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Diamonds on the Dow

October 26, 2005

Dow Theory seeks to call the direction of the Primary trend - based on:

  • Values and
  • Confirmation that both the DJ Industrials Index and the DJ Transportation Index are moving in the same direction

Right now, the P/E ratio on the S&P Index is overvalued in terms of the following 30 year chart, and there has recently been a worrying dip of the price away from the red "overvalued" line towards the blue "fair value" line (Charts courtesy Decisionpoint.com) )

In scrolling through the charts, I spotted the following corroborative formations on the monthly charts of DJ Industrials and the Transportation Indexes:

Both charts seems to have diamond formations (which are sometimes "continuation patterns" but, more often than not, "reversal" patterns)

The Transportation Index has a "double top" formation.

On balance, when you take all three of these observations together, it looks like the Primary Bear Trend wants to start reasserting itself. The issue is "confirmation". No firm call can be made BOTH diamonds break either up or down.

From my perspective, the market's knee jerk reaction to Bernanke's appointment was: "Inflation ahead", as evidenced by the sharp spike up in precious metals prices, and the sharp spike down in the US Dollar.

The chart that has been worrying me most of all is the monthly chart of the 30 year T-Bond yield.

Note:

  • The Double bottom in the monthly chart of the 30 year yield
  • The rising bottoms in the PMO
  • The break up of the monthly chart of the 30 year yield above the 6 and 10 month MA

Summary

If Mr Bernanke is going to man the printing presses then this will exert downward pressure on the US Dollar which, in turn, will put upward pressure on long dated interest rates. In turn, this will put downward pressure on equities and on real estate prices.

So what do we do?

Private investors should move to the safety of gold

The Government should back away from a "paper" solution to the economic woes, and move towards an industrial solution. Infrastructural investment will stimulate the economy far more robustly than moving towards a war footing externally, and a police state internally.

  • Conversion of carbonaceous materials to hydrogen enriched hydrocarbon fuels, using Fischer Tropsh technology, will enable us to address the intermediate term gasoline shortages, and also facilitate a "bridge" to hydrogen fuel cells (on board extraction of hydrogen) - without the necessity for a hydrogen delivery infrastructure for several years into the future
  • Upgrade the potable water supply system, with particular reference to the reticulation infrastructure.
  • Upgrade the existing copper cable electricity grid - initially in the cities - with superconductor cable. The primary reason for this is that it will reduce the amount of power that we need to produce because it will largely eliminate wastage arising from friction in the copper cables.
  • Provide strong tax incentives and success based reimbursement for research into minimising the energy input required to extract hydrogen from the environment
  • Provide strong tax incentives and success based reimbursements for research into Orbitally Rearranged Monatomic Elements, with specific reference to precious metals - which, if successful, will also assist in addressing the latter point

All of the above will offer an added benefit of assisting the environment to heal itself.


Throughout history the ruling class has always sought to own gold and silver because they represent purity and longevity.
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