Structural Dislocation?

The P&F chart below - which gave an important "buy" signal this week - has been a priority object of my scrutiny for some months

Given that the Relative Strength chart of gold:commodities has been showing signs of bottoming (see weekly chart below), it now seems that gold will likely:

• Make an assault on its own previous highs
• Soon (possibly after a final "washout" down-move in the ratio) reverse its bear trend relative to commodities, and start to rise relative to commodities

I am now watching the charts of Fannie Mae and Freddie Mac with keen interest.

Both the weekly charts below - based on the assumption that the market is still structurally "healthy" - should bounce up strongly from this point. If they continue down, I suspect we may be witnessing the beginnings of a structural dislocation (which would act as a driver of the gold price).

The chart of the 30 year bond price is also looking precarious, and there are no fewer than three bearish clues:

• Double top
• Rising wedge
• Declining tops in the PMO oscillator, with the recent rise in yields causing the PMO to drop sharply - but not yet give a sell signal.

The 64,000 Euro question - which no one on God's Earth can answer with certainty - is: "Will the US Dollar Index Hold above 79-80?

My guess? Based on the fact that 52% of the world's Central Banks have now actually stated that they will be diversifying their reserves away from US$ - which objectively means that "the news is out and has already been factored in by the markets" - the dollar should hold.

Conclusion

he breakout in the $CRB chart appears to be an early warning signal that the risks of a dislocation in the World's Financial Infrastructure are rising. If the substructure of the markets is healthy, Fannie Mae and Freddy Macshould bounce up from here, and the dollar index support level of 79-80 should hold.

Unfortunately, a significant clue that the substructure of the markets may not be healthy, lies in the patterns on the long bond chart. If the bond price should break down from its rising wedge formation (a high probability in my view), there is a concomitant high probability that the charts Fannie Mae and Freddie Mac will not bounce and, if they do not bounce, then there is a high probability that they could collapse.

In turn, if these two counters - which together have provided the underlying funding that has driven the significant rise in the US domestic property markets - do collapse; the probability that the US Dollar support level will hold, will start to recede. i.e. It might also collapse.

Post Script

By my understanding of the subject - a minor sell signal has recently been given under Dow Theory, the following conditions precedent of which are in place:

• There is an absence of underlying values,
• Both the Industrials and the Transports have recently fallen to levels which are below previous (short term) lows

Again in terms of my understanding of the subject, the key levels to watch are approximately 10,400 on the Industrials and approximately 3,400 on the Transports.

If those two support levels are broken on the downside, a "major" sell signal will have been given, and the probabilities of an equity market dislocation will be unacceptably high.

Under a scenario of such high risk, it will be irresponsible to remain (nakedly) invested in listed industrial equities, and it will be irresponsible not to have some form of (portfolio insurance oriented) investment exposure to precious metals.

Probably of most significance: This is not the time to allow important investment decisions to be taken by 30 year old "spreadsheet jockeys". If the markets do indeed dislocate then the "theoretical" protection that is supposedly inherent in derivative based insurance is likely to be worthless, give exponentially rising counter-party risks in the event of such dislocation.

In this latter context, the "king" of derivatives needs to be put under the spotlight.

The following monthly chart of JP Morgan is showing some important signs of deterioration:

• Parabolic sell signal two months ago
• Downside penetration (albeit slight) of the 24 month Moving Average
• A series of declining tops and bottoms on the OBV chart
• A declining trend on the MACD chart

Overall conclusion

The position is not yet irretrievably lost, but there are CLEAR signs that the markets are becoming increasingly nervous that the risks of structural dislocation are rising.