since been destroyed. Once the blue chips come under fire, the wailing is that heard in an inferno. Long term holders are forced to act in a bid to salvage what they have, unable to risk further declines and possibly end up retiring in poverty, the pain becomes too great, thus the selling orgy commences. For up to two weeks quality stocks are jettisoned at comical prices, the race for liquidity is on and people are motivated to sell at any price due to the despair of saving themselves from failure, regardless of any concern of embarrassment. Steady, dividend paying blue chips get sacked, dreams are destroyed, then in the last final decline, volume finally dries up, the markets then become immune to the most shocking of news, corporate closures or bankruptcies no longer drop the market since the selling has now exhausted itself. The bottom is then in. Stocks now sell at below known values. In Sept 1929 US Steel, the senior of blue chips, sold for $261, by July 1932 at the bottom of phase III, it traded for $22. That’s the power of phase III.

Phase III dead ahead – Factors demanding a verdict.

It has been my premise that despite the massive annihilation-class declines we have had across the PM spectrum we have still not had a phase III decline. I stake this claim for several reasons, the first being this bear market’s sequence of pattern construction. Recall my rule that the POR ALWAYS comes in phase II. The one fact that is unassailable about this bear market’s time line is that its POR came in April 2013. The POR was black and white and it came with all the classic indicators: a shift in psychology, a crash and volume to pinpoint it. After the Goldman bear raid (the POR) the word “bear market” surfaced and was now universally recognized as such. The Goldman raid just happened to be the trigger, and it was now collectively recognized as a bear market. Here is the significance of the POR, it gives us a stake in the ground to know where we are in the bears life cycle. Recall that after the POR a market then undergoes a prolonged consolidation. After this consolidation it may or may not have a BMR, but it then enters into a phase III after investors become sufficiently exhausted. In our current market we sparked a BMR after the post POR consolidation which lasted 12 weeks. So that’s where we are today, the question of whether its a new bull or still a bear is a case of Sherlock Holmes and the dog that didn’t bark. The post POR consolidation was followed up with a BMR, but we have not fulfilled the psychology and the liquidating price action of a phase III. In other words, the dog never barked.

The second factor is we have never had a prolonged period of illiquidity. In the twin crashes of April/June 2013 we only had 1-2 days max or little or no bid action. Previous bears have had up to 2 weeks of severe market stress with few bids offered. This is where the market experiences the dynamic of “comical” selling. That’s where investors are so distressed that they pick up the phone or grab their mouse and sell at any price, hence the name. The market undergoes truly comical trading with jokingly absurd price drops. This is full blown capitulation, and despite the current bears annihilation-class declines we really have not had this type of selling…yet. The psychology that accompanies this type of selling is that which I described in the previous flush paragraph.

The third factor indicating the bottom has not arrived is we have not yet seen the full work of the bear. We have not yet seen truly shocking news and events that rock the industry. These events surface at the bottom of phase IIIs but they have not yet occurred. Viscous bear markets see outright corporate liquidations at the bottom, surprises are to the downside. Not only do we see mergers and acquisitions of the weak sisters but we see bond defaults and companies entering into chapter 7 bankruptcies. The 10 year continued ascent of gold allowed wasteful practices to go unchecked. Over time, the industry morphed into a reckless uneconomic basket case of excess. These excesses became so extreme, the orebodies so low grade and the balance sheets so unsound that only a full phase III purging is capable of rectifying the distortions and laying the foundation for a sustained secular bull cycle. By the year 2000 the industry had wrung out all the excesses from the 1970s bull market in precious metals and it took a full 20 years to do it. From a beaten down level of $254/Oz gold it then embarked on an 11 year run to $1920/Oz. From 2000-2007 the PM sector became a go to alternative to the general stock market. The PM stocks soared and the excesses began to build. The concept of a well positioned mining company began to change. Previously an ideal company had a proven orebody and non-levered balance sheet, however as gold marched upward and government money printing increased the ideal company became one with low grade and large ore bodies in order to maximize the number of ounces in the ground. This was the most leveraged means to gain from constantly increasing gold prices which “had” to continue higher given the reckless printing of money by the central banks of the world. This shift in psychology incented managements to embark on acquisition and development sprees, scooping up big low grade deposits. Like the sub-prime housing boom in the USA this process corrupted the system. Engineers inflated estimates of value and understated development costs just as housing appraisers inflated the values of homes. The result was grossly uneconomic projects and over issued stock placements. This is the “junk” that Mr. Bear needs to clean up and it is the phase III that finishes the job. The amount of excess is directly proportional to the amount of downside pain required to correct the excess. So after a 10 year bull market it should not be surprising that it may take a 3-4 year bear market to clean up the mess.

The Step Sum

Finally, I would like to introduce the most compelling evidence that the bottom is not yet in. It is in the form of a new technical tool to evaluate the psychology of the market. It’s called the Step Sum. It has been developed by Mark Lundeen and it offers a unique insight into the psychology of the market. The SS offers a powerful clue that we have not seen the bottom, because it has not yet collapsed towards the price action which would indicate the psychology of capitulation. I recommend getting on Marks email list as he is a well seasoned observer of markets and offers insights not found anywhere else

Mark Lundeen

The step sum is simply a running total of up vs. down days and it reflects trader psychology. The unique insight that the step sum offers is that at the end of a bear market, the step sum normally collapses as the reflection of trader capitulation. The step sum usually remains steady thus diverging from the downward price action until the final capitulation stage. In the last stage when investor psychology finally becomes exhausted the step sum collapses, reflecting the final clean-out in psychology. This shows as a lopsided accumulation of down days. Here is how Mark describes the Step Sum’s utility: The step sum is a market sentiment indicator that provides an insight into the market’s psychology, and typically when step sum trends are out of step with the price trends, it’s the price trend that should be trusted.

In this first chart Mark shows us the step sum action over the entire secular bull and bear cycle from 1969-2000. Note how the step sum reflected the rise from 1969-81. Also note that in the 19 month 1975-76 cyclical bear the step sum correlates highly with the decline in the gold price reflecting an early break in psychology and lack of belief in that bull market. This is something it did not do in the upcoming 20 year bear market as bullish psychology had become well entrenched. Next observe how it refused to align itself to the price level until the final stages of the secular decline from 1980-2001. This shows how stubborn the psychology remained until the very end. It remained solid until 1996 where it finally gave in thus reflecting investor pessimism and exhaustion.

Lets see how Mark describes the step sum action in this chart: We can see when the gold bulls gave up their dreams of ever seeing gold resume its bull market, at the dotted line (1996) marking the beginning of the collapse of the step sum. Not surprisingly, this collapse in bullish sentiment in the gold market occurred just as the high-tech bubble entered its mania phase. Note too that gold’s step sum continued collapsing until 2001, when it then reversed to the upside. We see an eight year bear box beginning in 1988. The optimism of the gold bulls of the 1970s took a long time to die, as we see in the bear box below that began in the 1980s and didn’t terminate until the 1990s.

Now let’s move on to our current bear market in the Precious Metals. We can see how the Step Sum ( SS ) reflected the rise over the entire length of the bull market. Also observe how in the decline of 2008 the SS was late to reflect the decline in gold. It was not until 2-3 months before the bottom that investor psychology gave up and the SS declined thus reflecting investor capitulation. Now here comes the main insight of the SS when you look at the decline since the top of the bull in 2011. The SS has stayed solid and has NOT reflected investor capitulation! The huge declines in the gold stocks and gold has not even put a dent in it! The key message that this is delivering is that we have not yet had the requisite shift in investor psychology to drive down the step sum as a reflection of investor capitulation. Of course it is in phase III that this precise outcome occurs.

Here is what Mark has to say about final SS capitulation: So what good is the step sum when all you needed was price information to tell you the bulls in the gold market were losing money? Because when the step sum’s plot collapses downward toward the price trend, as it usually does in bear boxes, it tells us the bulls have capitulated in the face of reality and the correction is coming to an end.

Here is a close up of the SS intransigence through mid March. At what point will investor psychology “give it up” and allow the SS to align with the price action?

Its my premise that the answer to this question is that only after we violate the December 2013 lows will the SS collapse. We have expended investor energy and sentiment through almost 3 years, a 70% decline encompasing three BMRs , but we still need the final purging kicked off by a violation of that June 2013 , December 2013 double bottom to deliver demoralization to the party faithful gold bug crowd. That will usher in the final phase III annilhilation which clears the deck and establishes the base for a prolonged second half of the great 21st Century Gold Bull Market brought to you by the Western fiat decline.

Personally I take no joy in coming to these realizations , as by nature, I too am a goldbug .
For years I have been active in the gold community and travelled to precious metals mining meetings.
I count those in the industry and many precious metals investors as my friends . I look forward to
seeing this bear market finish its ugly business and seeing the precious metals investors again rewarded
for their faith .

Plunger