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It has been an interesting month to say the least.
The DJIA was suppose to rally to new highs and never did while gold was
suppose to fall to new lows and didn't Bonds and the dollar stayed range
bound while the CRB is making noises like it wants to break out to the
upside. To me it all smacks like the calm before the storm. The calm could
drag on for another month or two but look out in October and November as
history looks like its going to repeat itself. Let's take a look:
DJIA - The Dow closed out the month at 11,185.68
and within a few points of where it began thirty-one days earlier. On the
surface it appears not much happened but things aren't always what they seem
to be. Take a look at the usual suspects below, the Daily Charts of the cash
DJIA and the Transportation Index, and several things jump out at you. First and foremost,
those who truly follow
 
the market knows
that the Transportation Index has been leading the Dow for almost four years.
All of the sudden it seems that the Transports are breaking down after making
an all-time high that still remains unconfirmed by the Dow. That
non-confirmation sticks out like a sore thumb. Now the shoe is on the other
foot as the Transports made a new low for this move down several days ago and
that low is now unconfirmed by the Dow.
From a technical point of view, these two charts are
like day and night. The DJIA topped out in early May and then made a series
of three lower highs and two lower lows. The second lower low was not confirmed
by RSI, MACD, or the histograms. Note how the DJIA is currently trading above
both the 50-dma and 200-dma and appears to be slightly overbought. The
Transports, on the other hand, seem to have put in a textbook double top and
have since fallen below both the 50-dma as well as the 200-dma. Unlike the
DJIA, the Transports are considerably oversold. I do not see how we can have
a significant move, one way or the other, until these two major indexes are
both on the same page, i.e., until they confirm each other. I don't see that
happening right now and that means the highest probability is that the DJIA
continues to trade within a range. I calculate that range to be from
10,637 on the low side to 11,427 on the high side. We could stay in
this range for another sixty to ninety days. There is nothing to convince me
that we will make a new all-time high in the DJIA and I firmly believe that
the next move will be down and down hard. The key support numbers to
watch will be 4,180 in
the Transports and 10,417
in the Dow Jones Industrial Average. In the cash S
& P, the number I am looking for would be 1175.00.
CRB INDEX - As most of you know by
now, I was a deflation hawk for almost five years. Then in late 2005, I
modified my position and stated that I thought stagflation was going to be
the order of the day. This is where we see rising prices and a slowing
economy. In all honesty it's a position that keeps me up at night, but when I
have doubts I pull out the following Historical Chart of the CRB Index and
try not to drool all over it:
It is impressive and extremely important at the same
time. From an intellectual point of view, you can't look at this chart and
not see inflation. As a matter of fact, it screams inflation!
The August CRB futures contract closed out the month
of July at 392.00 and it now appears to be shaping up for a test of the May
11th high of 412.00. Once that high was put in, we corrected down to support
at the 50-wma and then began to trade within a range (376 to 397). I believe
we are ready to break out of that range, propelled by oil, copper, the
precious metals, cotton, and the grains, and we'll make new highs. Strong
support is at 376.60 while good resistance is at 397.70. Once we can make two
consecutive closes above 397.70, I believe we'll be off to the races. How
high will we go? There will be resistance at 430.68 but I believe we'll work
through it and reach one of three possible targets: 458.37, 476.82, or
487.39. Given the fact that this is a once in a lifetime bull market for
commodities, we'll probably hit the higher target sometime in late 2006 or
early 2007.
TREASURY BOND - To say that the bond
market is deceptive is being generous. What's more the bond pit seems to have
a mind of its own. The Federal Reserve has been raising rates for more than
two years now, and yet bond prices have been going up, meaning interest rates
were declining for most of that time. Take a look at the following Historical
Chart for the Treasury Bond and you'll see what I mean:
At the beginning of the year, everyone began to
speculate that the Fed was about done with rate increases, so what did the
bonds do? Why prices started to drop and the bond pit increased rates of
course. Put that in your pipe and smoke it, Mr. Bernanke!
It is my opinion that bond prices will continue to decline and interest rates
will continue to rise, and I don't think the Federal Reserve will have much
to say about it.
What does the bond pit see that the Fed can't or
won't see? Well to start with they see rising prices as indicated in the
previous CRB chart, but that's a secondary concern. Keep in mind that bond
prices are a function of supply and demand. Given mounting US debt, supply is huge. No
problem there baby, you want bonds? The US government will give you all
the bonds you want. Demand? Well that's a horse of a different color. What makes a bond attractive? Yield! Poor Bernanke has the bad taste to want to lower yield just
when the rest of the world is raising yield! Throw in the fact that the US
is a bad risk, and getting worse every day, and you can see a little problem
here. The bonds smell this and will, sooner or later, plumb the depths in
terms of price. Currently, I see bonds in a trading range that extends from
102.15 on the low side to 109.28 on the high side. Once the 102.15 support is
violated, look out below. As most of my clients know, I have been short bonds
for almost a year now and see no reason to change.
US DOLLAR/SWISS FRANC - Nothing new under the
sun here. You can put a dress on a pig (the dollar), but it's still a pig! As
is the case with pigs, the final destination will be the slaughter house.
In this Historical Chart of the US Dollar you can
see the top in mid-2001, a
retest of the top in 2002, and then the fall. We bottomed in late 2004 at
80.5 and then spent a year in a counter trend move that reached resistance at
92.60. Now we are going to see a retest of the 80.50 support at the very
least, and I expect a violation of this support before the year is out.
What is the problem with the dollar? For starters,
there are way too many dollars floating around out there. Remember Alan
Greenspan? He was a sneaky little devil. All the time he was raising rates
(tight money policy), he was busy printing dollars (lose money policy) like
there was no tomorrow. He printed more dollars than all the other Federal
Reserve Chairman's put together. That's quite a legacy! The next problem with
the dollar has to do with faith. Since we've gone off the gold standard, the
dollar has been backed by the "full faith and credit" of the United States
government. Let's examine this phrase full faith and credit for a
minute. Take the word credit: the US is the largest debtor nation
in the history of the world. There is no credit, only debt! The word credit
should be changed to debit. Now look at the word faith. The Spanish version
of Newsweek came out this week with a picture of the US base at Guantánamo
on the cover, and a caption that reads "The New Auschwitz!" That's
how the world sees the US.
Not a lot of faith there as far as I can tell. No, over the long run the
dollar has only one way to go. Down! Down into the trash can of history along
with every other fraudulent fiat currency that came before it. I am short the
dollar and see absolutely no reason to change .
GOLD - Where do I start? I will start by saying
that I am extremely bullish gold at this point in time. Surprise! The August
Gold futures contract closed out the month at 634.20 and that was up about
15.00 for the month. Given how bearish everyone was, and still is, that's not
too bad. Since
everyone is so 'today'
oriented, I have put up a Daily Chart of gold. You can readily identify the
June bottom that ended the one month, 25% correction that scared the hell out
of most gold bugs. Since then we rallied to test resistance at 664.20,
corrected back down to test good support at 602.70, and then headed back up
again. Many 'analysts' continue to call for a retest of the June lows, but I
just don't see it. Better yet, I think they are praying for a retest because
they missed the boat.
Note how the histograms, RSI, and MACD are all
turning up. I believe we are on the verge of a second test of resistance at
644.50 and then 664.20. Once we get through these areas, we'll test 686.20
and then 728.00. Given the lack of fiscal responsibility, supply/demand
concerns, the Middle East debacle, and
growing inflationary pressures, I believe that gold will be at a new all-time
high by Christmas Naturally I am long gold and will stay that way. In
fact, once we close above 664.20, I will add on.
SILVER - Gold's poor relative just can't seem to get
any respect. There is an old saying: what goes around comes around. Silver
will have its day although it is still a ways off. The September Silver
futures contract ended the month of July at 1137.00 and was up slightly. Note how silver has
been consolidated
and building a base for the last month. Whenever silver does this, good
things almost always follow, and this will not be an exception. The
histograms, RSI, and MACD tend to follow this reasoning. The key resistance
will be at 1169.5 while the key support will be at 1025.7. Once we get
through 1169.5, and we will, it will be up, up, and way.
GOLD STOCKS - There is good news and
bad news. The bad news is, at least over the short run, gold stocks will be
subject to the highs and lows of the DJIA more than the price of gold. The
good news is that, over the long run, gold stocks will follow the price of
gold just as it did during the Depression. I am long, and will remain long,
BVN, CDE, GG, GLG, NEM, RGLD, and SLW. Patience is required here!
OIL - There are three investments, on the long
side, that really interest me: gold, the CRB, and oil in that order. Like
gold, I am extremely bullish oil here and now. The September Oil contract
ended the month at 74.35 but did manage to make a new all-time high of 79.86
back on July 14th. Oil is a commodity filled with political commentary and I
find the easiest way to get down to what is important, is to strip all of
that out. To do so, I rely on Point & Figure charts which eliminate
everything but the price action, and that is what is really important. Take a
look at the following P & F Chart for oil:
It is strong to say the least, and the price
objective is 100.00. With respect to any downside pressure, we have held
support at 73.45 over the past weeks and 68.45 has held up like its set in
stone. Upside resistance will be found at the 79.86 high and then at 83.64,
91.73, 97.13, and finally 100.21. I have been calling for a test of 91.73 for
several months now and nothing has happened to change my mind.
CLOSING REMARKS
The markets remind me of a kid I knew years ago. He
used to drive like a bat out of hell. One day we were traveling
together, he was driving, and I dosed off. I woke up an hour later, looked at
the speedometer which was pegged at 120 mph, and asked where the hell we were at?
He responded "I don't know, but we're making great time!" There's a
wreck coming, it will take place in the Middle East,
and it will be very, very bad. Try to protect yourself as best as possible.
Enrico Orlandini
Dow Theory Analysis
Ignacio Merino 636, Santa Cruz,
Miaflores,
Peru
Phone: 001-51-56-973-5599 - Fax
: 001-51-19-280-8796
Email: ebo@dowtheoryanalysis.com
Website: www.dowtheoryanalysis.com
For those of you interested in receiving
information on the Funds we manage, please feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as possible.
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