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This is a periodic email from James Smith of Princeton Economics that
all can get for free by registering at http://www.pei-intl.com.
I have no association with the company.
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To be a good technical analyst you have to be a bit more twisted than
the average. You can't see good news as good, you have to see how
bad is good and good is bad. Another way of expressing it, you have
to be contrarian. Stocks are bouncing back today and gold is in a
freefall...so what's not to like?
We have long held the view that gold must make New Lows
before a secular bull mkt in gold can begin. In fact we have
a "Panic Cycle Week" due for gold & oil the wk of 11/06. So if gold
sells off, making New Lows into wk of 11/06, it may very well end the
bear mkt in gold and set the stage for a new secular bull mkt!! If
gold does not make New Lows, ironically that's bad news for gold
bugs. Failure to make New Lows could set up another false rally that
will again give way to more selling.
One of the intriguing things that caught my attention a few weeks ago
is the fact that our system shows a Panic Cycle Week indicated for
both the DOW and the S&P the week beginning October 30th. Just one
week later (wk of 11/06) we have a Panic Cycle Week due on both oil
and gold (as I have already noted above). Put your thinking caps
on for a minute. This should have your brain spinning.
DEFINITION: "Panic Cycles" are the name we give to specific
periods in time when you can expect higher than normal volatility.
Typically the market will swing violently from one extreme to
another. Sometimes panic cycles will bring days when the market
moves strongly in only one direction. But it is more often the case
that a panic cycle brings wild swings in both directions.
It is very rare to have a Panic Cycle Week indicated on 4 major
markets within the span of two weeks. For you options traders out
there, this means you want to buy volatility over the next few
weeks. You don't really want to be selling vol in the near future.
Let's assume for a moment that stocks continue to rally on Friday and
into early next week. You know darn well that CNBC will bring on
various "experts" (read: brokers who want you to buy!) to argue the
point that we have seen the Lows in stocks and that you should take
advantage of the wonderful opportunity to buy stocks on the cheap.
This is what they do every time. They are predictable, though
rather sleazy in their approach.
We are saying you need to exercise more caution than normal
over the next two weeks. A lot can happen in a very short space of
time. You have to ask yourself why both gold and oil are indicated
for a panic cycle week the same week of the election! And if the
Panic Cycle Weeks on both the DOW and S&P are to bring "panic
buying," does it follow that you should be an eager buyer??
First, we don't know for sure that next week will be panic buying in
stocks. It could be panic selling! Second, you have to wonder how
this week could possibly be the Low for stocks if both gold and oil
are due for panic cycle weeks the week of 11/06. Remember if gold
continues to sell off into the week of 11/06, making New Lows, this
is bad....because it ends the bear market in gold.
It dawned on me a few weeks ago that Saddam might very well
take advantage of the extremely low inventory picture to stop Iraqi
production---right before the election. It just did not seem
accidental to me that we have a panic cycle week for oil the same
week as the election. Now, today we see in the news that this
indeed may happen. Saddam is reportedly threatening to halt
production of Iraqi oil
unless the UN agrees to Iraq's demand to allow payment in EUROS
instead of dollars.
Panic Cycles are like over-the-horizon radar. They can tell you
things long before the event takes place. This may explain why the
CIA were so intersted in our models over two years ago. PEI made a
public forecast of the impending Russian default two months before
the event. You're thinking that was luck....apparently the CIA
didn't think it was luck.
Could stocks rally strongly next week? In other words, could the
panic cycle week indicated for both the DOW and the S&P bring "panic
buying"? Yes, this is clearly possible. In fact today's retest of
support may have set the stage for a strong rally, perhaps more so in
the S&P and the Nasdaq, less so in the DOW. The DOW did NOT retest
support today, and is now bumping up into Daily Trendline
Resistance. Only if it breaks out above this DownTrend line, can it
manage to continue a rally.
By now I hope you are completely confused. That would be good. What
you need to realize is that Panic Cycles can bring either or both
Panic Buying and Panic Selling. You can't lock your mind into one
view on the market. You have to maintain an open mind.
But one market that I will be watching very closely over the next few
weeks is gold. If we do get New Lows, then as I've said before, it
suggests the Secular Lows are not that far off....in time. In price
terms we cannot rule out a move to $195-215 area. In any case,
picking the bottom in price is not so important. It is sufficient to
know that once you've seen New Lows (below $252) you probably are
getting close...in time.
Why is that important? If gold is about to bottom and start a
secular bull market, what does that tell you about stocks? Can
stocks continue to rally at the dawn of a new bull market in
commodities with gold finally chasing after Oil?
The answer is Yes and No. Our view is that the next few years will
be much more of a "stock pickers" environment. Throwing darts to
pick your stocks will no doubt outperform the broker recommendations
on CNBC, but that still wont' leave you very happy. You will need
to pick your stocks carefully. Pick stocks that can do well in a
rising inflationary environment. Some of them can do very well, but
others will get killed.
You might be wondering, "What if gold doesn't make New Lows? Does
that mean the commodity bull market is not going to happen?" The
answer is no. Commodities can still rally while gold trades down.
We've seen that already in the last few years as oil tripled and gold
meandered sideways and down. But I believe commodities would
have a more impressive run once they are all in sync...ie once they
all go up together.
One of our stronger long-term predictions is that oil will
conservatively reach $60-100 range no later than November 2002.
2002 is a Panic Cycle Year. If you just think for one minute how
much chaos can occur during a Panic Cycle Week, imagine what a Panic
Cycle Year can bring!!! It is the difference between one standard
deviation and 3 standard deviations from the mean.
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