Speculation has been rife in the financial press lately about the
possibility of another financial market meltdown. It seems that
investors are waiting for the proverbial “other shoe” to drop as
worries continue to mount over the sustainability of the financial market
recovery that began over one year ago.
Even the president of the United
States has jumped on the fear
bandwagon. On Thursday, President Obama was stumping in New
York as he attempts to win favor for his proposed
financial overhaul legislation. Playing the fear card,
Obama said it was “essential that we learn the lessons of this crisis,
so we don’t doom ourselves to repeat it. And make no mistake;
that is exactly what will happen if we allow this moment to pass.”
There is also the latest announcement from the International Monetary
Fund, which said that Greece’s
financial crisis could be the start of a “new phase” of global
financial crisis, one focused on uncertainties over sovereign debt.
According to the IMF, “Higher debt levels have the potential for
spillovers across financial systems, and to impact financial stability.”
The IMF also noted that current levels of debt in advanced countries have
already risen to levels not seen since the end of World War II.
Retail investors, politicians and bureaucrats aren’t the only
ones speculating on the likelihood of another financial market crash.
They’re in good company as billionaire hedge fund manager George Soros
has recently weighed in on the subject. In his latest book, Soros
discussed the handling of the 2008 financial crisis and drew attention to the
handling of the crisis by the major countries involved, particularly the U.S.
Regarding the bailouts he said, “These measures have been successful,
and the global economy appears to be stabilizing. There is a growing
belief that the global financial system has once again escaped collapse and
we are slowly returning to business as usual.”
Soros then drops the bomb on this assumption as he offers his opinion:
“This is a grave misinterpretation of the current situation.
Humpty Dumpty cannot be put together again.”
Elsewhere in the book Soros writes, “I regret to tell you that
the recovery is liable to run out of steam and may even be followed by a
‘double dip,’ although I am not sure whether it will occur in
2010 or 2011.” Yet on the same page Soros also admits that
“Others – including me – failed to anticipate the extent of
the rebound.”
Many investors look to a financial oracle such as Soros for guidance
as to what the financial future may hold. Others are content to place
their faith in the pronouncements of the president or even the proclamations
of the financial press. But the one source of “inside”
knowledge that hasn’t yet failed to provide correct guidance is the
stock market itself. Since rebounding in dramatic fashion in March
2009, the market has been forecasting economic recovery for the U.S.
Many investors have refused to listen to Mr. Market’s optimistic
message in the face of widespread headline pessimism, but the message is
undeniable: more recovery is on the way.
As we have pointed out many times since last March, the “Stock
Market Barometer,” made famous by Charles Dow,” is known for
predicting improvement in the business outlook. It has been screaming
at investors and anyone who cares to listen for over a year now. That
message has been one of steady improvement and already we see signs of its
partial fulfillment. Various segments of the economy have already
started on the road to recovery but the last area in need of major
improvement is obviously the job market. This is always the last
segment to show improvement following a recession, however, but improvement
will be seen for employment before all is said and done. In its entire
history, the Stock Market Barometer has not yet failed.
Another strong indication that more recovery is on the way to the
business economy can be seen in the New Economy Index (NEI). This index
is a simple average of the share prices of the five leading representative
companies of the domestic retail economy. When the NEI and its 12-week
and 20-week moving averages are in an established uptrend and making higher
highs on a sustained basis, it forecasts sales growth for the retail economy
in the months that lie ahead. As the latest chart shows, NEI has now
completely recovered its losses since 2007 (when it was forecasting economic
weakness) and is now at a 3-year high.
Turning our attention to the gold market, earlier this month we looked
at our favorite proxy for the gold price, the SPDR Gold Trust ETF
(GLD). We noted that the silver ETF (SLV) had broken out ahead of gold
and this was interpreted as a positive leading signal for the gold price as
we concluded that GLD would likely test its January trading range high.
Since then GLD has gone on to test the intermediate-term trading range high
at about the 114 level and has been consolidating for the last couple of
weeks as you can see here in the daily chart.
The gold price, while not as vibrant as it was last year, still has a
couple of important factors going for it. One is that any tendency
toward strength in the broad market for equities has had a residual benefit
for the gold price in pushing it higher. Another is that the
“fear factor” concerning the economic outlook that we’ve
been discussing is still supportive for the bullion price. These combined
influences argue in favor of the gold price pushing out of its interim
trading range and moving above the January 2010 high.
Support & Resistance
One of the most important skills traders and investors can possess is
the ability to distinguish between important price levels in stocks,
commodities and market indices. When a benchmark price level is
approached by a stock you’re trading in, for instance, it helps to know
if the level is technically important, and if so, what are the chances it
will keep the stock’s price from moving any further ahead in its
current direction. This is the basis behind support and resistance
analysis in a nutshell.
Beyond the classical way of looking at support and resistance is an
entirely new way of evaluating important price levels for stocks and
commodities. These groundbreaking techniques were discussed by the
famous market forecaster, the late great PQ Wall. Among the many
techniques Wall employed in predicting price movements was the use of what he
called “Magic Midpoints,” which was a revolutionary way of
looking at trading ranges. He also introduced the use of parabolic
curves in market analysis, breaking the traditional reliance on rigid trend
lines heavily used by practitioners of technical analysis.
Back in 2000, I published the first edition of the book, “New
Concepts in Support & Resistance,” which to my knowledge was the
first manual of technical analysis to explain and expound upon the techniques
of PQ Wall. Now in its second printing, the book contains an
easy-to-understand summary and detailed explanation of the many unique and
profitable forecasting and analytical methods when approaching support and
resistance in the markets. The book was written so that retail traders
might be able to understand and practically apply these useful methods of
market analysis. The book is now available for sale at:
http://clifdroke.com/books/newconcepts.mgi
Clif Droke
Editor, The Daily Durban Deep/XAU Report
Clifdroke.com
Clif Droke is editor of the weekly Gold Strategies
Review newsletter, published since 1998,which covers mainly U.S. and
Canadian-listed gold mining equities as well as the spot gold market and
forecasts of market momentum trends, short- and intermediate-term. The
forecasts are made using a unique proprietary analytical methods involving
internal momentum and moving average analysis. He is also the author of numerous
top-selling trading books, including "Stock Trading with Moving
Averages." For more information
visit www.clifdroke.com
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