When we price the Dow in terms of Fiat currencies, we see that nothing much has changed since we last published two articles on this subject. The Dow has done Zilch this year and Dow at a 52 week high. Yeah right
Even with all the impressive gains, the Dow still looks like it is doing nothing when priced in stronger currencies. In terms of the Rand, the Australian dollar and even the Swiss franc, the Dow is stuck in a wide channel. Long term this is a huge negative as channel formations are indicative of massive moves. Unlike the precious metals and energy sectors that were exhibiting channel formations after huge multi year corrections, the Dow is essentially doing the same but after only experiencing a minor correction. This means that there is sill tremendous downside potential once we break below the channels support lines. These are longer-term views, we expect the Dow to mount one more rally, which could turn out to be rather spectacular. Then when everyone is celebrating and dreaming of even higher gains it should start to correct in a rather spectacular fashion.
Another currency clearly illustrating that the rise in the Dow, which is priced in US dollars, is totally bogus.
The Dow looks weak and unstable even when priced in Swiss francs. It has not been able to break above the July 2002 high. Essentially it has been trading sideways for over a year.
Even in terms of the weaker Yen, the Dow has been truly unable to rally. The July 2002 high also has not been broken and it looks like the Yen is once again gaining on the Dow. After the initial spike that took place from Jan to Feb 2004, the Yen has basically been gaining on the Dow. Currently we are locked in a congestion zone, it will be interesting to see if the weaker Yen can trounce the Dow. A defeat by a currency that is not really that strong will be a true signal of how the Feds are cleverly and artificially masking the secret correction the Dow is undergoing. This is what inflation does. When you have no constant you live in a free for all environment where the powerful completely separate the masses from their wealth.
Same story here with the Canadian dollar. The Dow is essential locked into a huge channel and has been unable to break out to new highs. It has not surpassed the July 2002 levels.
When you price the Dow in terms of Copper and Aluminum (base metals), you get a very interesting picture. When priced in terms of copper the Dow is getting pulverized and there seems to be almost no reprieve in sight. Notice that as soon as the channel formation was broken in Oct 2003, the Dow/Copper ratio plunged.
Perhaps this is a precursor to what lies in store for the Dow in the future as it is now in a tight channel formation that is occurring after a multi year bull run. Notice that we also have two separate channel formations. There was break below the first channel formation, followed by a brief rally in the Dow. This rally was not strong enough to surpass the first channel formation. Instead the Dow put in a secondary lower channel formation, sort of a descending ladder pattern. This provided a small clue as to what lay ahead in store for the Dow. From April 2003 and to October 2003, the Dow attempted to break out but failed, instead copper was the one that broke out. The main down trend line is still intact, as copper appears to be far stronger than the Dow.
The story is not as pronounced here as it is with copper. However you will notice we have two channel formations. These two channel formations are different, in that the smaller channel formation is inside the larger one. We have broken below the small channel formation and seemed to have found some support at the base of the larger Channel. It is quite conceivable that the Dow attempts to mounts one more rally all the way to the top of this channel before embarking on a major correction. The Dow could even momentarily break out of the larger channel, before correcting very hard.
Lets look at the Dow in terms of the precious metals and start of with Gold. In terms of Gold the Dow initially lost till Feb 2003, but has since mounted a valiant attempt at conquering the yellow metal. It appears that this attempt has failed so far as the Dow has been range bound since April 2003. For the last 15 months we have done nothing but trade in a tight channel formation. Sooner or latter something has to give, either Dow wins (which means Gold fails) or Gold soars off to the moon (means Dow cracks apart, a more likely scenario). We think that the Dow might actually break out of this smaller channel formation just to frighten the Gold bugs (via the help of the Feds free money policies) into selling most of their Gold holdings. The larger channel formation (in the 28-30 range) will most likely be the place where the Dow runs into a brick wall. We believe that this area will mark the point where the Dow begins a spectacular sell off.
Silver on the other hand has done nothing but trounce the Dow since Nov 2003. We officially told our subscribers that Silver was much stronger than Gold around June 2003. Look at the beating the Dow has taken since Nov 2003. Currently the Dow is mounting an equally impressive comeback. Notice when it ran into the lower support line of the channel formation now resistance, the Dow backed off. It will be interesting to see if the Dow will be able to break through the resistance in the 1800 price range. Even if it somehow managed this, it would have virtually no chance of breaking through the mega resistance represented in the 2000 price range.
The story here is a lot more interesting. Initially the Dow rallied very strongly in terms of Palladium up to April 2003 and then started to trade sideways. In mach of 2004 it actually broke below the lower support line of the channel formation and is now attempting to break above it. Even it were to break above this line, it would be almost impossible for it to break out of the channel as we have incredibly strong resistance in the 55 range. We personally think that palladium could end up performing better than Gold in the future, even though it is not a precious metal in the true sense of the word. This in no way alters our bullish outlook on Gold. To defend our view we need only say two words "China" and "India". The number of Cars produced is increasing at an unbelievable rate. Palladium is one of the vital components in manufacture of catalytic converters.
Platinum basically gave the Dow a beating like it has never seen in a long time. The beating was so severe that we had an additional 2 branches of the main down trend line. As we have always stated in the past when you get 3 branches in a down or up trend line, some sort of reversal is imminent. So the Dow mounted a feeble rally and is now trading sideways in a wide channel formation. We think this sideways movement will most likely go on for several more weeks. Then platinum should start to win the battle again.
Oil is rather interesting in that each time it has broken below the channel formation it has made higher highs (in terms of oils price) and pushed the Dow to lower lows. It has currently broken below the channel once more and it will be interesting to see what happens. It appears that the Dow might attempt to mount a rally here, however the bottom of the channel will provide a wall of strong resistance. We can only watch with interest to see how things unfold in the future. Based on current patterns it looks like in the long run, oil is going to win.
The only highs we seem to be seeing are when we price the Dow in the toilet paper currency of the US. "The mighty American Peso". This is the only chart that appears to look good and it is the only chart that over 90% of the traders use. Do you see how well the nefarious feds are masking the secret correction in the Dow? When you have no constant other than worthless pesos, anything can be made to appear totally fabulous. Welcome to the world of the modern magicians. I think Merlin would be truly proud of the illusions the Feds are so successfully pulling of every day.
The Dow is in a state of suspended animation and only appears to be gaining when priced in depreciating dollars. If we just value the Dow in US dollars, this pretext could be kept up indefinitely. The Dow would simply adjust to account for the increase in the money supply. This could happen naturally or unnaturally (propping up the markets). What the average investor has to understand is that he is being robbed blind, under the guise of a so-called rampant bull market. To see the full-scale effect of this blatant mass robbery, one only has to look at the price of basic commodities. Every basic good has gone up in price; milk in New York will soon cost close to 5 dollars a gallon. Live stock, cheese, butter, olive oil, all agricultural produce, base metals such as copper and aluminum have all seen dramatic increases in their prices. Individuals pay cheques have not adjusted to reflect these high levels of inflation. As a result many lower income families are beginning to feel the pinch very seriously. One of the areas that have gone completely ballistic is the real estate market. Most individuals are getting priced out of the market and consequently have to move down or move out to look for areas that fall within their budgets. However this is a topic for another day.
What can you do to protect yourself? Make sure you are cutting down on your debt as fast as possible. The theory that it pays to borrow money in inflationary times; because you can pay it of later with cheaper dollars is not as sound as it is made to look. The main problem is that most salaries do not inflate in sync with the general rates of inflation, so you are left with less purchasing power and higher debt. One of the safest solutions in any situation is to get rid of your debt or try to bring it down to manageable levels. Other forms of insurance are buying Gold, Silver bullion, shares in gold and silver companies, oil and natural gas shares and possibly even a small portion in base metals.
When you take time to look at the big picture you notice something immediately. The Dow is doing nothing but stalling for time and we all know what happens to anyone who stalls for time. Ultimately they end up getting punished 10 times as much.
I would add one more chart to confirm what Sol is saying. It is the chart of the Dow compared to the other world stock markets. It accentuates just how serious the situation the Dow is in. Clearly there has been a shift of funds out of the Dow into other markets. It is interesting that the low coincided with the 31 March balance date for many countries and the opening of the money spigot by the Fed that Robert McHugh Phd. has commented upon. I do not think that a 2 trillion annualised rate of fiat creation will cure the problem staring the Dow in the face.
Clearly money is finding a new home, outside of the Dow. I would suggest that any new money should follow the same path given time.
© 2004 Alan Lunt
www.tacticalinvestor.com
Allies1111@tacticalinvestor.com
© 2004 Sol Palha
TACTICAL INVESTOR
www.tacticalinvestor.com
info@tacticalinvestor.com
5 June 2004