These are thrilling times to be a trader especially if you're in the bearish camp! For the bulls it's a different kind of excitement
But as I often say, it's important not to get married to a view. Let the charts show you how to trade. Right now, it's a bearish view from where I'm sitting!
Developments are coming at us thick and fast. It just feels to me that the excitement can only snowball from here.
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But to make serious money from the markets, a trader must join the winning camp, and sometimes put beliefs to one side. Or better yet, change beliefs!
We're in an historic period in the markets, make no mistake. I firmly believe what we're experiencing now will go down in the annals of market history as a landmark period.
And the waterfall declines I predicted in my lastpost appear to be gathering pace. The signs are very ominous.
That spells trouble for a lot of traders caught on the wrong side. Remember, markets exist to punish the majority!
Markets are in synch falling as liquidity dries up
Again, I'm spoilt for choice on which of my main markets to cover. Many of my observations could apply equally to all three the EUR/USD, Dow, or gold. Major support zones have been breached in all three in the last few days.
As I've been saying for some time, markets are moving in synch. And that's because they are rallying with increases in liquidity in the banking system, and falling when liquidity dries up.
Much of this increased liquidity has been created out of thin air by central banks. And as easily as it was created, it can be destroyed. That's what we are seeing big falls in money supply around the world.
And as night follows day, this will lead to massive falls in economic activity and the markets are getting a sniff of this. They don't like what they see
Today, I've decided to continue with gold, as it represents a very emotional market and is one of the biggest beneficiaries of the money-printing operations. And emotions have been running high in gold for some time. Here's the hourly gold chart showing the decline off the 1 May minor high:
(Click on the chart for a larger version)
The arrows represent the slope of the declines. Note how they're getting steeper. This is making tramline detection that much more difficult in fact, impossible for the short term.
In Monday's post, I had a chart showing the major support line my 'line in the sand' around the $1,500 area.
(Click on the chart for a larger version)
But I believe I can do better and here it is:
(Click on the chart for a larger version)
Instead of the down-sloping line, I can draw a superb new up-sloping line of support/resistance. Note the perfect touch-points prior to last July (red arrows) and the January point. The September touch-point (black arrow) is a near-miss. But overall, I like it very much.
For over a year, this line has acted as support.
And with this week's declines, we have a clean break down through this support. This is very bearish for gold, of course.
We could soon see a major capitulation in gold
So already, my long-standing target around $1,500 is being challenged.
There are many who say that the $1,500 level is critical. For one thing, it is a very large round number, and many traders believe this is significant. For another, it is around 20% off the $1,920 high, and some believe a 20% decline is enough to label it a bear market.
I have news it has been in a bear market since last summer when it made the double top blow-off highs. But no doubt, the pundits will be out there calling the bear market as if they have just discovered a new planet.
Many are buying into these declines, of course. Their motivation is largely their view of fiat currencies, and how they are doomed to fail. This has been the story behind the gold bull market for some years, of course.
So which view will prevail: Currency debasement, or credit deflation?
The market is telling me that the deflation story is winning.
On Monday, I wrote that I would like to see capitulation by the bulls in a large down day. It could come at any time, of course, but if history is a guide (it usually is), the odds favour it occurring sooner rather than later.
I'd be interested to know what you think about gold. You can share your views below.
If you're a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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