I am writing this at the request of a few readers and a few people in Joe Donahue’s chat (which, by the way, you can learn a lot in if you happen to join Joe’s premium service at www.upsidetrader.com (this was a totally spontaneous and unpaid plug for his service on StockTwits.com by the way). Lets talk about models, but not fashion models. I mean trading models. I will likely make this a multi-part series because I am in the middle of two business projects and I want to do some additional back-testing of an hourly forex model. For tonight, we will simply address the numbers.

In later posts I will discuss how I built models using NeuroShell Day Trader Professional Version 6.2. You can find out more about it by going to this link or to this link for more information from Ward Systems Group, Inc.

I for some reason cannot find the original post I did way back in 2004 in which I made comparisons of trading models to models like Jessica Simpson. I think I stated that if trading models were as inconsistent and unreliable as Jessica Simpson that one should basically stop trading. Why is that? Well, it has something to do with statistical expectancy. B.C. Lund wrote brilliantly about such things in his blog post this weekend. Study what he shows in terms of the number of losses one can suffer as reward to risk slips to parity. To quote Mr. Lund at the end of that table, “You can see that if you only take trades that have a 1:3 risk/reward ratio, and you are correct just 50% of the time, you will have a 10R profit on ten trades.” What one must realize is that during that sequence, one will lose on EVERY OTHER TRADE, so that reward/risk ratio will have to be skewed in your favor strongly if you are to end up with profits.

What you see at the top right of the picture (and quit staring at Faith Hill will you?) is a model for Cheesecake Factory (CAKE) I built in August of 2010 (that is right, about 18 months ago). It has three key statistical characteristics that I like in a trading model:

1) Look at the red box a the top right (percent change in price and annual change in price). Those are the numbers for a pure buy and hold from August 25 2010 to February 2, 2012. The box below is is what the return would be from the trades the model produced. The model on its own produced a better return than pure buy and hold (and by a decent margin). That is a primary sign of a good trading model (I will comment on tax implications at a later time, but the point is, the model traded better than if you had simply bought and held the stock.)

2) The win to loss ratio which is $3.69 made for every dollar lost. Typically, I would like to see this ratio at least at 1.60/1 or higher before I would trade it (as is discussed on the Lund post).

3) The percentage of wins to total number of trades is 83.3% (basically 8 out of every ten trades is a winner). My minimum acceptable winning percentage is 60%. Tom Joseph, an expert oil trader who developed Advanced GET a couple of decades ago, used the 1.60/1 and 60% statistical model as his minimum acceptable statistic because he figured you needed at least that kind of edge to cover both for losses and potential trade errors that could be made. I think he was right when he said that.

Models have improved over the years. Jessica Simpson dumped Tony Romo, got married and is now pregnant with her first child. Faith Hill, well, you saw her at the start of Super Bowl XLVI. She hasn’t aged a day and didn’t need to lip sync her  intro the way Madonna lip sync-ed her Halftime show. Neuroshell Day Trader Professional has gotten better as well. In 2001, it might take 45 minutes to build one model. Now, it takes as little as 15 seconds given the processing speed of Intel i7 chips and the ability of the software to use multiple cores from all areas of a computer network.

Do I believe that only neural nets can produce trading models with positive expectancies? No, because I have seen and personally traded models that were thoroughly back-tested and consistently make money. Why do I use them then? I use them because they provide me with statistically viable stable models that  are basically “buy at open” with stops and targets at the ready. I do not have to use finesse or emotional judgements to make a trade. It eliminates the hesitation to pull the trigger when I have to. I already know that not every trade is a winner, but I have the confidence that the statistics are still on my side when I trade.

In the next installment of this series I will discuss the basic components of what make up a good trading model, and not just a good neural net trading model. There are components of the model that make the good basis for a specific trading plan, which most traders don’t have. Typically, that is the reason most traders fail to make money.

I hope you ladies were not offended by this post, but let’s face it. Some models ARE better than others. The numbers prove it.

Thank you, ladies and gentlemen, for supporting this blog!

I am still working out details on the new course of this blog with individual stocks names as well as sector analysis as time progresses, but for now it is time to look at perhaps a critical junction in the price action of the $SPX (S&P 500 Stock Index).

As stated previously in this blog, I had anticipated either a deep correction followed by a rally, or a continuation of the current rally followed by a serious correction. It looks, for now, like option 2, the rally, is occurring so far in 2012. One of the things you must learn in my opinion as a trader is that there should be a primary focus in technical analysis, as John Murphy has written about on several occasions. That primary objective is to set reasonable price objectives when holding a long or short position in the markets.

Under the current price action, we could have three very possible bullish outcomes:

1) Price symmetry at a point of resistance. Look at this monthly chart. What you see an example of here is AB=CD price symmetry. The retracement level from B to C is 0.618 the length of price segment A to B (form the low of A to the high of B). If that holds true, we should see a target high of around 1370.58. That is right at the cycle high set in April of 2011.

2) One of two butterfly patterns could play out. One would end at 1427.94, and the other at 1451.04. The retracement of A to B is roughly 0.786 of the  X to A down move. Both of those patterns should end in a later reversal which means both patterns are bearish in nature.

Which one will it be? Well, the momentum indicator I use still sees the $SPX bullish in daily, weekly, and monthly time frames. The neural nets also are still bullish on a daily basis, though the current daily rally is extended a it.

On an inflation adjusted price/earnings ratio basis, the$SPX cash index is quite extended also at a value of 21.97 at the time of this writing.

Conclusion: I still think that if any short-term euphoria remains, the resistance level at 1350 to 1370 is achievable in the coming couple of months. After that, however, any extension of the market toward new highs will essentially exhaust what ever future return could be achieved over the next couple of years after that (2013-2014). The return from 1258.86 to 1427.94 is about 13.4% and to 1451.04 would be about 15.2% . Nothing says this cannot happen (does anyone remember the ridiculous returns of the late 1990s?), but I think to expect something beyond that level completely ignores the difficulties in the Eurozone and the world-wide problems associated with sovereign debt.

For now, I think the 1356.48 to 1370.58 level will be a point of exhaustion, with an outside possibility of 1451.04 at a bearish butterfly completion. I have no clue whether this will happen, but I do know that the analysis that I have done is consistent with profitable trading practices I have used in the past. These extensions and pattern completions are highly repeatable in various time frames, so that is my story, and I am sticking to it.

More will come soon. The neural nets are back in gear again and as I see particular stocks or sectors that begin to look appealing, I will report on them.

Thanks for supporting this blog!

As most loyal readers of this blog know (and I know from Google Analytics that there are still about 750 really hardcore readers of this blog around), this blog has shifted gears a lot as my schedule and priorities have changed with time. In 2004, this was literally a reflection of my swing trading in stocks, with the neural net models my basis for all analysis. I still have the capability of screening the entire US stock market (imposing a $10 minimum stock price, which drive some people nuts as many will only trade low-priced stocks), and do a very competent job of figuring out which sectors were hottest from the long end and picking the best of the best from a momentum,Fibonacci price pattern, and value perspective. I could also invert the model for shorts (something I never did because I never really had to until we ran into the brick wall in 2008). I can still do that, but I chose not to as I began working on other projects.

I used to show people what I traded every day, for good or ill, and it was read very widely as I approached 2008. From that time forward, things began to change. I had to take a little business over after my brother passed away, and I decided to turn it into some kind of a cash flowing business (and it does in a small way now, and perhaps in a much larger way in the future). I also had begun to work on other projects and help others with their businesses. That has also taken off within the last year. I do not have the time to physically knock out the research I once did. Over the last couple of weeks, I finally repaired a software error that allows me to run the latest version of NeuroShell Day Trader Professional 6.2 and I have restored full capability to that model.

I am now considering turning that output (with an inverted screen for shorts) into a product with a friend of mine, a former prop trader, who now runs a training service of his own. This is a product I had considered creating in 2007 but put on hold as I took on other responsibilities.

What I would like to do in this blog, however, is to do some kind of bi-weekly sector analysis using the same kind of screens you used to see like this. What I hope to do is to find a WordPress widget that replicates the chart posting I used to do for Mr. Swing that will demonstrate the consistency of the patterns (and that readers really liked when I had that capability).

What I want to know is, what do you want me to focus on in this bi-weekly format? Sector analysis with individual stock names added, or would you simply want me to feature single stocks?

I do not have the time to post daily any longer. Between the forex trading and all the other stuff I do, it prevents me from getting real work done.

Many of you will not post in chat, but will send me an e-mail. My e-mail address for this blog is buffalotrader100@gmail.com. I can also post on forex as I see major patterns hit and when there might be a significant swing opportunity.
Thanks for supporting this blog!

There were times when the Standard and Poors 500 Index ($SPX) felt like a casino in 2011 with news flows so caustic that pinning a long or short position seemed impossible. In 2012, it likely will be more of the same.

Quite frankly, what I say is at best a guess, and my estimates will only be in the ballpark, but I do want to discuss what I think will happen generally, with some technical analysis targeting thrown in. I will not discuss the Dow Jones Industrial Index, because it is not broad enough a stock index to really matter, and it has been bastardized even more times than the $SPX, so I think it is almost irrelevant in today’s world except for the emotional barometer that it has become. As far as the NASDAQ Composite is concerned, it is a technology-weighted index, and for the next couple of years, attempting to target the value of that index, other than simply for trading it, is a waste of time. I typically do not trade that index, so I will leave it at that. (I do think, though that the index will be guided by INDIVIDUAL names that one needs to research for growth and value/growth measures. No index will tell and individual company’s story, so one must choose carefully which stocks one owns, particularly with ever changing technology). For now, let’s talk only the $SPX.

Why do I care about the $SPX this year? The main reason I do is because the U.S. Dollar value against the Euro in 2012 will likely determine how strong export business is, and that is the main thing that drives large multinational companies for which the largest component resides within the $SPX. Because of U.S. equity market negative correlation with the EURUSD (the Euro/Dollar foreign exchange pair), a stronger dollar will mean more difficult sales abroad and poor earnings performance in 2012 versus 2011. If the opposite occurs, you will likely see better performance against 2011 numbers in 2012. I think correlations will continue strong, and that combined with my belief (however flawed) that the Eurozone as we know it will break up by the end of this year, we are likely to see a lot of crazy action. The action that will likely be the strongest will be the strengthening in the US Dollar, which will pressure S&P 500 earnings in 2012 because of that same negative correlation. According to this Seeking Alpha article, The $SPX should earn collectively 107.60 per share. Since it trades at a ratio of 12.50 times it’s EXPECTED earnings earnings, according to Barron’s.  that would set that target for next year at roughly 1345 for the $SPX in 2012. That seems reasonable IF 1) the dollar remains relatively stable and 2) there are no external events in the world (economic or political) that would cause dollar value to change radically. The problem with that assumption is that we know that nothing is completely stable in the current environment.

What would the charts indicate? Well, I can give you a best case scenario and a worst case scenario, but in either case, we will likely 2012 close very near where we are today (1221.75) at worst and 1377.57 at best, in my opinion. The best way to look at this is through a monthly chart. The green lines represent the most bullish scenario and the red lines the bearish scenario.  I could explain the nuts and bolts of symmetry in either case (and if you leave me a comment to do so, I will), but here is the bottom line. If we do break above the critical areas of resistance at 1270.05 and 1370.60, I think the $SPX may stage that seasonal cyclical relief rally to 1564.75, and perhaps even slightly eclipse the 1576.09 all-time high of 2007. By spring and summer, though, I think the full weight of the European debt crisis will be bearing down on this index and we will slump back into the high end of the range near 1377.57, the rest of the year we may drift, but end at that level. In the bearish scenario, the $SPX falls below the 1074.77 range and probably ends up around a support level at 978.51 (which would match that previous bear swing down in intensity). The rest of the year we might drift back higher to about where we are now at 1221.75.

I tend to be a bit bearish early on because I think the disease that is the European debt crisis is going to continue to pressure markets and destroy retail investor confidence. Until something is done to rein in spending in the Eurozone, the possibility of breakup increases each day. I simply do not see the political will being enforced there (or here in the U.S. for that matter) to restrain spending. Delaying restraint only makes the pain worse, and threatens further economic damage via interest rate hikes, increased taxation, or some other economy-killing moves that will stunt economic growth.

The other reason I am pessimistic about the high end of this market is simply history itself. I add the current value of inflation adjusted value of already occurring S&P 500 earnings, which is measured at 21.04, which is at the high end of historical ranges (and not just 5 or 10 years, but 130 years of market history). There are two ways for that index to fall into a reasonable area of value, though earning growth (that is, a higher denominator, earnings, can be divided into price to create a lower value of P/E) or by price decline (the numerator declines because market forces press prices down to reasonable levels for some kind of sustainable price appreciation in the future). If one has read Unexpected Returns – Understanding Secular Stock Market Cycles by Ed Easterling, you know that history tends to punish markets valued this richly over time. We would need to see these values at high single digit levels to have a market to sustain a solid buy-and-hold investing approach. We simply do not have that now. We are still in year 12 of a secular bear market, and we are likely to remain there until we can cure the disease of debt accumulation and asset price valuations in real estate. The real estate is slowly beginning to heal, but it is likely to be several more years until that process is completed. The average of the last three secular bear markets was roughly 18 years, so this is nothing that out of the ordinary.

We likely will see sluggish growth as described in John Mauldin’s piece, The Years Ahead. If you are young (in your 20s) you will likely survive this mess as long as a free-market economy exists on the other side of it. I am going to be 57-years-old in July. I was able to bail substantially from the market in 2000, deciding to trade at the margin, and allowing other businesses to grow from which I can make a solid return. I will always swing trade when conditions are right, but I am not very keen on the idea of long position trades until we see this debt crisis resolved. I do own resource names and a few other stocks, but stocks are NOT the major holding in my portfolio at this time. Does that mean I am hiding under a shell like in this 1950s civil defense video? One needs to look at trend following and value techniques to buy stocks that have a high probability of hitting their targets. That requires an understanding of charts (technical analysis) and basic value analysis. There is no way to escape working on both. When valuations become reasonable again, I will invest again with a greater portion of my portfolio.

What you will eventually find is that trend following can work in any market, and can be the source, along with options strategies, of better than average returns if one is disciplined in using them.

Conclusion: I see more volatility ahead for the $SPX, and with very little progress made by the end of 2012. If the bearish case holds, we will lose a little ground again in 2012. If we no hit those highs mentioned, one needs to consider valuations and trend to take profits if they happen. A close in the 1500s would discount a few years of future growth. I do not see a tremendous amount of upside until the debt and real estate crises are put to rest. Good luck with investing and trading in 2012!

I will do a short post tomorrow with regard to the neural net data and what I intend to do with the blog going forward. Thanks for continuing to support this blog!

For the last three years, we have accepted by and large the risk on trade (equities, and gold as a hedge against fiat currency and any implied inflation), versus the risk off trade (bonds and cash, in the event that world markets become unstable and equity prices fall. This basically becomes the disinflation trade. This sort of of thing, risk on-risk off, wax-on, wax-off, in rapid succession is sort of the same thing that confused even the Karate Kid. In 2011, we began to see the intense correlation between the value of the U.S. Dollar and Euro become the central focus of that risk-on, risk-off trading motif, as wild fluctuations in the Euro based on the Eurozone’s problems with Greece, Italy, Portugal and Spain (the first two being the most critical for now) being played out. It was not a fun time to hold gold during those periods, and it seems now that we are at a crossroads. Is gold still in the midst of a bull market? Should an investor sell his or her gold now?

Let us look at gold from the perspective of the GLD exchange traded fund.

Those are huge questions, and I am going to attempt to answer them in as concise an answer as possible. We are, I think, at a pivotal moment for precious metal investment, but I think gold bulls and gold bears are both ultimately going to be surprised at what will be perhaps THE most volatile year in gold in the last 30 years perhaps. Its not guaranteed, but odds, I think, favor it. It is entirely possible that a bull shakeout occurs that could leave most of the bulls crying after they sell their positions in panic. I think it is possible in 2012 for GLD to hit BOTH 127.80 AND as high as 230.82 (that means gold could trade as high as $2300/oz).

What factors will lead to the inevitable correction in gold and GLD?

1) The U.S. Dollar is likely to strengthen for awhile against the Euro. Why? It is likely because there is no real resolution to the Eurozone debt crisis that will release the weaker economies (Greece being number 1) from the strongest members, and Italy is probably on the ropes as well in terms of its ability to repay debt. As one can see in this chart, it is entirely possible to see the EURUSD trade at 1.1215 if a three-drives-to-a-bottom pattern completes. Any overshoot of that to a 0.786 retracement could take it as low as 0.9901, which is below parity, sometime in 2012. I realize that it is not any linear equation to figure the gold price, but a 29% strengthening of the dollar would mean a 29% decrease in the GLD price, which would put it close to 107.91 (see later how closely that correlates to one key area of support on the chart).

2) Italy has the world’s 4th largest gold reserve on earth. What do you think Italy’s government will do to cover at least some of their debts? You got it. They will likely sell it, depressing prices further.

3) At some point demand in Asia (particularly India, but also China) should a deeper slowdown begin to hit the nations in that region. That should also begin to have a negative effect on gold and GLD prices.

As economic pressures continue to build on the Eurozone, I think there is a good possibility of selling of gold reserves by governments,investors, and institutions (Dennis Gartman has tempered his bullish on gold just recently, as has George Soros).

And what happens after that? Well, I am indeed pessimistic on one point. I think the Euro will die eventually (and in 2012 quite frankly) and that the Eurozone will break up. (I agree strongly with John Mauldin’s position here. Time is definitely UP for the EU). That event should have two primary effects:

1) It will create the mother of all volatility cycles in world currencies for the remaining sovereigns and the ‘new’ old currencies like the French Franc, Deutsche Mark, and Swiss Franc, among others, as they re-emerge.

2) That action will refocus the world’s scorn on the most profligate spender on the face of the earth, The United States of America. As our debt spirals above 100% of GDP, there will be even more concerns as 2012 passes and 2013 arrives regarding out inability to sustain our “nanny state”. We already know that Social Security is running out of cash sooner than expected and that Medicare costs continue to spiral out of control. What has yet to be seen is the economic impact of single-payer healthcare on the cost of doing business in the United States, and it will be the job of the next President (or the one in office now) to deal with that mess. I cannot begin to write out all the negative implications of that or this post will become a novel. The key point is that our debt growth is totally unsustainable, and it will probably cause our currency to weaken once again, which will AGAIN cause a spiral in all commodity prices including gold, silver, and other industrial and agricultural commodities. Consumers may see cheaper gasoline at the beginning of 2012, but they might indeed be feeling a real pinch as 2013 arrives. Prices of this and other commodities may rise again by the end of the year.

While we might see a breather in commodity prices going into the election (which will be a boon to all incumbents who will use as an excuse to call for another term in office), what will likely happen is a quick boomerang in costs as the U.S. Dollar weakens again in the midst of this mess. How quickly that happens will be hard to tell, but that is likely to happen in the next cycle. It is not going to be pretty. John Mauldin has done a good job of describing it in this article, The Years Ahead. I would read that if I were you.

What does that mean for GLD?

Look at the Fibonacci targets for extensions should a major rally ensue. It still puts GLD at any where from 201.26 to 230.82.

The corrective price action happens in separate options in all likelihood. Lets call them option 1 and option 2. The target outcomes of slingshot rallies for option 1 and option 2 are here.

That brings up an even bigger question than the last.

What would I do if I have ridden gold up to the 1900 area and now see myself with a 400 dollar negative reversal in value? If one is a position holder, I would consider put option or collar strategies that would allow one to be taken out below the 1070 area (actually below that 1000 area where resistance first hit), and if you are taken out, you still have your 1500 dollar gold if you had held since 2001 (I have friends who have held it that long). If that is taken out, then you could re-enter again with some kind of bullish option spread to await a breakout to the other side of the slingshot bullish trade back above 2000. I realize that is a bit risky, but I think the odds of that happening are probably much better than a coin flip. I personally think we are going to see volatility in 2012 and 2013 that will make 2011 look tame (and 2011 wasn’t). When politicians kick cans down the road, they cannot stop until there is no more road. Even an optimist in this environment realizes there is not much road left with which to kick cans.

I still believe there is enough fear to cause people around the world to run to gold for protection, not so much from inflation, but from damaged fiat currencies. The break-up of the Eurozone, even though I think it is inevitable, will not change the problem of worthless fiat currencies. When we see that the break-up causes even more uncertainty, investors will face the choice between the U.S. dollar and gold. In the short run, people will run to the U.S. dollar in all likelihood. In the long run, I think there will be one last rush to gold, and that will likely be the slingshot heard around the world.

Conclusion: I think the new year will bring a short burst of optimism both for the U.S. dollar and for a rescue of the Eurozone that could drive GLD prices down from 141.28 to as low as 127.80 in one scenario and perhaps as low as 113.57 ( a 0.618 retracement of the swing from 11/1/2008 to 9/1/2011.). Sometime in late 2012 into 2013, I still believe GLD will top out somewhere from 201.26 to 230.82 late in 2012 or early 2013. At the outside, it could be as high as 258.18.

Now, I know I sound rather pessimistic, but a lot of it is built upon the chart patterns I see. Many forecasts are awkward and wrong, as Barry Ritholz describes, but I will stick with what I see for now. I would tend to hedge any portfolio position in gold, and not really sell all of it. Remember, my forecast is a bit gloomy, but not quite this gloomy.

Happy New Year everyone! I will post my forecasts for the $SPX tomorrow and likely announce a couple of things I am working on with regard to the neural nets also.

I apologize for the recent lack of postings. I have been busily testing a couple of trading models and working on a real estate project while trading away as usual. Hopefully things will slow down a bit and I can find time to do what I like to do, which is to write about markets. I figured with all that has been going on in the last few days with the Euro, that it was time to insert a brief post on the matter. Things are looking rather ugly in the Eurozone of late. This credit accord for the profligate spenders in the Eurozone is a complete non-starter, and the drop in the value of the Euro versus the dollar is prime evidence of it.

We got word from Jim Cramer yesterday afternoon that we are officially in Defcon 2 mode (assuming Defcon 1 is the full blown European depression or Great Recession as Cramer nuances it to be) today as the EURUSD broke below $1.30 ( a buck thirty is what they call it where I live). Sadly, there is some time tested Fibonacci Price pattern analysis that says that we are only in the beginning of a severe correction in the Euro/U.S. Dollar pair. What I have decided to do is to show you that if you are worried about 1.30 as a critical level, then you might just be terrified at what symmetry indicates for this pair going forward in the not too distant future. My goal here is not to make a wild projection, but to give you an indication as to how quickly the good ship Euro is taking on water, and how that could affect our markets as well. What you are about to see are very reasonable estimates.

Let’s look at two charts, the first being a Fibonacci Pattern Chart for the weekly EURUSD (Euro/U.S. Dollar foreign exchange currency pair), and the second being a Fibonacci retracement confluence chart for weekly EURUSD. The one thing you will notice is that the 7-period (7 week) average true range (ATR) is 365 pips or 3.65 cents a week. That is a fluctuation of roughly( (.0365/1.30) X 100%), or about 2.8% PER WEEK. One could compare this to the speed at which a certain DeLorean had to speed in order to allow Doc Brown’s flux capacitor to travel through time (cleaned up of course for refined traders). It looks something like this. A 2.8% drop per week in the value of the Euro versus the dollar is a serious impact on U.S. exports with that trading partner, particularly with low profit margin products. Because of this close relationship with the dollar, U.S. equity markets are very strongly inversely correlated to the value of the Dollar versus Euro. When the Euro appreciates, our markets appreciate (as exports become cheaper in the Eurozone), when it is the opposite, our markets decline.

Because the ECB has basically decided to leave rates low and because there is still no solid accord to deal with the massive debt of nations like Greece, Italy, Spain, and Portugal, investors and savors in the Eurozone abandon their currency and their banks in many instances, and the value of the Euro decreases. The question is, how far can the Euro decline?

Well, as you can see from the weekly pattern chart, if a perfectly symmetrical Gartley pattern completes, the XABCD pattern will terminate right around 1.2404, at approximately the 1.414 extension of the A to B leg that occurred from Spring to Fall 2011. (You can see that extension value circled in green on the right). The full 1.618 extension of that same A-B leg would be 1.2038. At present using statistics from a previous model, the odds of the 1.2404 are around 70%. At the present time, the 1.2030 target is roughly 50%. And with Euro values dropping 3.65 cents a week, it would not take very long for those targets to be realized. I will not discuss the 1.18 level, but the possibility of that being hit is much larger than zero. That is how serious this correction is.

What about potential support points along the way? Because I got a wee bit angry with the Ensign folks for their lack of response to a continual software glitch, I decided to do some simple confluence calculations using E-Signal without it (and in fact, I suspended my Ensign account until the problem gets fixed). For the time being, there will be no more “air traffic control charts”. But they are not needed. If one looks at the red rectangles, one will note some close confluence at the 1.2796 to 1.2777 area, the 1.2690 area and the 1.2444 to 1.2404 area. All of those areas, if this accelerated selling takes place, could hit within the next 3 weeks (remember 3.65 cents per WEEK is the current 7-week ATR). Bottom line, the EURUSD is in a very ugly place for EURUSD bulls and U.S. equity bulls at the moment.

Is there an impending miracle that will save the Euro?Maybe. But seriously, unless the profligate socialist nanny-statists can cut spending and kill the cradle-to-grave entitlement stuff in the Eurozone, nothing is going to stop the eventual collapse of the Euro. No individual nation is going to quickly surrender its fiscal sovereignty to a central authority without chaos (and no self-serving, power-obsessed politician will let that happen). They have become so skilled at kicking the can down the road that their feet have no feeling. Politicians are the one class of individual that can never suffer turf-toe. For some local humor (or now humor in the Buffalo, N.Y area), there will likely never be a President or Prime Minister Spiller in the EU. I also hope that our own power-obsessed, lobbyist-funded, re-election addicted politicians are watching this, because this very same situation is coming to our doorstep very soon. As we get closer to implementing single-payer government-run healthcare, there will be some unprecedented fireworks in this country as well.

I think the Euro is headed for this kind of an ending (with expletives included, and perhaps the cataclysm shown in this Doc Brown video). What happens afterward, is something we will deal with in 2012, but it will have a serious and likely negative short and intermediate term impact on the U.S. equity markets as well. 2012 is going to be a year we will all remember I think, but then again, was 2011 any picnic? Commodities like gold and silver, energy, and all that the energy complex serves will also be impacted, perhaps by lower prices, but in other ways. A strong dollar, however, could be a nightmare for U.S. multinationals, struggling to remain competitive against its own government, which chooses to egregiously  tax it and would-be-American jobs into offshore havens. The fun is only beginning ladies and gentlemen.

I will be around to discuss it and to analyze it. Thank you for your patience and for your support of this blog. It is much appreciated. Hopefully in 2012, I will get back to more discussion of equities as well.

One of my rituals on alternating days of the week is to use the elliptical trainer in my little exercise room and watch Bloomberg Television. This past Friday while watching it I saw the scroll at the bottom of the screen heralding “Jim Rogers says buy Japanese Yen, Japanese Stocks.” Being the information geek that I am, I went through my news searches to find out exactly what he said. All I saw was a title headline in Bloomberg, but no information linked to it (and sadly, no article was provided either). The most recent video discussion from Mr. Rogers (yeah, he does wear sweaters but he is not often thinking how wonderful the day is in the neighborhood) is right here. In it, he states his boiler plate stance about owning currencies and commodities, but does not mention specifically Japanese Yen or Japanese stocks. There is certainly a reason to buy Yen currently. Despite the downgrade in sovereign debt ratings because of the recent earthquake, the yen is still a relative safe haven from the potential asset bubbles in China and and the Eurozone debt mess. Purchases of currency and of short-term Japanese debt are up. As investors and institutions attempt to find safe places for money, the Japanese Yen indeed seems to be one of those places.

I think the thing that concerns me the most is the fact that Japan is so dependent upon export trade (as is the USA now) that any appreciation in currency probably hurts Japanese multinational corporations (automotive manufacturers like Toyota and Nissan for example). That is the point of the cartoon I pulled up (there were no cats on YouTube swallowing yen notes and I couldn’t find anything mildly humorous. I decided simply to make a point). One reason the Japanese Yen (JPY) remains strong is that its current account balance is at a pretty strong surplus. That surplus though, comes from investment revenues and NOT trade. That is one reason why the IMF is now concerned about Japanese sovereign debt as deflation continues.

I realize that Jim Rogers is a long-term (and I mean really long term) investor, but here is the great conundrum. It would appear that the Japanese Yen will continue to appreciate (as will the US Dollar) as long as there is a debt crisis in the European Union, but what does that mean in this case to the Japanese economy and Japanese stocks? If earnings do not improve in the coming year, does that not spell trouble for Japanese equities? Its hard to tell, but let’s take a look at the charts.

U.S. Dollar/Japanese Yen Pair (USDJPY)

Daily Momentum: Bullish (Positive)

Weekly Momentum:Bullish (Positive)

Monthly Momentum: Bullish (Positive)

Since making post-World War II lows, this pair has been rallying a bit, though the crisis in Europe likely had more to do with JPY weakness than did Bank of Japan Intervention (look at the monthly chart to see the path of JPY trajectory over the years. What is most important to note is that for now (on the daily chart) there does seem to be a bullish counter-trend rally in this pair (meaning the JPY is indeed weakening a bit, but it would appear that on a daily basis we could be hitting some near-term resistance at 77.945 (the 0.618 retracement of the first bullish price movement), but odds are decent that a rally to retest 79.478 could happen. With volatility increasing, the momentum model typically stays continuously bearish until a major reversal occurs. So far, that has not had one as yet. On a weekly basis, a break above that trend line which would include that 79.478 price would likely lead to a retest of 81.79. Sadly, none of my momentum models has yet been tested on the weekly basis yet, but the patterns tend to hold up over time. I think the key point to make here is that even if we break above that trend line, we are still operating in a bearish environment for the JPYUSD pair, meaning strengthening of the JPY could still continue after the rally.

What about the Nikkei 225 Index?

Daily Momentum: Bearish (Negative)

Weekly Momentum:Bearish (Negative)

Monthly Momentum: Bearish (Negative)

What we have is the exact opposite of the USDJPY. A bearish market that seems determined to retest its recent multi-year lows. On the daily chart, there is some loose confluence (and quite a bit of possible price symmetry) that might exist around the 7200 area. It might take a few weeks to get there, but it is quite possible that this low could ultimately hold. 7845 could be a support level as well. If Jim Rogers is holding Japanese equities here, is he expecting to accept a perhaps 10% haircut until a bottom is put in? Apparently so, because the market could easily retest the lows almost 2 years ago.

I think the conclusion to make here is that we are still dragging along bottom both with the USDJPY and the Nikkei 225. If the goal is to buy low and sell high, it is likely on the daily basis that we could see that work for the USDJPY, but that it might be awhile before we see the Nikkei 225 begin to be bullish again. In the end, it all boils down to following patterns and being patient for bottoms to kick in within the context of your time frame, not someone else’s time frame. For me, I would wait the Nikkei 225 out for another reversal, or wait until a Japanese stock I was following to make a double bottom before diving in again. We would likely need to see both forward earnings AND price momentum before buying.

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I decided to do this post about a week early (as next week is Thanksgiving and I have a lot of things to do in between now and then on a lot of fronts). For the average long-term investor, particularly those very close to retirement (as most boomers are) may feel a bit like Judge Elihu Smails (Ted Knight from Caddyshack) when christening his sailboat. Things look relatively positive over the last couple of years, and then all of a sudden the algorithmic traders, sovereign concerns, and debt maladies swing in to his retirement plan like Al Czervic’s yacht. Many who have the cash available to invest in this market have made this decision. Drinking is definitely NOT the solution to the problems associated with trading and investing. Good analysis is.

I think the point of this post today is to demonstrate that all we have seen since the first large crack in bullish momentum that we experienced in August 2011 is random price movement in a period of deep and even panicked uncertainty in the context of a larger and perhaps more ominous pattern for the $SPX (Standard and Poor’s 500 Cash Stock Index). Perhaps the best aggregate summary of the current volatility is found in Michael Santoli’s Streetwise column in this week’s Barron’s. What I will do with a host of daily, weekly, and monthly, charts today is to show what little progress we have made in resolving direction in the past three months (regardless of what anyone’s opinions might dictate from a fundamental or technical basis), and what things must be resolved for a resumption of a major trend. For the sake of time, I will not post all the momentum charts.

Daily chart: Current momentum trend is bearish. Take a quick look. Regardless of the amazing amount of volatility, we are still trading within the broad ‘box” that includes current resistance at 1292.66 and  support at 1074.77. What I think is most critical is the fact that (using the greatest technical analysis tool known to man, a ruler), you can see that the general trend since August is now accelerating downward. What is even more critical at this point is that there is decent confluence between the 0.786 retracement of the July 1, 2010 low (the Tepper low after the flash crash) and the April 29, 2011 high at 1370.58. That confluence level is between 1293.61 and 1308.58. That would coincide pretty well with key resistance at 1295.92 on July 18, 2011. When markets accelerate in a bear market rally, they often overshoot the 0.618 retracement to a 0.786 retracement. In this case we have resistance right at that point.

Weekly Chart: Current momentum trend is bearish: Here is the bearish scenario. Because the $SPX has not taken out 1292.66, that still remains the C pivot of a potential AB=CD Fibonacci pattern in context to a bullish impulse between X and A as shown on the chart. Symmetry would place a near-term momentum low if that pattern works out at roughly a support level of 996. 68. Momentum suggests for now that this pattern should occur. Anything is possible, but the odds favor this outcome if bearish momentum persists on a weekly basis. IF we were to see continued selling, even in the midst of a potential rally from the low shown at B (1074.77 on week of 10/2/2011), then a possible three drives to a bottom would put a longer-term low of approximately 936.50. If we were to sell off rapidly as we did rallying back from the October 2011 lows, an extended target of 817 is not impossible.

What about the bullish scenario? It is shown here. If we were to hold the October 4, 2011 lows, assuming the markets can blow out 1292.66, then symmetry suggests a high near 1440.24, extended to 1469.77 at the 127.2 extension of the A to B line, and perhaps even as wildly high as 1594.21 at the outside 161.8% extension. That could take 35 weeks to get there, but, that would put you into the March April 2012 time frame.

Monthly chart: Shown for completion. Momentum neutral to bearish. Bottom line here is that if you do not take out 1370.58, then the $SPX is simply going to churn at best, or perhaps complete a right head and shoulders top. I have run some neural net analysis on patterns like this one (and in fact ON this one, but the statistics are not all that solid, the last buy signal was at the end of September, but that would have been a hell of a ride until now). No sell signal is given, but the output of the net is turning negative and could signal soon. It hasn’t YET though.

Basically, with the exception of the neutral momentum on the monthly charts, the combined momentum model would favor the bearish outcome outlined in the weekly chart analysis. Still, I think anyone who can call this market in one direction or another at this point is probably going to be lucky until we get some resolution on the debt crisis in Europe, our own debt crisis here (the Super Committee, which seems to be more of an embarrassing circus act every day), and some sense of confidence that the U.S. economy is not still going to stall out at some point in 2012.

What evidence do we have to support either case?

What about the EURO? Perhaps the best thing I have read this weekend is found here from John Mauldin (who would like to sneak in a sales pitch for alternative investments whenever he can). If Germany balks and does not agree to printing Euros in some kind of agreement to inflate its debt into non-existence, then the Euro will weaken, the dollar will strengthen, and we will likely see the current correlations kick into the market. For a simple explanation of how that works generally, here is (please don’t hurt me) Jim Cramer. (Watch the video to 7:36). Bottom line is, the correlation between a weak US dollar and better exports abroad for multinationals is the paradigm that institutional traders are sticking with. You have seen my evaluation of the EURUSD from last week, and it still holds. If Germany somehow does not agree to print EURUSD through the ECB, then the 1.2395 handle on the EURUSD is a distinct possibility, and that would very likely be bearish for the U.S. equity markets, and particularly the $SPX with its large multinational company exposure. Nothing is outside the realm of possibilities. The German taxpayer is on the line as the Eurozone drowns in its own debt and unwillingness to take the pain of fiscal discipline. Really the only thing left is not avoiding pain, but figuring out HOW much pain there is going to be. Pollyanna has been reported missing in the EU and assumed debt (that was bad, but it was the only pun I could make work).

What about the Super Committee and its quest to reduce the U.S. federal deficit? The odds of avoiding the sequestration that leads to budget cuts in defense and other programs (besides the ones that really need to be curtailed in entitlements) is not going to happen. The entire constitutionality of the thing is certainly questionable, but the politics is virtually guaranteed, as our elites shaft the American public to secure the votes of those who will re-elect them. That, in the very short run, could also have a negative impact on stocks.

And what about S&P 500 earnings? Well, they’re OK for this quarter so far, but what about the future? The Wall Street Journal lately questioned earnings momentum of late despite the good news regarding U.S. industrial output of late. The real question going forward is whether we can last another year without some kind of slowdown, and that news could work either way, depending on how the other world events described here play out.

General valuations: I am not going back into that discussion in depth here, but most of you understand my concerns about inflation-adjusted price/earnings ratios and how all that compares to the risk-free rates of interest (at zero) currently. I still do not think we are in any sort of “buy and hold” territory unless you absolutely know that you are going to be invested for perhaps 15 to 30 years and can ride out what I believe is the second half of what could be a two-decade long secular bear market. What I want people to do now is to hedge themselves against what could be a very wild ride as we move into 2012 and 2013. Or you could decide to believe and act upon the fact that cash IS a position. Some billionaires do.

So what is MY conclusion?

I think there is still considerable risk of a drop in the $SPX below 1000, perhaps to 936 or so, in the next year. If typical pattern symmetry takes hold, the price action could play out exactly as I have outlined in these charts, but I cannot be so sure, since the news flow from around the world is rapid fire. I have not even included all the international messes that are piling up (Iran-Israel being one of them). So much will have to go right for a major rally to occur. The certainty of that happy ending is simply to complex to calculate. So, for now, if one is worried about a downside, the maximum I can see at this point is around 817. I really think either wild temporary optimism or just plain momentum could also press the $SPX  to 1440 at some point, but not until there is a resolution to the Eurozone debt crisis. Remember, when the Eurozone crisis is over, which one is next? Yep, the US Dollar crisis. The U.S. Congress cannot even get its collective head around the fraud of baseline budgeting versus bottom dollar accrual budgeting and we have a President who uses Executive Orders to subvert the will of the people via fiat regulation. The solution of this problem, in my opinion, could set us on a course of conflict we have not seen since the American War Between the States.

We are only in the second inning of a game that will change this country and the world forever. I love a good ballgame, I just wish I didn’t have to live with what could be some not-so-favorable results.  I still believe, though, that the United States will be stronger on the other side of it, as long as our selfish Machiavellian political elites do not destroy the essence of free expression and economic liberty. If you read the Mauldin article, you noticed the rather obvious tints of German statist notions with regard to “fears that German plans to deal with the Eurozone crisis involve an erosion of national sovereignty that could pave the way for a European “super state” with its own tax and spending plans set in Brussels.”  To me, freedom is the only answer and ethical sovereign management is the only tool that can be used to fix problems.

That is it for now. I hope U.S. readers have a happy Thanksgiving! Thanks for supporting this blog!

You know I hate to make animal references in my blogs, as everyone knows my last name, but I guess today it is inescapable. Greece, Italy, Spain, and Portugal seem to be lined up like pigs to ride in the European Union (EU) “Austerity Bus”, ready to head to the processing facility of “Fiscal Responsibility”. One by one, in Greece, and now purportedly in Italy, we have replaced those gluttonous socialist politicians with “technocrats” who will only do this most correct and painful things in a straight and narrow way to prevent the all consuming debt from destroying the integrity of the Eurozone and the integrity of the EU,hopefully following the dictates of the European Central Bank (ECB). I know all of you believe wholeheartedly that the Eurozone will immediately eradicate its massive unfunded liabilities and march into the sunshine of eternal fiscal solvency. Manna will fall from the sky and there will be no want in the Eurozone again, because everyone will go to work, produce massive GDP, and not complain that a worker cannot retire at 50 on full salary EVER AGAIN!

What? You are not buying that rancid truckload of bacon? (It’s not Canadian bacon either, because at least Canada has oil, natural resources, and agriculture to fatten its currency).

Well, guess what? Not many others are either. Italian bond yields rose again. The situation in Greece is also tenuous at best. There are simply far too many unanswered questions and roadblocks along the way that the solution does not appear to be rosy or quickly coming to fruition. So clearly, the Euro must be instantly going into the burning pits of Hell in a highly flammable wicker basket. Right?…Well, not exactly. I have watched the pundits tell folks to short the Euro or go long the Euro or to anticipate a cataclysmic price action in one direction or another. Traders who have decided to stay positioned in one direction or the other ends up, when looking either at individual trades or to their trade equity day by day, looking a bit like this creature. They are thoroughly mesmerized, frightened by the wild swings in equity, and utterly confused (and probably out significant cash after a few trades). Is that you?

The bottom line is that the EURUSD (Euro Dollar Currency Pair) has reacted violently with every piece of purportedly good news or bad news that hits the wires, your cable TV via whichever financial talking head you are watching. While the Euro did swing rather rapidly during 2009 and 2010, this year, it has gone thermonuclear. Anyone trying to trade a straight trend has probably had pieces of their trade equity anatomy ripped from their account trying to stay firmly trending long or short this pair. The 7-day ATR as of 2130 EST was about 180 pips per day per unit (that is almost $1800 a day/unit. That kind of volatility could destroy a small forex account pretty quickly if one is trading in the opposite direction of the actual price action). Not even putting those expressions to music will help the pain of loss.

So what could happen to the EURUSD based on the most recent price action? If the Euro were to ultimately fall apart of be hampered by some kind of political or structural problem, this is how one major pattern would play out if an XABCD pattern would complete with near perfect price symmetry using a standard AB=CD pattern. (See the daily chart). If we do not rally beyond the previous high at 1.42475 and break below the October 4 low of 1.31458, then symmetry would suggest an ultimate low somewhere between 1.2489 and 1.2395. Without dragging out every momentum chart I have with the time I have, I can show you the following data:

EURUSD 2130 EST

Monthly Momentum direction: Bearish (Downward, close to oversold)

Weekly momentum direction: Bearish (Downward)

Daily momentum direction: Bullish (Upward)

For now, it does appear that the intermediate and longer-term direction for the EURUSD is bearish, but the daily mo tends to indicate that despite the sell-off this evening that a rally back to 1.3956 is NOT impossible should news events press buyers back into this market. For the time being though, I think it is best to consider the bearish case for now. I can present the bullish case at some other juncture (and I will if need be) but for now we need to either break above those key resistance areas around the 1.42475 levels to begin to really evaluate a strong bullish move for the EURUSD. For now, things still look volatile, but bearish.

How in the world do you trade this pair knowing that the volatility is almost if not totally out of control? Well, for one thing, if you are trading this pair, given the recent months trading patterns, if you are using a long-term trend following methodology, you are likely going to lose your shirt (and other articles of clothing) quickly. What I am doing in the midst of this volatlity is trading a simple momentum model that measures average true range in 3-minute bars, long and short. I attempt to capture HALF the average true range with each trade, and I take about 3 to 4 trades a session in the early morning from 0330 to 1130 EST, when the combined US and European markets are trading. I do that for 2 reasons:

1) to minimize risk of trades running against me based on news.

2) so that I can trade with requisite size to capture 20 pips/unit per day. (That is roughly $200/unit/day).

In any market that uses leverage (as forex and futures markets do), it is not wise to swing for the fences unless you have a model that you have confidence in (one that has been thoroughly tested and vetted against all kinds of volatility). If you take large risks, with very wide stops, I can promise you one thing. Your trading equity will vaporize RAPIDLY.

Remember that markets only trend about 1/3 of the time (stocks, futures, forex, you name it). The other two thirds of the time they cycle trendlessly. If you do not have a trading methodology that can handle trendless or highly volatile conditions, you are bringing a knife to a gunfight, and your equity will be destroyed ultimately. Trading a trend following model under those conditions is both idiotic and suicidal to your trading capital. That is not a supposition made by a C.M.T., that is a fact based on 30 years of trading. Take it to the bank.

There are countless ways to trade markets successfully. If you have not done so, you should read Market Wizards and New Market Wizards by Jack Schwager. What you will find there is over 30 interviews with traders discussing how they developed their trading strategies, made mistakes, blew up, returned again and eventually succeeded by honing their methodologies. The only holy grail they had existed between their ears and was improved by their determination to conduct mistake-free trading according to a well-defined and written down trade plan. Anything less than that will ultimately lead to failure. That plan should also include any antecedent market conditions that qualify the plan to be executed. Trending is a market condition that only exists about a third of the time in most cases. If that is all your have in your trading game, you need to step up and learn another one.

That is it for now. More to come soon on forex and equities. Thanks for supporting this blog!

Yes, I know that dentist’s photo is an ugly sight, but so is the current daily chart of SPDR Gold Shares (GLD). As one can see, the gaps on the daily charts have essentially been filled. As I stated in previous posts on GLD, the road to any new highs is going to be rocky. I still think that a target around 211 is possible for GLD, largely because investors, traders, and holders of the physical metal or ETF shares still believe owning any fiat currency (U.S. Dollar, Euro, or Japanese Yen) is a bad bet on future currency, price, and economic stability. Regardless of my opinion, one should view the playing field from various time frames to truly get a picture of how wide these price swings can be and STILL be in a bullish trend (look at this weekly chart in context with the daily chart in the next paragraph).

There are basically two scenarios shown here. Either we see GLD head back toward 143.97 ending in AB=CD price symmetry, or we simply rally to 197 to 213.

1) AB=CD scenario with price correction: It is not impossible for GLD to correct all the way back to 143.97, and still be in a bullish longer term pattern. The AB=CD Fibonacci pattern is quite commonplace, and that correction would land right around 143. A look at the weekly chart shows that a longer-term uptrend is not erased even if GLD were to trade as low as 143.97. That AB=CD Fibonacci price pattern completion is a bullish pattern, meaning that in all likelihood the march back to 211.87  would occur after that.

2) A retest of the previous highs occur before GLD rallies back to 197.38 and eventually 211.87, the longer range daily target. This is quite possible as well if some kind of quick resolution to the debt crisis in the Eurozone.

Which will it be? At present, I would tend to think that  we are close to seeing a correction in the fashion of AB=CD, but momentum has not yet turned bearish on the daily chart.

What could be the driving forces for a major rally in GLD?

1) The talking heads and meandering political class is really right and the Eurozone debt crisis is going to be solved by Greece taking a massive haircut and a neutered Italian government without Prime Minister Berlusconi will do all the right things, accept austerity, thus saving the other major sovereign debt basket cases (Spain and Portugal) from detachment from the once pristine ECB credit rating. Sure, you believe that, don’t you? I for one do not, and neither do people like Dennis Gartman, who thinks gold will hit 1800 an ounce (which is roughly equivalent to a price of $180 on GLD). He has experience in most of the precious metals, and besides, he is an N.C. State graduate and dresses rather dapperly. If this austerity thing holds up, it is indeed possible for those outside targets as shown in that initial daily chart to be hit. If the Euro strengthens, oil and other commodity prices will rise, and inflation at the consumer level in the U.S.A. could spike again, just as the holiday season (and the bill paying season afterward) hits.

2) But what if it doesn’t and rates run through the roof (as shown in that chart of Italian debt in the video, which would occur in other nations of the Eurozone)? GLD would likely break below 143, the dollar would strengthen versus the Euro, and the cost of U.S. exports to the EU (and likely the Asian nations as well) would spike. That would hurt U.S. equity prices, likely plunge the Eurozone into another recession, and set off a bunch of nasty world economic events. In the next few days I will cover what possible longer term effects will befall the Euro (EURUSD) and energy prices as well.

Once again, the U.S.A. is caught between the vice of either higher commodity prices or a potential global slowdown, neither of which is particularly good for the American consumer. The U.S.A.’s only salvation is that the Euro continues to strengthen and that some method of burdening a Eurozone (or should I say German) taxpayer with bad debt is possible. In that way, the continued profligate spending ways of the part power-and-incumbency obsessed and part brain-dead American political class weakens the U.S. dollar to expand exports. As long as the Federal Reserve continues to force rates lower via this new “twist” procedure, then the down-the-road-can-kicking methodology can continue and the fragile U.S. economy can continue to grow GDP at half of its 200-year historical rate of 3.0 percent per annum.

What do I think will happen? Well, we think that we got Berlesconi to resign. That does not mean, however, that the government to come (which will be some kind of loose coalition) will buy into austerity. With a limited mandate and a lot of angst over how to reduce spending, nothing can be taken for granted, even with a so-called “technical” government. This near-term “positive” development will likely cool the jets temorarily on GLD and gold price rallies if progress is made on debt issues. Still, NOTHING has changed with regard to currency debasement. Even if this debt crisis can be defused, most investors do not trust either American or Eurozone measures to tame spending (and the longer-term inflation that spending would create) and they will continue to flock to GLD and gold. I think, with or without the neural net analysis (which I hope to have back in tip-top shape next week), we will likely see another correction in gold that should nearly match the AB=CD pattern in short order, trapping the gold bears once more before running back to the highs I estimated. There is still Spain and Portugal to deal with (and Greece for that matter). At some point, this Eurozone agreement will likely melt down, causing another panic to grip bond, currency and equity markets. I simply do not think that there is even an ounce of true consensus among EU members to agree to anything (other than perhaps to have Germany pay for everything, which Germany, or at least Angela Merkel, would not accept, because she would like re-election as well).

Conclusion:

Bottom line is this: I think it is impossible to know for sure if this debt crisis is over. Quite frankly, I am not optimistic that that the European Union can survive in its present form in the long run. Negativity with regard to any debt agreements will likely fuel weakness in the Euro and will likely put some near-term pressure on GLD prices, pressing it toward 143. I would still be long gold, however, because even as the Euro weakens, the U.S. Congress inability to reduce spending is likely to weaken the U.S. dollar as well. Keeping stops at least below 143.97 for long-term holders of GLD would be the best thing to do for now until this crisis subsides. GLD is a victim of the value of the dollar. It will rise as the dollar weakens, and fall as it strengthens. The long-term prospects for the U.S. dollar are not that wonderful either, so staying long with a portion of your portfolio with GLD is a good idea still. Even if we do see a correction to 143.97, ultimately we should still see 211.87 or so. The situation has really not changed, but the volatility associated with that change HAS. It will become more noticeable as the crisis deepens.

This is not a time to be flailing happily with your cash in buy and hold schemes, except for core holdings. I still think GLD in the next 6 months to a year can still be a core holding. Once we reach these outside targets, it may be time to re-evaluate the positions, but for now governmental arrogance and folly will pressure gold and GLD prices higher as the U.S. dollar ultimately weakens. Just make sure you have your crash helmet and kevlar jacket handy. If you don’t, you might lose a few of your gold fillings.

Thank you all once again for supporting this blog!