One always has to be flexible when trading. I was expecting with the break on the dollar we would see a more aggressive follow through. I reduced some of my earlier positions long dollar and short the euro for a modest gain but will still hold the remaining for the long term. There is still the possibility that we are in the early part of an uptrend. Personally I think we are perhaps just going to be flagging higher before we make a lower high and ultimately breakdown. Long term I remain bearish on the Euro, but long term can be a bit longer than anyone would like to see.

I shifted some capital into the beaten down YEN for a speculative play. I’ve been just using options on currency ETFs for now.

More on the Yen play later.

The last market to break above it’s very long term resistance on a trend channel was gold and it went parabolic. Before that it was maybe banks and real estate, but ultimately the big one was tech/biotech/the nasdaq.

A break above say 16,000 in the dow basically could either put dow into a secular bull or perhaps even “parabolic territory”. I just don’t see dow going parabolic. Basically, if the DOW went parabolic it isn’t exactly like we are talking “growth” names here. It is the DOW and it’s pushing the ranges where it might start moving like the tech bubble here. If it does, I will start to actually believe the crazy people talking about hyperinflation because that becomes at least a possibility with those types of moves. Otherwise, it could just be capital everywhere around the world fleeing bonds, gold and all assets to get into stocks probably the most likely.  Even so, the idea of the market going parabolic to new extreme highs over the next few years just doesn’t seem right to me. Such a large percentage of the world’s capital is held in the US already that expecting a repeat of the 1980-2000 style run for any other reason seems somewhat farfetched, but not as much as hyperinflation in an economy that is the world reserve currency.

So as the title suggests, at some point, something has to give.

Now we have to try to identify WHEN and what price.

I believe we are in a broadening pattern on the very long term chart. I still remain open to the possibility of a long term secular bull market, and it’s possible a breakout would be all that is. However, if it happens I just think we still will make a higher low before we just go ripping through resistance.

Finding a reference point for markets making all time highs is not easy at all time highs so I had to go to the 20 year chart.

The only other way I could come up with a reference point was the dow to yen chart, which shows we still have not hit all time highs priced in YEN.  So it’s possible the capital shifts have reached it’s extremes once we touch the previous high level of 2007.

There are plenty of instances when market was in a sideways range for quite some time before it made the major secular bull run type of move.
1)early 1900s Before roaring 1920s bull market.
2)1931-1950 before the 1950-1965 Bull Market
3)1965-mid 1980s before the 1980s and 1990s run interupted by the 1987 crash.
4)(late 1990s) 2000-???

I think it’s a bit premature to start calling for a secular bull run although I will absolutely not dismiss that possibility.

Unfortunately what is concerning is that this pattern is not the same as the others, rather than ascending lows, we see lower lows. A broadening formation (we also still have an outside chance to form a long continuation diamond bottom or a diamond top) typically is a reversal pattern at least on the daily and weekly charts. If the market is fractal than even though we really have no history of such a pattern, it should still have relevance. However, it’s still possible for there to be broadening formation breakouts. Nevertheless, at least a pull back to 14500 after perhaps a run to 15800 is a strong possibility. If we are to go higher, the capital is going to have to come from the bond holders and from Europe.

Just working a bit on historical moves a bit. In historical context just how “frothy” is this rally at this point? And just how much of a pull back would be “normal”. In every instance of the sideways move there were very large moves higher AND lower within the consolidation.

The following are roughly the peak to trough declines rounded to nearest 5%
1901-1904 45% decline in dow.
1906-1907 50% decline in dow.
1909-1914 50% decline in dow.
1916-1917 40% decline in dow.
1919-1921 40% decline in dow.

*1929-1932 90% decline in the dow.*
1937-1942 50% decline.
1966-1970 40% decline.
1973-1974 45% decline.

**1976-1982 Stagflation… Inflation adjusted decline?
1987-1987 40% decline.

2000-2002 40% decline.
2007-2009 55% decline.

*Around the 1929 crash the dollar rose trough to peak by around 50%. I look at it as a 50% move on top of a 50% rise in the dollar rather than a 90% move.

In terms of actual rallies there are two options. ONE is that we are entering a secular bull market, and the other that we are just nearing a top of a CYCLE. If it is a CYCLE top I think we see a “typical” 40% decline or so. Given the pattern it could be over 50% like 2008. But how much higher do we go before a pull back in that case? How much higher do we go if we enter a secular bull?

We are currently up 135% from the trough. Leading up until the following peaks there were bigger rallies. 1906, 1987, 1929,1937,1966,2000. That’s it.

In other words, leading to the 1906 peak and 1937 peak were the only non secular bull market runs of this magnitude. Moves 100% but under 135% are the following starting with the least leading up to the peak 1932(minor peak from absolute bottom),1916,1946.

There are 6 other rallies in the 50-100% range that I recorded.

Secular bull markets As such in that sense the decline could be relatively “normal” at 50%

A secular Bull emerged from 1920-1929, OR Even 1908-1929

1920 low-1929 peak=64 to 358 =460% return  1908-1929 peak= 53 to 358 575% return

A secular bull emerged from 1942 into 1966 OR 1932-1966

1942 low to 1966 peak 92 to 1001.10 =990% return 1932 low – 1966 peak = 40.6 to 1001.10=2365% return

A secular bull emerged from 1982-2000 OR 1974-2000 Or 1974-1987

1982 low -2000 peak=1425% return. 1974 low – 2000 peak=1960% return. 1974 low – 1987 peak= 380% return

From “breakout” point (This has YET to happen)

1924-1929 104 to 386.1  A 271.25% Gain

1951-1966 235 to 1001.1 A 326% Gain

1983 to 2000 1100 to 11750.25 A 968.20% Gain

(ALTERNATE: 1983 to 1987 1100 to 2746.70 A 149.70% Gain)

(1995 to 2000 4000 to 11750.25 A 193.76% Gain)

Finally, we can look at Bull Market cycles within the sideways consolidation type of moves between the major secular bull markets.

I put the current 2013 amount from trough at the bottom as it has yet to establish a peak and the 1987 amount separately as it is more of a secular run before a crash which continued and kind of in it’s own category.

For the time being I am not convinced one way or another whether this is a major secular run just in it’s infant stages, or a sideways consolidation in it’s “mature” phases.

Until we clearly break the broadening pattern, I am starting to get increasingly cautious heading near the edges of the aforementioned pattern.

As mentioned before, I am getting bullish the dollar as a hedge to allow me to stay long. However, I am inclined to even start to reduce my long exposure more aggressively and/or go out and get some shorts and bearish bets should we cross into the 15500-16000 range. If we trade down it could be a vicious downtrend possibly even a 60-65% decline to new lower lows.

The dollar on a weekly chart is in an ascending triangle and may breakout at some point. It is at a good spot above considerable support. The euro on the other hand is making a head and shoulders while the Yen remains in freefall mode starting another major leg down.

Looks as if the dollar is bullish from technical perspective. And that gives me a bit of caution on the market. Meanwhile a lot of individual stocks are still looking bullish.

The conclusion? As you take profits from winning gains in stocks, consider using the dollar to hedge. I have been doing so and now with today’s move it seems as if it may pay off.

p.s. Also be aware that the FXE (euro) is about to make a deathcross with further declines (10 week MA below 40 week MA).

Full disclosure: I am currently long the dollar and short the euro at the time of creating this post.

With gold likely staying put for awhile, I believe the best way to hedge is now by short dollar, or long euro. UUP calls and FXE puts is one way you can do it. I am looking for a move over the next few weeks. After that we may see if it’s just a quick breakdown or only the beginning.

Okay, with the “I Told You So’s” out of the way, it’s time to take a longer term look at $GOLD and explain some things so you might learn. Maybe you didn’t see this coming and weren’t prepared for the possibility, it’s okay. Experience can be gained so you can understand better next time.

Gold Monthly chart below.

Looks like we are simply correcting to the longer term trend. The 1250 area is about where we broke out of the price channel and went parabolic to the upside. Then we went into bear market territory from there. Formed a double top after over a year of no real progress and now we have broken down. Longer term trend remains intact on a monthly chart. However, we could pull back below 1000 at some point in the future and really flush everyone out claiming “broken trend” before it reverses.

The volume profile tells you where transactions take place. The price of ANYTHING is ONLY when the demands/requests of a buyer and seller meet. The high volume spikes occurring during certain prices is a sign that lots of buyers and sellers met there, and therefore, there is a market at those levels. Minimal volume areas or “volume pockets” mean there is not much of a market there, and prices likely will gravitate to an area where maximum transaction can take place. Should there be more buying demand than selling demand, the price will generally quickly gravitate to the next highest major “market-zone” If there are more selling demand than buying demand, the price will generally quickly gravitate to the next lowest major “market zone”.

That’s not to say transaction might not pick up somewhere near the area and that past buyers or sellers might quickly adjust NEAR that area, however in general it is simply fundamentals of supply and demand that drive price. Observation of past “markets” may not always tell you the future, but it provides a good understanding of what is likely in order to manage and understand the risks.

This is just one tool to add to the toolbook to determine when the given market is a “buy the dip” type of market or “sell the breakdown”.

I correctly identified that gold was a sell the breakdown market, and avoid buying the dip as it had no legs to stand on below it’s support level around the 1520-1570 range. This is not an “I told you so” but a “how I told you” for those wishing to learn that my call was not “magic”. Of course, if I sold you on that idea, it might be better marketing for some $2000 subscription or whatever, but I am not here to sell you anything.

You can see from the channel down support why I don’t have a problem with anyone buying the dip here. Channel trendline support in oversold conditions. I may speculate from time to time with some capital, but I prefer to wait until the longer term trend or longer term support indicates action before making any major changes.

Personally I have no plans to add a long term position in gold until we go below 1250, or unless some other setup occurs that convinces me otherwise.

I’m more interested in WHY this gold flushout is occurring now and what that means for everything else. This kind of forced liquidation can spillover into other markets. I think the Fly made a great point there and we certainly see at a minimum at least that occurring today.

The margin liquidation and forced selling in any market can cause a demand for cash. That demand may have to be met by raising cash from other markets. The other markets that are sold may trigger further downside pressure. Eventually there is an excess amount of cash on the side and those waiting to buy the blood strike with force, then the money on the side can then chase higher. When that happens though is anyone’s guess.

I also think that gold is not about inflation, but about currency alternatives free from government mismanagement of the money supply. When government’s ability to raise revenue and pay the bond holders, and/or fears of them inflating the currency (a side effect of gold going up with inflation not inflation being the cause), gold is the alternative.

A shift away from gold may be a signal that confidence is returning either into the Euro (I doubt it) or the Dollar (more likely) or some other government currency. Whatever caused smart money to move out of currency and into gold has moved into whatever currency they think is the strongest going forward. I suspect that is very bullish for the dollar. That probably goes well with a volatile market and/or a market decline as well.

These are likely to be very trying times ahead for people with a position (so everyone) as we can see early warnings of high volatility and major capital shifts. Bitcoins was just a microcosm of the overall market sentiment shifting. Then Gold followed. Gold is a major market. It isn’t anywhere near the debt markets, but what is? Anyways, It should be a wakeup call to those that think the stock market can’t do the same thing.

Having multiple asset classes and extra cash with a few short term speculative positions as well as long term positions is a great way to diversify over multiple timeframes and multiple asset classes. Someone long gold from $800 who holds through the storm and rides this all out and doesn’t sell may eventually in a few years come away very well just as the person who speculates and grabs some puts. Both may be right even if at a given moment the positions may be opposed. This is just one way to protect yourself even though at times you may have multiple long positions. But if you protect yourself right, you profit.

In my Post I warned you of Gold’s demise that is happening.

Quote:”…which is why we must watch the 1520 level or so in gold, if that gives way, there is a lot of danger below.”

The warning was a warning of a lack of support. Meaning if it fell, we would go down quickly. But even I was surprised by how quickly it occurred.

Fortunate are those who heeded my warnings.

Well, I also warned about 2 levels of support below that it would test quickly. Both of them had a lot of high volume in those areas making them a prime candidate for support/resistance zones.

The first being somewhere around the 1400 area. Yes, we are there. Stay tuned, this may hold. However, if it does not, we do have another volume pocket/GAP to the next level

The next is $1200. I expect this to hold. Finally just above $950, should this be gold Armageddon.

Gold is a market like many other commodities. Forced liquidation can happen.

If you have puts I hope you would take profits sometime today. But I think this is good news for the gold market long term. The weak longs must be shook out for bull market to resume. Sometimes that shakeout must be very violent such as the ’87 crash being the most extreme example.

No I am not some hypocrite like I was long Bitcoins and now I am saying face after a 75% decline by saying it’s a “shakeout for crybabies” like the Norm McDonald sounding character, Max(imum) “boom boom” Keiser. I am not a permabull or bear in anything. Markets always rotate and never go straight up forever. I got this exactly right. The structural damage is indeed severe, but right now I look at this as nothing more than a panic. While bitcoins will be shut down by the government someday, and gold can be seized by the government (along with your Cyprus bank accounts), Gold at least represents an international medium of exchange that can be used. If the government mismanages the money supply, globally currencies may shift. The fundamentals behind gold are no different. Nor were they when gold declined from 1980 until 2000 by something like 90% adjusted for inflation. In my view, you must understand where money is moving and WHETHER OR NOT THERE ARE/WILL BE BUYERS at a given level to be able to accurately measure risk and reward.

I am not trying to call the bottom right here, but I applaud the people bold enough to step in and do so. It certainly is a very oversold market right now. There is certainly support around these levels as well, it’s the levels below I am concerned about.

Right now the risks are pretty neutral in terms of about a $200 volume pocket upwards and downwards. The momentum is down but we are oversold. However, as we decline as I write, that is becoming more favorable to the upside. If you want to tell me you can predict where it goes next be my guest.

I personally sold the last of my GLD puts here with /GC at 1365. Good luck to those who still have a position either way.

I saved the world… It was scheduled to end today… But I saved you all. You’re welcome.

According to my sources
The #1 expense is entitlements and unfunded liabilities
The #2 is national defense
The #3 is interest payments on debt and
The #4 is education.
Please correct me if I’m wrong.
Entitlements were promises made without plans to finance them. With unemployment among the youth at record highs and the baby boom “bubble” in the demographics it has helped in a climate of slow growth and during a European Crisis with sovereign defaults mounting to produce the perfect storm and lead to a fiscal cliff.

It doesn’t matter who’s “fault” it is, we need to fix it.

The problem? We owe more than we earn.

Can it be solved without entitlement cuts?

I think so, but it requires a radical change in the education system that utilizes technology.

Education costs $810B per year. That is perhaps one of the biggest misuses of funds I have ever seen. Education is terrible, spending more doesn’t make it better. The test scores aren’t #1 yet we spend about 5 times more than the next largest country’s education expense, Japan.

According to 2010 census data, age range 5 to 19 includes just over 63M americans. Doing some math. $810B divided by $63million is over $12500 per student. Yet I have seen the figure of around $7,000 per person.

Anyways, I could bring down education costs very drastically and get rid of what we currently call “schools”.

Give every kid an ipad custom made that doesn’t allow them to access anything but a few apps unless they complete the required assignments. Apple would love to cut a deal and get free branding and marketing, but lets just say it costs $1,000 per custom Ipad like this preloaded with an “education app.” That is only $63B a far cry from $810B.

Now get rid of teachers in a way. You are going to give them a severance package if they agree to record their lectures and record video of their lectures for awhile. The severance package will be about $100,000 per teacher, which will help forgive their debts, their student loans and compensate them for the time they spent pursuing a career that we just made obsolete (more or less). Assuming 1 teacher per 30 kids there are about 2M teachers in the world, so you are talking about maybe $200B for this. You could make it bigger since it’s a one time thing if you really need to and buy off the unions and whatever political pork you have to do to get it done. Now you have the 1 time cost of Ipads and then you only have to cover replacement and repairs going forward. You have the teachers uploading lectures, but also the students to younger students that are less advance so the students teach what they learned. And you have question and answer section that will find similar questions and answers and if your question still isn’t answered you can submit it for students, teachers, and parents. You can have audio, books, tests (which can be printed out and then answers you can take a picture of and upload the picture with answers back),etc.

You can rent out every kid age 5-19 an Ipad or other tablet and make an app for education and it will only cost you about $35B as a one time cost plus additional cost for replacement, repairs, and for population growth requiring more in the future. I bet Apple/google/microsoft/whoever would love to give the government a deal for name recognition and branding and they may even cut that price in half or cover all repairs and all future expenses to cover population growth.

Then have all the current teachers and experts and students (for younger students) upload lessons and course material and audio and any teaching material.

Even if you have to throw in a bunch of crap like a daycare center, software updates, etc… You can in the future save at least a minimum of perhaps $500 B a year on education.

Plus you would be laying the foundation for an education system that could teach kids important lectures that aren’t usually covered like basic finance, business, investing, how to raise capital and financial education that can train more people to become job creators rather than looking for jobs. The sad fact is that technology will continue to make human labor obsolete and leave more and more people jobless if we don’t make up for it by skyrocketing amount of entrepreneurs, businessmen and investors since more businesses can get by with less employment.

It also can teach them at a much faster rate as the slowest kids won’t have to repeat an entire grade, but can just take maybe 12-14 months per school year, rather than just 8 months or however long students are in school. The fastest students might learn in 4 months, knowing that they can advance a grade and go at their own pace, and that they can learn about alternate subjects of their own choice if they finish the mandatory stuff. Maybe students can go through k-12 working the full year rather than just 4 months and they can get normal k-12 done in 4 years.

Now maybe you can have a test every 3 months or something and use those tests and tracking of which lectures they listened to and watch and determine what lectures yields better test scores to provide a better rating system for helping kids learn efficiently.

I think ultimately you could save hundreds of billions of dollars and provide a MUCH better education system for the modern era that will lead to a huge rise in productivity, employers and as a result reduce unemployment and raise wages at the same time while boosting the economy globally as well.

That would make a huge dent in the trillion dollar deficit.

The other side is revenue enhancing. I have heard talk of a tax amnesty which I agree with to bring in delinquent tax payments and those that are involved in illegal activity who owe taxes but don’t want to pay for fear of persecution.

I think you can finish the rest and reward income earners more while punishing black market and illegal income earners by eliminating the income tax and replacing it with a national sales tax.

Average personal expenditures in US in 2011 is nearly 50k. There’s about 220M people 20 and up times 50k is about 11 trillion. Times about 18% national sales tax is about 2trillion.

During FY 2011, the federal government collected approximately $2.3 trillion in tax revenue or 15.4% GDP. Primary receipt categories included individual income taxes (47%), Social Security/Social Insurance taxes (36%), and corporate taxes (8%).[9] Other types included excise, estate and gift taxes.

47% of $2.3Trillion is 1.081Trillion compared to the 2T or so you collect with a sales tax. You raise about a trillion more before accounting for all of the changes that may effect spending. People will keep more of their income so I don’t know if it’s fair to assume that spending will go down just because spending gets taxed. However, the poor would need exceptions so it wouldn’t unfairly hit them harder. So Food, fuel and housing/shelter costs you would not collect national sales taxes from. The reason for the plan to eventually substitute is the underground economy which tends to happen when you raise taxes and the capital that is unaccounted for. You also would collect from illegal immigrants. I’d have to really look at individuals’ average expenses and subtract food and fuel to determine what sort of revenue it would add, but I think the plan would be to make the amount you collect about even to the amount you collected before, and any additional revenue you bring in from underground economy and illegals would be a bonus.

Through illegals’ spending habits you can still collect their taxes and discourage people from avoiding taxes via illegal activity instead of encouraging via tax relief.

I think this would solve the problem, or at least a temporary solution that would give us a serious window of opportunity in which the youth would need to come through and really grow the economy as they come out of this new educational system.
Sure entitlements will still hit the fan in maybe 2016 or so when baby boomers start to reach retirement at alarming rates, but this would position the youth to deal with the economy which has fundamentally changed since the end of the industrial age and continues to eliminate the need for human labor, creating a huge void of jobs. This void will continue to grow if we do not change how we prepare children. We need an educational system that prepares them to be employers, not employees and does so at a very reduced cost. This way, they will be waiting for a job that never manifests and instead will create several.