SQUEXX
15th August 2010, 09:16 PM
August 15th, 2010
FALL CRASH Update
Clive Maund
http://www.clivemaund.com
The markets continue to look like they are shaping up for a Fall crash, but, thus far at least, are doing the decent thing by waiting for everyone to return from vacation before the fireworks start. We will now swiftly run through the charts to see how things are looking.
The S&P500 index is behaving as expected, lazily completing a large and ominous Head-and-Shoulders top beneath a zone of heavy resistance that promises some serious downside action before much longer. Right now it appears to be descending to complete the right side of the Right Shoulder of the pattern. The downslope of the "neckline" of this H&S top makes it more bearish.The fun will really start when it breaks down below the neckline of the pattern. Timing wise it appears to be setting up for a classic Fall crash.
http://www.clivemaund.com/charts/spx3year150810.gif
Copper has been strong of late, but here too the recent rally looks like the Right Shoulder of a Head-and-Shoulders top, this time with a horizontal neckline. Note that the Left Shoulder, Head and Right Shoulder highs in copper have occurred at about the same time as these points on the S&P500 index, so it should be a case of "we will all go together when we go" when things get rough. Note also that copper's Right Shoulder peak may not yet have been reached, although if it hasn't it is unlikely to rise much more before turning down.
http://www.clivemaund.com/charts/copper2year150810.gif
The charts for the Chinese markets are interesting at this time, especially as some people are hoping that China's strength will somehow stop the world economy from slipping into the hole. From the charts it looks like they are going to be disappointed. As you may recall China's stockmarkets went through a boom period some years ago that culminated in a spectacular parabolic blowoff top. After crashing back from the peak in tune with the worldwide slump in 2008, China's markets enjoyed a "son of bubble" rally in 2009, partly caused by those entertaining the delusion that the earlier casino conditions would return, but as we can see on our 5-year chart for the FTSE/Xinhua China 25, this rally stalled out at heavy resistance beneath the earlier top area and an ominous series of descending highs has been forming above a line of support. The 2009 advance, impressive as it was, looks on this chart like nothing more than a bearmarket rally, meaning that renewed decline is to be expected, with a severe decline likely once the support shown fails, which of course can be expected to synchronize with US markets breaking down from their H&S top.
http://www.clivemaund.com/charts/fxi5year150810.gif
In the light of the grim appearance of so many other markets, gold's recent performance has been impressive. Here too though there are signs that all is not well. On our 1-year chart we can see that upside momentum has been faltering with the new highs in May and June not being accompanied by new or even equal highs in the MACD indicator, which is viewed as a warning. There is also a potential Head-and-Shoulders top forming in gold, although smaller than those in copper and the broad stockmarket, with a downsloping neckline as shown on the chart. Most of you will have seen that picture of a woman who appears simultaneously as a beautiful young lady or an old hag, so it comes as no surprise that some optimistic commentators have spotted a potential Head-and-Shoulders bottom that may have developed in gold over the past month. Even if this is valid, however, it only has measuring implications to a level a little above previous highs, and so if it rises that far the pattern could morph from the Head-and-Shoulders top that we have observed into a Broadening or Megaphone Top. So any new highs attained could suck a lot of people in amid great fanfare before it then reverses and drops heavily.
http://www.clivemaund.com/charts/gold1year150810.gif
The silver chart looks frightful, and the only thing thought likely to force an upside breakout would be something really dramatic like an Israeli strike on Iran, more about which later. On its 3-year chart we can see that silver is perfectly set up to crash. Many recent attempts to break out to new highs have all come to nothing and now we have a line of descending tops that has brought the price and moving averages into close proximity, with the 200-day moving average flattening out - conditions are ripe for a devastating plunge.
http://www.clivemaund.com/charts/silver3year150810.gif
The charts for the PM stock indices look truly awful and like they are preparing to tank along with the broad stockmarket. On our 3-year chart for the HUI index we can see the giant Double Top that appears to be completing with the highs of 2008. Gold's rally of the past couple of weeks has only engendered a miserly rally in this index. The refusal of the PM stock indices and silver to break out upside to confirm gold's recent new highs is viewed as an ominous sign, and the recent clear uptrend failure by the HUI index and the now tight bunching of the index with its moving averages, with the 200-day flattening out have put it in position to crash. Even if gold should succeed in making a marginal new high in coming weeks, this index would still be unlikely to break out above the strong resistance in the 500 area. About the only thing likely to bring about an upside breakout in the PM complex would be an Israeli strike on Iran, as mentioned above.
http://www.clivemaund.com/charts/hui3year150810.gif
A large top area appears to be completing in oil too. Following the crash of 2008 oil rebounded quite strongly for several months, a classic bearmarket rally, but has made almost no net progress for a year now. We can see all this on our 3-year chart for Light Crude. Right now it appears to be completing the Right Shoulder of a Head-and-Shoulders top that parallels those completing in copper and the broad stockmarket. Breakdown below the neckline of the pattern should lead to a severe decline. Again the only thing likely to bring about an upside breakout in the PM complex would be an Israeli strike on Iran.
http://www.clivemaund.com/charts/wtic3year150810.gif
All of the charts reviewed above suggest that things are going to turn very nasty this Fall, but as we know no technical patterns are infallible, and so the bearish patterns that we have observed could conceivably abort. So the question is "What could cause them to abort?" More Quantitative Easing? - it is not considered likely that this will stop the markets falling - as Peter Schiff has repeatedly pointed out, the current US administration is only interested in short-term expediency, in buying more time, and has no interest at all in fiscal restraint or responsibility. We can therefore expect them to continue creating more money ad nauseum. The markets know this and so more QE, or QE2 has already been discounted. This at least in part accounts for the rally of recent weeks. A point worth making regarding this is that they can create all the additional money they like, but if consumers and/or companies go into retrenchment mode they won't borrow it and won't spend it, so they will be "pushing on a piece of string" - all they will succeed in doing is breeding inflation and driving up interest rates. While it can certainly be argued that inflation will be a positive influence on Precious Metals prices, a market crash will cause investors to dump whatever they can sell, and that will include gold and silver. A menacing factor that is about to come to the fore that could certainly contribute to crashing the US markets is the fact that the Bush tax cuts expire at the end of this year - capital gains will be taxed at 15% for this year and 30% - 37% for next year, so investors are going to have a powerful incentive to sell this Fall to sidestep much higher capital gains. One potential development that we should be aware of that could cause a general market crash but send the resource sector soaring would be an Israeli strike on Iran. There is a story going round that the Russians are about to instal nuclear fuel rods in reactors in Iran, and when they have these sites will be "unbombable", since an attack would cause a Chernobyl style escape of radioactive material. Israel therefore has an incentive to attack immediately or very soon. The veracity of this story is not known, however, and in the absence of any such attack the resource sector looks set to drop in tandem with the general market.
FALL CRASH Update
Clive Maund
http://www.clivemaund.com
The markets continue to look like they are shaping up for a Fall crash, but, thus far at least, are doing the decent thing by waiting for everyone to return from vacation before the fireworks start. We will now swiftly run through the charts to see how things are looking.
The S&P500 index is behaving as expected, lazily completing a large and ominous Head-and-Shoulders top beneath a zone of heavy resistance that promises some serious downside action before much longer. Right now it appears to be descending to complete the right side of the Right Shoulder of the pattern. The downslope of the "neckline" of this H&S top makes it more bearish.The fun will really start when it breaks down below the neckline of the pattern. Timing wise it appears to be setting up for a classic Fall crash.
http://www.clivemaund.com/charts/spx3year150810.gif
Copper has been strong of late, but here too the recent rally looks like the Right Shoulder of a Head-and-Shoulders top, this time with a horizontal neckline. Note that the Left Shoulder, Head and Right Shoulder highs in copper have occurred at about the same time as these points on the S&P500 index, so it should be a case of "we will all go together when we go" when things get rough. Note also that copper's Right Shoulder peak may not yet have been reached, although if it hasn't it is unlikely to rise much more before turning down.
http://www.clivemaund.com/charts/copper2year150810.gif
The charts for the Chinese markets are interesting at this time, especially as some people are hoping that China's strength will somehow stop the world economy from slipping into the hole. From the charts it looks like they are going to be disappointed. As you may recall China's stockmarkets went through a boom period some years ago that culminated in a spectacular parabolic blowoff top. After crashing back from the peak in tune with the worldwide slump in 2008, China's markets enjoyed a "son of bubble" rally in 2009, partly caused by those entertaining the delusion that the earlier casino conditions would return, but as we can see on our 5-year chart for the FTSE/Xinhua China 25, this rally stalled out at heavy resistance beneath the earlier top area and an ominous series of descending highs has been forming above a line of support. The 2009 advance, impressive as it was, looks on this chart like nothing more than a bearmarket rally, meaning that renewed decline is to be expected, with a severe decline likely once the support shown fails, which of course can be expected to synchronize with US markets breaking down from their H&S top.
http://www.clivemaund.com/charts/fxi5year150810.gif
In the light of the grim appearance of so many other markets, gold's recent performance has been impressive. Here too though there are signs that all is not well. On our 1-year chart we can see that upside momentum has been faltering with the new highs in May and June not being accompanied by new or even equal highs in the MACD indicator, which is viewed as a warning. There is also a potential Head-and-Shoulders top forming in gold, although smaller than those in copper and the broad stockmarket, with a downsloping neckline as shown on the chart. Most of you will have seen that picture of a woman who appears simultaneously as a beautiful young lady or an old hag, so it comes as no surprise that some optimistic commentators have spotted a potential Head-and-Shoulders bottom that may have developed in gold over the past month. Even if this is valid, however, it only has measuring implications to a level a little above previous highs, and so if it rises that far the pattern could morph from the Head-and-Shoulders top that we have observed into a Broadening or Megaphone Top. So any new highs attained could suck a lot of people in amid great fanfare before it then reverses and drops heavily.
http://www.clivemaund.com/charts/gold1year150810.gif
The silver chart looks frightful, and the only thing thought likely to force an upside breakout would be something really dramatic like an Israeli strike on Iran, more about which later. On its 3-year chart we can see that silver is perfectly set up to crash. Many recent attempts to break out to new highs have all come to nothing and now we have a line of descending tops that has brought the price and moving averages into close proximity, with the 200-day moving average flattening out - conditions are ripe for a devastating plunge.
http://www.clivemaund.com/charts/silver3year150810.gif
The charts for the PM stock indices look truly awful and like they are preparing to tank along with the broad stockmarket. On our 3-year chart for the HUI index we can see the giant Double Top that appears to be completing with the highs of 2008. Gold's rally of the past couple of weeks has only engendered a miserly rally in this index. The refusal of the PM stock indices and silver to break out upside to confirm gold's recent new highs is viewed as an ominous sign, and the recent clear uptrend failure by the HUI index and the now tight bunching of the index with its moving averages, with the 200-day flattening out have put it in position to crash. Even if gold should succeed in making a marginal new high in coming weeks, this index would still be unlikely to break out above the strong resistance in the 500 area. About the only thing likely to bring about an upside breakout in the PM complex would be an Israeli strike on Iran, as mentioned above.
http://www.clivemaund.com/charts/hui3year150810.gif
A large top area appears to be completing in oil too. Following the crash of 2008 oil rebounded quite strongly for several months, a classic bearmarket rally, but has made almost no net progress for a year now. We can see all this on our 3-year chart for Light Crude. Right now it appears to be completing the Right Shoulder of a Head-and-Shoulders top that parallels those completing in copper and the broad stockmarket. Breakdown below the neckline of the pattern should lead to a severe decline. Again the only thing likely to bring about an upside breakout in the PM complex would be an Israeli strike on Iran.
http://www.clivemaund.com/charts/wtic3year150810.gif
All of the charts reviewed above suggest that things are going to turn very nasty this Fall, but as we know no technical patterns are infallible, and so the bearish patterns that we have observed could conceivably abort. So the question is "What could cause them to abort?" More Quantitative Easing? - it is not considered likely that this will stop the markets falling - as Peter Schiff has repeatedly pointed out, the current US administration is only interested in short-term expediency, in buying more time, and has no interest at all in fiscal restraint or responsibility. We can therefore expect them to continue creating more money ad nauseum. The markets know this and so more QE, or QE2 has already been discounted. This at least in part accounts for the rally of recent weeks. A point worth making regarding this is that they can create all the additional money they like, but if consumers and/or companies go into retrenchment mode they won't borrow it and won't spend it, so they will be "pushing on a piece of string" - all they will succeed in doing is breeding inflation and driving up interest rates. While it can certainly be argued that inflation will be a positive influence on Precious Metals prices, a market crash will cause investors to dump whatever they can sell, and that will include gold and silver. A menacing factor that is about to come to the fore that could certainly contribute to crashing the US markets is the fact that the Bush tax cuts expire at the end of this year - capital gains will be taxed at 15% for this year and 30% - 37% for next year, so investors are going to have a powerful incentive to sell this Fall to sidestep much higher capital gains. One potential development that we should be aware of that could cause a general market crash but send the resource sector soaring would be an Israeli strike on Iran. There is a story going round that the Russians are about to instal nuclear fuel rods in reactors in Iran, and when they have these sites will be "unbombable", since an attack would cause a Chernobyl style escape of radioactive material. Israel therefore has an incentive to attack immediately or very soon. The veracity of this story is not known, however, and in the absence of any such attack the resource sector looks set to drop in tandem with the general market.