September 2006

Gold jumped back on a bullish track Wednesday as December futures pushed above a benchmark at 607.10 that we'd flagged here a couple of days earlier. From a Hidden-Pivot perspective, this feat would look more promising if the move above the two prior peaks shown in the chart had occurred in a single bound, so to speak, rather than in two separate segments. But the rally was nonetheless sufficient to lift the burden of proof from the bulls, at least for the moment, and to imply that buyers of bullion and precious metal shares may have the wind at their backs for a change. (Click on chart to enlarge) One simple but reliable way to predict whether a rally is likely to continue is to ascertain whether each new thrust on the hourly chart has surpassed a visually distinctive peak to the left of it. A rally that falls just shy of this mark invites skepticism. Indeed, every new push above a prior peak or peaks, especially those recorded during the preceding and perhaps still-dominant downtrend, should be viewed as renewing and reinvigorating the bull. This mode of analysis is a key feature of the Hidden Pivot method, and it can be used not only to predict short- and intermediate-term price swings very precisely, but also to gauge a trend's staying power with a high degree of confidence. We did just that in Newmont Mining yesterday, by the way, projecting a rally top at either of two closely spaced Hidden Pivot targets not far above Tuesday's settlement price. As it happened, the stock head-faked moderately higher in the opening minutes of the session, topping for the day at 44.15, the precise midpoint between our two targets, 44.10 and 44.21. Newmont plummeted $2.40 thereafter, or more than five percent, before bottoming

Today's headline could just as easily have been 'The Beauty of T-Bonds,' but we'll get to that in a moment. I just wanted to make sure I had the attention of gold bugs, who have been on my mind lately. They have been a voluble and engaging presence in the Rick's Picks chat room, concerned mainly with finding that so-far painfully elusive bottom in gold. For my part, I have preached caution on purely technical grounds, since I still have an unachieved target for the Comex December contract at $513, well below current levels. But there is another reason I would urge caution, and it boils down to a single idea ' namely, that in a deflation it's conceivable that relatively few investors will be looking to safeguard their nest eggs via the purchase of chunks of metal priced at $1,000 an ounce. More to the point, there may be no savings left to deploy in bullion, since deflation will have wiped out most of what we consider 'wealth' these days. Just a thought. (Click on chart to enlarge) 'No-Brainer Investment' Yes, I've said here before that gold is the 'no-brainer investment of our lifetime'. And so it has been, especially for anyone who became interested in the stuff when it was priced at $300 an ounce not very long ago. But if there is a reason to reconsider if not recant my words, it is the current onslaught of deflation in the housing sector. I am baffled as to why, so late in the game, so many otherwise intelligent observers can't see it coming. But come it will, with the irresistible pull of a black hole. In the end, tens of millions of homes will be unsellable at anywhere near today's appraised values. Who will lose in the end?

Technical signs that a major top is in continue to accumulate, some of them ominously coincident with the autumn equinox and yesterday's solar eclipse. On the S&P chart, MACD and relative strength indicators are flashing red, and support for Dow stocks is breaking down at the 10-day moving average. So why am I cautiously bullish nonetheless? Take a look at the chart below, because it contains some subtle, contrarian evidence that may be uniquely significant to Hidden Pivot analysis. Notice that last week's highs slightly exceeded the price peak recorded in May. That created a bullish impulse leg of daily-chart magnitude, and its positive implications for the next few weeks or so will endure so long as the S&P does not soon plummet below the bottoms I've labeled #1 and #2. Mind you, I'm not suggesting that anyone mortgage the farm to buy stocks at these levels. In fact, I lightened up myself on long positions at Friday's close, selling shares or call options in Citi, Merrill Lynch and IBM, three of my high-beta favorites for playing whatever upside remains if there's a short-squeeze blowoff in the offing. As I noted here a couple of days ago, a DJIA run-up to as high as 13045 is possible based on my technical runes. If this is indeed about to occur, the reasons for it lie beyond my imagination, since it would be notwithstanding the evident, recent slippage of the housing sector and U.S. economy into incipient recession. Actually, I would feel relieved if the S&Ps were to plummet beneath lows #1 and #2 in the next 5-7 days, since that would square with the conventionally bearish technical picture, not to mention with my sense of reality. However, because last week's highs exceeded May's peak, I am obliged for now to treat

With Bay Area homes sales hitting nine-year lows, there's at least one economist who knows a bust when he sees one: 'The market is flat and the bubble has popped,' said Chris Thornberg. And while some in the real estate business may have been encouraged by yesterday's decision by the Fed to leave administered rates unchanged, Thornberg sees a problem that has been growing far bigger and faster than even the most pessimistic observers might have predicted: 'This is way beyond the Fed,' he said. 'It's just so out of whack, it's going to take a long time to clear out.' Just so. Even with homebuilders doing all they can to stoke sales, inventories are mounting. Pulte Homes, for one, is offering a free week's vacation and up to $99,000 in incentives to buyers at its 17 Bay Area developments. But it may not be enough. New homes in the area have been hit harder than any other segment of the real estate market, dropping 11.6 percent from a year ago. In dollar terms, this means that a home that sold for the median price of $649,000 last August would now fetch, on average, $574,000. Who Remembers? If you can sell it, that is. With buyers and sellers both holding out for better deals, sales in Alameda County fell 28.2 percent year-over-year, according to DataQuick, 23.5 percent in Contra Costa County, and a whopping 34.3 percent in Solano County. But are would-be sellers taking this menacing trend seriously? Probably not, since most property owners doubtless remain confident that whenever real estate prices fall or stagnate, they eventually will bounce back. Only old-timers who were around during the 1930s could recall a time when the status quo went so badly awry that home sales dried up for years. This is why

Let the Dow Industrial Average get within a hundred points of new record highs, as it did yesterday, and America's economic troubles seem to melt like lemon drops. 'I think this market action is telling us that the economy may be past its worst point,' Wells Capital's James Paulsen told the Wall Street Journal, evidently inspired by yesterday's 72-point gain in the blue chip average. Paulsen will have to ratchet up the hubris if he wants to be a contender for the Professor Irving Fisher Award. Fisher, you may recall, was the economist who was immortalized after saying, just a few days before the 1929 Crash, that stocks had 'reached what looks like a permanently high plateau.' (Click to enlarge) Maybe we shouldn't be so hard on Paulsen, since a glance at the chart above more or less confirms that the Dow Average has indeed been on a plateau for a long, long time, even if not quite permanently. Ignore the anomalous post-9/11 dip and the Indoos have spent nearly all of the last eight years cruising at heights that would not have been believed before the tech boom radicalized investors' imaginations in the late 1990s. But does this really mean the worst is behind us, economically speaking? We think not, for reasons that have been piling up recently like crumpled vehicles in an I-70 fog. The most alarming of them is of course the housing bust, which, Paulsen's optimism aside, is all but certain to intensify in the coming months. Even so, we are willing to suspend disbelief until the Dow reaches 13045, the very bullish target broached here just a couple of days ago. Coldly objective chartists that we are, we have no qualms whatsoever about joining the bullish lunatic fringe, if only for another couple of months.

Gold stocks got pounded once again yesterday, buttressing an earlier forecast here of a further decline in December Gold futures to at least $513. We'll continue to fish for a bottom in selected stocks as gold falls, since this can nearly always be done without risking much more than small change; however, I have my doubts that any significant turn will occur before the target is reached. In the meantime, the Rick's Picks chat room has been attracting its share of gold bugs, some of whom are becoming adept at buying mining stocks at Hiden Pivot supports without risking an arm and a leg. (When we tried this in Newmont last week, we actually exited with a small profit on a long position before the stock succumbed once again to gravity.) (Click to enlarge) One stock that attracted particular interest in the chat room yesterday morning was Coeur d'Alene, a popular silver play. A Hidden Pivot denizen posted a 'buy' in CDE shares at a support that proved to be just 11 cents off the intraday low, and although the subsequent bounce left him in-the-black by day's end, the rally was not quite strong enough to have made him very confident about holding the stock overnight. There is good reason to be cautious in silver, as I pointed out during the session. To wit, last Friday's low in December Silver at 10.55 created a menacing impulse leg of daily-chart magnitude. This suggests that the Decembers are about to fall to 9.61 or lower, which if true would have bearish implications for Coeur d'Alene, not to mention dozens of other companies that produce silver. Not surprisingly, crude oil is showing signs of further fatigue as well. The downside target we looked at in the chat room is 60.57, basis the December

If the stock market is about to get short-squeezed to new record highs, a possibility I raised here the other day, what would be the catalyst? A plausible answer can be glimpsed in the very interesting letter that I received recently from a Rick's Picks subscriber, a man in the construction business who says things don't look too bad from where he's sitting, at least not right now they don't. The subscriber's long-term outlook is very bearish but he is nonetheless willing to accept that the U.S. economy is not quite ready to go down the toilet. For balance, and lest we be lulled off guard by his pragmatic point of view, I have included at bottom a report on foreclosures in California from Merrill Lynch that could make one's scalp tingle. With ARMs just starting to ratchet up by 2% or more, the housing bust continues to evolve beyond the nostrums of monetary policymakers. A Bullion Buyer The subscriber writes as follows: 'I have been reading all of the doom and gloom forecasts for the U.S. economy and believe, like many others, that they will prove to be correct. To prepare for hard times, I have been positioning myself over the last six months for the long haul, buying physical gold and silver bullion. I will probably buy more soon. 'On the other hand, I see the realities of what is going on in my own business. Our bid activity is still high, sales are steady and we will at least equal our volume over the next 12 months. Our year ends on September 30, and we will have done approximately $14 million in gross sales. We currently have an $8 million backlog. These are projects that will get built. In our trade, it is typically four to seven months

Considering the viciousness of the short-squeeze on September put options that bears just endured, we might well ask what lies in store for us in October? Logic suggests that if the pessimists were willing to bet heavily on a September crash, as they evidently were, then they will be betting even more aggressively on a crash in October, historically the worst month for stocks. If so, the stock-market downturn that so many of us have been expecting, particularly those of us who have closely tracked the ominous decline in real estate prices, could conceivably turn into a spectacular, last-gasp rally ' the Mother of All Bear Traps, if you will. I pondered this unsettling possibility after receiving a query from a friend of mine who runs a very popular, gold-oriented Web site. Is Dow 16500 possible, he asked, based on the inverted head-and-shoulders pattern shown below? (Click on chart to enlarge) Truth to tell, I'm not much for head-and-shoulders formations, since its is a pattern that pops up just about everywhere one looks for it. However, the inversion show in the chart does indeed 'count' to somewhere above 16000, even if there is no corresponding Hidden Pivot target I can find that is much above 13,000. So what about 13000? asked my friend. Well, I replied, if I can contrive to ignore every instinctual bone in my body, and to curse logic itself as the enemy of successful investing, then there is indeed a case to be made for Dow 13000 ' or to be more precise, Dow 13045, as shown in the chart below. While this may seem highly improbable to those of us who believe a deep recession has already begun, a purely mechanical reading of the available technical evidence suggests that a 1500-point rally in the Dow over the next several months is a prospect

Here's some trading-floor wisdom that could suit us well as we continue to fish for a bottom in gold: When attempting to catch a falling piano, one should always wait until it has bounced three times. Or so the saying goes. Yesterday, however, we threw caution to the wind, opening our arms and casting our eyes skyward as that Steinway of the bullion sector, Newmont Mining, came a-plummeting once again. Shares of the world's largest gold producer have fallen nearly 20 percent in a little more than a week, but there was reason to believe that any significant, further decline yesterday would bring it to a Hidden Pivot support with the potential to turn the tide. So far, we haven't been proven wrong. The target I'd flagged at 43.75 caught the nadir of yesterday's $2.25 swoon within a nickel, and by day's end the stock had rebounded sufficiently to leave us with a small profit in the Oct 45 calls we'd bought to leverage this potentially important low. Or was it? It's too early to say, since the subsequent rally had only 30 minutes to feel its oats before NYSE trading ended for the day. We have our suspicions that Newmont will see still lower prices, since our worst-case target for Comex December Gold is 513.30, well beneath yesterday's dismal lows at $581. But unless Newmont opens on a gap lower this morning, we will have tested this theory without much pain or risk. *** What Do I Need to Know? Registration forms for the October 28-29 Hidden Pivot seminar at the Fairmont Waterfront in Vancouver went out yesterday to those who earlier had said they plan to attend. Click here to receive the form if you were not on the list. If you are wavering, here is some possibly