Zulu Land Markets

The markets, right now, seem to be in a period of indecision with most market writers diverging toward the two extremes. The Deflationists are looking for the Dow to fall to 4,000; or in one case even down to 1,000. They are looking for much lower $Gold, down to 800 or even 600. One thing I find a bit interesting is that when the deflationists comment on the opposing view of an inflationary outcome, they usually refer to "hyper-inflation", rather than using the term inflation. Though we will get into these issues to a much deeper degree as the weeks roll on, for now, I'll just say that my view is all based on the "State of the Dollar." There is nothing I can see in terms of the Dollar that suggests anything like deflation of the Dollar unless one considers a dead cat bounce as strength. It looks to me like another round of QE is in the works, and that the markets will be factoring such a round into the mix over the coming weeks.

PART 1: THE DOW

The short-squeeze in the Dow hit a wall in terms of a cluster of moving averages sitting above price. The Bears call this move a "re-test" as they are looking for much lower Dow prices. Personally, since the US economic deterioration will likely continue for the foreseeable future, I see nothing but more monetization of debt to come our way. Let's take a look at how the Dow traded in the fractal comparison charts I posted two weeks, ago, at the recent bottom. At that time we were looking for a short-squeeze to commence. Now, the question is whether the uptrend will continue. I would expect the Dow rise to continue after this correction as the markets start to discount further QE. We might see a bit of a deeper correction in this time period than in the earlier fractal simply because the psychology seems so bearish at this time. That is to be expected since the weekly version of a daily fractal often plays out a bit "heavy."

The first chart is the current weekly Dow chart. I have chosen to display the chart showing only the basic exponential moving averages, rather than the moving average ribbons so it is easier to see the cluster of moving averages that stopped the price rise as the RSI indicator was repelled at the 50 line and price hit the down trend line.

The next chart is the Dow Daily chart at a similar juncture in July of 2009. We can see in the chart that upside price movement was stopped by a confluence of moving averages, coupled with the down trend line off of the top.

These two charts are simply to show that the Dow met resistance in the same environment in both time periods. I believe that the "Driving Force" of all of the markets is Dollar Inflation, much like it was in the 70's. It is more difficult to see this time around because the Dollar inflation in this second leg since late 2008 is created by the monetization of debt, and it is occurring in order to effect a devaluation of the USD. As the Dollar is further devalued, it puts a floor under the prices of everything denominated in Dollars. Though we could certainly see more downside in the Dow in the near-term as the psyche of the markets battles with deteriorating economy versus further Dollar Devaluation, I think the bottom is in for the Dow in this period of time.

As the US Dollar approaches the 200 day EMA, I expect it to bounce back up for a few weeks. We can see on the left side of the chart that in te two previous falls, the re-trace either came at the 200 day EMA- or price spiked below the daily 200 EMA before re-tracing higher. This might become significant in terms of the near-term price movements of the PM sector.

PART 3: CLF

CLF, our proxy for the general inflation stocks, appears to be putting in a bottom very similar to July of 2009, also. CLF tends to lag the Dow a bit at bottoms. You can see in this chart that price has found support at an angled resistance line, and the first move up was repelled by the lower edge of the moving average ribbon. This is very similar to July of 2009. A change in psychology to further QE should be very supportive to the price of CLF, and I expect that over the coming weeks CLF will moving higher. In fact, I suspect that CLF might be seeing new highs before the end of the year.

In the chart, below, we can see the two similar bottoms (potential bottom, now) circled in blue.

PART 4: THE PRECIOUS METALS STOCKS

Everybody is wondering when the Precious Metals Stocks will be taking off to higher levels. Let's take a look at the chart of a Bigcharts version of the HUI. There might be a bit of a double whammy in the ultra short-term for the HUI as investors are scared of a deflationary collapse. Many investors only invest in stocks, and if the general market is under pressure they might sell their Gold stocks. This is especially true going into Gold option expiration week- a time when the Precious Metals Sector is usually under price pressure.

In the chart, below, we can see that the HUI sits just above its uptrend line drawn back to January. If the HUI breaks below that line during a coming period of further price weakness in Gold and Silver, we could have a fairly short (in time) and sharp drop. This is what played out at the similar juncture in our 70's surrogate PM stock fractal chart. If you look at the very similar juncture where price currently sits just above the 20 week EMA and uptrend line as the earlier point at the arrow, you can see what I am talking about. A break of the current uptrend line could see a sharp fall back to support back around the 365 area to near the 200 week EMA. So far, the fractal surrogate chart for the PM stocks has been very close to the PM stock moves for the last decade. We'll just have to see how price resolves. If we have the down move, I'd expect it to be over in 3 to 4 weeks, with the potential for a bottom in 2 ½ weeks. That is the bad news.

So, what's the good news? Well, if the PM stocks continue to follow the path of the 70's fractal surrogate, then immediately after any coming correction PM stocks will finally be moving into the kind of momentum up-move we saw back in the good old days of 2001 through 2003. The fractal 70's comparison is a true momentum run up into what should be the first quart of 2011.

A few notes…………..

1. If you look back at the LT chart of Gold I posted in a recent editorial, you will see that I noted back in April that "price is pushing toward the end of this node." The reason I used those terms was because I was expecting further weakness into this period, today. Editorial containing thta chart linked, www.gold-eagle.com/editorials_08/goldrunner070410.html
2. Nothing says that the HUI has to drop down to the 200 week EMA, but I wanted you to be aware of the possibility. It would be ironic to sell out right before a major upward run in the HUI.
3. It will be interesting to see if the stronger mid-tiers and the explorers with great reserves outperform if the HUI falls as suggested. Any PM stocks holding up pretty well if the HUI corrects, might become a big gainer in a potential momentum run to the upside.
4. In my eyes, deflation is the backdrop, and Dollar inflation/ devaluation is the cure being created by the Fed. The deflationary spiral in the markets back in 1929 occurred precisely because the Dollar was in a state of deflation- strength- quite the opposite of Dollar devaluation.

On our subscription 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 other 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 the site to be functional in the next few weeks since we wanted to have it up around the time that the PM stocks start their next anticipated momentum run.