January 2009

If a low at 856.70 recorded Tuesday evening endures, the next bullish thrust should carry to at least 870.60. If the futures get past that resistance, a midpoint Hidden Pivot, then they could keep going to as high as 884.40. In the meantime, there were no enticing hidden supports at which I might suggest that you attempt bottom-fishing overnight. _______ UPDATE: The bullish look of the daily chart remains intact following today's sharp selloff, but the hourly chart is another matter and points toward a minimum 824.70. Bottom-fishing there is suggested with a tight stop-loss.

The Dollar Index has exceeded the 83.56 target show in the accompanying chart by a decisive 46 cents. This suggests there may be enought power to push DXY into the uppers 80s, where a test of 2008's recovery highs awaits. A two-day close above 83.98 would likely clinch it, since that is the midpoint resistance of an even larger pattern begun from 75.89 last September. _______ UPDATE: This morning's nasty plunge has brought into sharp relief a bearish pattern on the daily chart that yields a 79.01 midpoint support. We'll use it as a minimum downside target for now. It looks like the way down could be quite choppy.

With the global economy caught in a deflationary vise, I queried Bob Prechter recently about gold’s prospects. He is the right guy to ask for two reasons. First, his 2002 book At the Crest of the Tidal Wave established him as the foremost expert in the world on the subject of deflation. And second, as someone who has been relative tepid toward gold, perhaps he can explain why bullion quotes have not been hitting new highs even though fiscal and monetary policy in the U.S. and elsewhere have turned recklessly expansive. Below is my letter to him, followed by his response: “I am writing to ask your opinion about a key question that divides inflationists and deflationists. To wit: If we are indeed headed into a deflationary depression, why has gold quadrupled off its lows, and why does it look like it’s consolidating for a push above $1000? (If you’d like to have Rick’s commentary delivered free to your e-mail box each day, click here.) “I am a deflationist myself -- a hard-core one, in part because of your pellucid writing on the topic in At the Crest. Other books that influenced me were C.V. Meyers’ The Coming Deflation (1977) and Davidson & Rees-Mogg’s The Great Reckoning (early1990s). I have written myself on the topic (and inevitability) of deflation in Barron’s, as well as in the column I freelanced for several years to the San Francisco Examiner in the late 1990s. I continue to write regularly about the tightening deflationary noose in my daily newsletter, Rick’s Picks, and I see the economy as headed into a morass even deeper than the one the nation experienced in the 1930s. ‘Puny’ $8.5 Trillion “I have been arguing that the so-far $8.5 trillion bailout is a puny number compared to the deflationary implosion

A minor downtrend in play Monday night pointed to 851.70, a Hidden Pivot that night owls can bottom fish with a stop-loss as tight as four ticks. If the stop is hit, expect the weakness to continue to at least 845.00, or to 829.10 if any lower. That last number can also be bottom-fished using a stop-loss as tight as you can abide. _______ UPDATE: Gold is acting too, too coy today. Bearish short-term targets were negated by a move above 861.00 (aka point 'C'), but there are no useful upside targets that I can offer you as of yet. Meanwhile, price action in gold stocks such as Newmont has not only been bullish, it has been blatantly manipulative in a way that will have benefitted knowledgeable buyers.

We hold 200 shares for 40.41. Since the stock looks like it could fall to 37.74 before it gets traction, let's try to hedge the exposure by offering two Jan 40 calls (NEMAH) short for 1.19. They were trading for around 1.25 when the bell rang on Monday. _______ UPDATE: We shorted two calls for 1.20, giving us a covered write. No further action is suggested for now. Incidentally, I have inferred that the action at the opening was quite bullish, since the predatory scumballs who manipulate this stock for a living were able to move it 86 cents, from low to high, on the opening bar.

The bear rally has been mediocre so far, but that would change if the surge were to hit 57.25 without any intervening pullbacks lasting for longer than a day. The chart shows why. As you can see, a push to 57.25 would surpass three prior peaks, two of them "external" -- an impressive feat. More imnmediately, the futures appear to be struggling to reach the 49.65 target of a minor uptrend. If they get there in the first two hours of today's session, though, you can try shorting with a stop-loss as tight as 18 cents. _______ UPDATE: The move above 49.65 came in labored spasms, but the fact that it occurred at all suggests that still higher prices lie in store. Since it occurred in the middle of the night, no trade was effected.

Because powerful rallies often look like fakes initially, we shouldn’t be too quick to diss last week’s vaporous surge, which sent the Dow wafting 700 points higher in the space of just four days. Another 100 or so points of such hot-air magic on Monday and bears could find themselves seriously on the ropes. The chart below shows why. Notice how Friday’s 258-point thrust goosed the Industrial Average past two prior peaks. That’s not very impressive by itself, because these were weak “internal” peaks created by the uptrend begun on November 21. But if you look to the left of them you’ll see a third peak that was made when the Dow was falling hard. This is a more daunting “external” peak, and if the blue chip average were to push above it Monday or Tuesday without taking a breather, it would generate a powerfully bullish impulse leg on the daily chart. The peak lies just 95 points above Friday’s high, so it wouldn’t take much more silliness to get past it. Skeptical as we might be about the staying power of such a rally, we’d resist the urge to short it until we see how it fares at 9256, a “Hidden Pivot” resistance. If that number gives way easily, though, and the Dow closes above it for two consecutive days, bears had better run for cover.

The 901.00 pivot flagged here earlier can continue to serve as a bullish tripwire, and once the futures move decisively above it they should be considered bound for at least 972.20. Meanwhile, February Gold appeared on Friday to be setting up for a nice thrust, having touched bullish trigger points for two patterns, one of them minor, the other a few weeks old. _______ UPDATE: The New Year has begun -- Friday didn't count -- with a so-far gratuitous downdraft that bottomed at 843.50. However, it would take a print at 820.30 today to do any real damage to the hourly chart.

Assuming we're about to experience a big, silly rally to kick off the New Year, there are just two Hidden Pivots with which we need concern ourselves: 969.25,and 1008.50. The first, our minimum upside projection for the near term, is a number I first flagged here an eon ago; the second is of more recent vintage. If the lower pivot is breached decisively intraday, or on a closing basis, assume the second is likely to be reached. Traders can short either with a stop-loss as tight as 1.00 point.