Dr. Clive Roffey
This is probably one of the most important analyses that I have produced since I started writing stock market newsletters over 30 years ago.
Global markets, with the Dow in particular, have reached a very critical decision making crossroad. We have witnessed the sustained upward 3 329 point 48% thrust of the past year from the Dow's March 12th 2003 low of 7 417 to the recent February peak of 10 746. Was this upside surging the start of a new bull phase that is the popular opinion of most CNBC commentators or was it just an overstated rally in a major bear market? Your decision on this topic will affect your portfolio performance for the next three to five years.
If you subscribe to the new bull market concept then you will be a serious buyer during the current corrective phase as the Dow works its way out of an overbought position. You will believe that stocks are cheap and represent a major buying opportunity for future growth that should take the Dow to all time new highs over the next couple of years.
Conversely if you, like myself, believe that the 48% upside move was merely a strong rally in an ongoing bear market then you will be an aggressive seller in the belief that you are better off in cash or defensive positions or even a heavy exposure to resource and gold stocks.
It is up to you to choose. I am plumping for the top of a typical bear market rally and the resumption of a major bear market to take the Dow well under the recent 7 200 lows.
Last week I was inundated with emails from concerned investors about the gold market and particularly Goldfield's apparent downside break under what was viewed by many analysts as a critical support level. My analysis indicated the downside move to be a major buying area, not a panic selling one. In fact in my regular Wednesday evening Roffey Review slot on Summit TV I put my head well and truly on the public block by categorizing the gold share price levels at last Wednesday's close as a major buying opportunity.
Bullion has made a major upside breakout above $403. Once again I note that many TV analysts are detailing that gold must fall back to $367 in the current correction. My data is just the opposite. I look at the move from $430 back to $390 as just a minor correction in a hugely extended first wave. There is still a lot more upside to come in the $ bullion price before I hit my corrective level. It would not surprise me to see a move to well above $500 before the next major corrective phase is triggered. Sure there are likely to be intermediate corrections but the next big one is still some time away.
Stay with those gold and resource shares.
These are the two different scenarios. The red lines show the analysis for a continuation into a new bull market once the current overdue corrective phase on the Dow has run its course. The current downside reaction will be viewed as an outstanding buying opportunity for picking up cheap stock ready for the next upside leg that will take the Dow to all time new highs. The blue lines detail the bear market rally concept with the Dow resuming its bear market move to new lows. In this case you will be an aggressive seller and buyer of defensive counters, including gold. Global markets are at a major crossroads, and so to for investment decisions.
The B Wave Split
This is a classic example of the B wave split in the Elliott Wave analysis of similar markets. Note that during the bull run the indexes moved in concert. Once the top was achieved the indexes corrected together to their lows in 2002 at A. But the upward move of the past 12 months presents a problem. The Amex soared to a new high whilst the Dow effectively formed a double top pattern leaving the S&P 500 floundering well below its 2000 peak. This is one of the key elements in my decision to label this area the top of a bear market rally and not the start of a new bull market. If the latter was correct I would expect to see all the indexes moving in tandem. This is not the case. The S&P has mapped out a classic Zig-zag correction in Elliott whilst the Dow has formed a typical Elliott Flat top and Amex the Irregular top. This disparate action of the B wave is typical of the B wave split effect in similar markets. It is a clear signal that the upward move from last year is not the resumption of the bull market but a classic B wave correction in an ongoing long term bear market.
One by $5 Reversal of the $ Gold Price
I have previously detailed the huge support level on this chart in blue at $370. This is the downside target level to which several commentators are indicating gold must fall. Since rising off this level to top out at $430 the price has pulled back to form another critical support at $390. On this data it is most unlikely that this support will be penetrated. My analysis indicates that this is a major base platform for another serious upside move in the gold price. The horizontal count off the blue base gives a target of $495 whilst the full count off the red base indicates a target of $525. I expect both counts to be made during the next upward surge in the gold price.
Dr. Clive Roffey
20 March 2004
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Gold Action is a fortnightly commentary on global gold markets produced
by Dr. Clive Roffey who has been a leading independent commentator on
gold markets since 1969.
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