DOW Short Squeeze!

Since the Precious Metals Sector is the main emphasis of our investing interest for the foreseeable future, we will be moving our attention on to the Precious Metals and the Precious Metals Stocks over the next few weeks. That does not mean that what we are currently addressing does not have significance for the PM sector. The Fed is devaluing the Dollar via debt monetization in this second leg of Dollar Inflation since the Deflation Scare, and we have now reached the early stages of Global Competitive Currency Devaluations where many nations are debasing their currencies. This is very similar to what happened at this same juncture in the late 70's. In fact, it has become obvious to me that the fractal work that we have derived is all driven by the "Paper Currency Cycle" which has a big impact on pricing for everything denominated in a particular paper currency. This is why we included the "price chart of the Dollar" in our last editorial. Though it is our opinion that there is a divergence between the Dollar's price and its value as we enter the stage of Global Competitive Currency Devaluations, most investors only see the Dollar's "price" as depicted in the USD Index. Thus, this index weighs heavily on the psychology of the investment world. If the price of the Dollar is going to fall further, we'd expect the psychology of the markets to change to one of support for stocks in general, which could be a sharp change from current price deflation expectations. That was the potential of the inflection point we addressed last weekend.

PART 1: THE DOW

Last week, we presented the case for a turning point in the Dow that might present as a short-squeeze for the stock markets in general. We used a weekly moving average ribbon chart to present that case in comparison to a daily moving average ribbon chart from the first move up off the 2009 bottom in the Dow. The comparison shows the possibility that this short squeeze might present as much more than just a short-term squeeze. A link to last week's editorial is posted, below.

https://www.gold-eagle.com/editorials_08/goldrunner070410.html

So far, the short-squeeze that we had anticipated last weekend looks pretty strong. The weekly chart of the Dow responded with a big white engulfing candle. The current chart of the Dow with the Bullish Engulfing Candle is posted, below.

This one bullish engulfing candle by itself means nothing more than a short-term bottom has been put in place. Still, the potential for more than a short-term bottom presents itself with the candle's presence in conjunction with the potential of the US Dollar Chart weakness. If the rally holds for stocks for the rest of July, then the comparison to the daily fractal chart we showed last week might become a fractal reality with the Dow running up to new highs over the intermediate-term. For comparison, we'll again post the daily chart from early to mid 2009 shown in last weeks editorial, below.

If the chart of the US Dollar continues to fall, then we suspect that the Dow chart , along with most other stocks including the Precious Metals Stocks, will continue to be supported. Let's take a look at the US Dollar Chart.

PART 2: THE US DOLLAR

The first chart of the USD is the same daily chart we showed last weekend. We can see that the price of the USD has continued to decline with the dotted midline of the Bollinger Bands rolling over the top of "price." The MACD is falling, and the ADX line has turned up, confirming that the Dollar is now currently in a momentum decline. If you look closely at the two circled areas at the two previous tops on the left hand side of the Dollar Chart, you will see that around this juncture in the past the Dollar decline accelerated sharply to the downside. If the Dollar again accelerates to the downside in the near future, we'd expect stocks to be further supported by the Dollar's decline.

The next US Dollar chart is a "working chart" using a chart from Netdania.com with different angled lines forming a bit of a grid. In this chart the Dollar appears to be falling in a channel where price has dropped down to the bottom trend line and is "crawling down that line." We can see in the previous Dollar topping pattern on the left of the chart a very similar sequence in price where the Dollar subsequently accelerated its downtrend. The two similar patterns are circled on the chart.

As we have written in the past, there is now doubt that we continue to face a massive deflationary backdrop. Yet, the current round of debt monetization aimed at devaluing the Dollar is key to the ultimate price environment that plays out in terms of inflation or deflation. There is no doubt that the economy will continue to suffer in either environment since the Dollar Inflation in this second leg of Dollar Inflation/ Devaluation that is being provided since the Deflation scare is not operating inside the Federal Reserve Banking system in terms of loan creation. Still, the state of the economy and the state of general pricing are two completely separate issues.

PART 3: CLF

To give a bit of a different look to the juncture that I think stocks might have reached, let's look at some charts of CLF- Cliff's Natural Resources. CLF is what I'd call an "inflation stock", a miner of iron ore and coal- largely metallurgical coal for steel production. I, personally like the potential of the chart of CLF to be putting in a significant bottom at this juncture. If so, we might see new highs on the chart into September.

The first chart of CLF is a weekly moving average ribbon chart. Price has tried to penetrate the MA ribbon on the downside multiple times, and this week the price resolved to the upside with a white bodied hammer in place- often a bottoming candle. If price moves higher from here, there will be no more moving average resistance lines above "price" on the weekly chart. We believe that the weekly chart is the primary consideration at this juncture. The RSI almost looks like it has formed an expanding triangle. I haven't seen this type of formation often, but the last one I saw resolved strongly to the upside in terms of price. Chart, below.

The next chart of CLF is a daily line arithmetic chart showing CLF appearing to have bottomed at the long-term lower trend line. I could show you a dozen charts of CLF in all different forms, but to not test your patience I picked two that basically show what I consider the most important technical considerations.

It will be interesting to see how the general stock markets resolve from this crucial area. I believe that the Dollar will be key in determining the direction of the stock markets over the next several months.

One note on the PM sector. Though I don't know whether the PM stocks have bottomed, yet, in this minor cycle, down- I do have very high confidence that this correction will be the final one before the start of a momentum move to the upside. The LT fractal chart surrogate for the PM stocks shows that in the 70's analogy, the coming move will be a momentum run very similar to early 2002.

Please note that like all of my writings, the above is not intended as investment advice. I am not licensed to give investment advice, nor do I ever intend to. My work consists of showing potentials of what may, be based on my personal biases. Once we get our investment site up and running, we do expect to have a licensed financial advisor involved who will present buy and sell recommendations. On the site I will be including much more chart analysis of individual stocks, along with covering the usual indices. We expect to have a few other individuals contributing both technical and fundamental analysis as well. Our primary work will involve the Precious Metals sector, though much of my fractal work is extending out into inter- market fractal considerations as well. Anyone wishing to be contacted with additional information when our site is up can send us an e-mail to the following address. We expect to be functional in 30 to 45 days.