Crime and Punishment - Print Version

Crime and Punishment

David Petch

Crime and Punishment was a masterfully written piece by Dostoevsky. The central plot involves the main character, Raskolnikov committing a double murder. He murders the moneylender with two strikes of the blunt side of an axe. He is startled by her simple-minded sister, and strikes her once with the sharp side of the axe. Depending upon how long one has been holding gold stocks they can relate metaphorically to the pain. Holding stocks since December 2003 has been a slow grind, being kept long enough to experience the pain. Those who have decided to catch a falling knife the past few days have had pain dealt in a short quick blow to the portfolio.

The most recent update I had stated we should be going up to 220-225 prior to heading down in a pattern like we are now. The fact that this did not transpire is a bearish event. The Elliott Wave count is set in stone now…….we completed wave I of cycle degree in December 2003, and now will continue correcting for another 3-4 months minimally. Figure 1 provides evidence to suggest this. The weekly 55 MA Bollinger bands have a unique pattern; when a top is put in, it curls down, and when an advance is nearing, it begins to curl up (refer to Figure 1). It is most probable when we bottom this will complete one leg of the corrective sequence. A rally up for 2-4 weeks followed by another 2-3 months of downside to sideways motion is expected. Notice the pink line shows the expected trajectory of the 55 MA BB before we complete this corrective sequence. The purple circles illustrate the similar stochastic patterns. The move down could weave its way ever so slowly, so be careful.

Yes we probably will have more downside tomorrow, and given the violent move down, predicting a bottom around here is difficult. One thing obvious is that a rally of some form will occur, lasting for ~2-3 weeks (maybe longer if the market forces are buoyant). The US dollar is strong right now, and it does have the potential to retrace 38.2% to 50% of the move down it made from 120 to 84.56.

I talked to Captain Hook earlier tonight and he stated that traders should have had their stops strategically placed below 207. The significance of 207 lies in the fact it represented a break of the low put in earlier in February 2004. Investors should not panic, as the longer-term trend for gold is going to be well above $1000/ounce. It was recommended earlier that if people needed money for paying down bills, or items to do so. Hopefully those that were in this situation took the advice. The main focus people should concentrate on now is debt reduction with an affordable percentage being diverted to buying physical bullion and high quality gold stocks like GoldCorp. Core positions should be retained, and those holding since 260 on the HUI…….the downside now is minimal considering the decline thus far.

The Elliott Wave count on the TNX is incomplete, so I have been treating the move from the lows a ways back as a fractal. The move we have will minimally hit 51 by June, possibly heading as high as 56 to 57. This will be a short-term interest rate hike that will correspond with a likely top in the US dollar index and the HUI. The ultimate destiny of the dollar will be to lower levels, but this is a technically driven market (up to 70% of the NYSE trades being conducted by computer software with complex algorithms). It will behave technically until the major flaws in the economy reveal themselves and wreak havoc with unexpected wrenches thrown into the gears.

The best thing for gold traders and investors to do is wait for the dust to settle and look for a technical shift in the HUI pattern before slowly deploying capital. IF we completed wave I of cycle degree which I think it did (if this is occurring right now, it is actually better than later…….a move up now to newer highs to put in wave I would result in a longer correction) then the move down will be technically damaging, but not enough to derail the bull market. It is important to use indicators to gauge the market strength and form the Elliott wave counts around that. I can not stress how important it is to allow for an Elliott wave count to be changed on a dime. It is a representation of market behaviour and emulation of certain patterns can add to the trickery. Corrective patterns are by far the worst wave patterns to quantify. Impulsive structures are easy to decipher. Corrections can consist of flats (3-3-5), zigzags (5-3-5), triangles (3-3-3-3-3) and complex corrections (3-3-3) taking on combinations of the prior three.

A more in-depth analysis of the HUI, USD, XOI, TNX, S&P 500, and select commodities is available for subscribers tracking the Elliott wave counts at varying time frames and indicators to provide accurate labeling schemes.

David Petch
Market Letters Digest
April 21, 2004

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Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.