January 18, 2010

A lot of investment focus for outlook 2010 is geared toward inflation based assets such as gold and oil.  What a change from the turn of the last decade when the rage was totally based on paper assets such as stocks, bonds and yes folks, even the US Dollar.  Indeed the age of the Dot.Com stocks was the zenith of the paper world.

Right around the time the NASDAQ was peaking at the 5000 area, gold was bottoming at the 250 dollar area and crude oil at the around the 18 dollar per barrel price.  How times have changed.

Gold Trends Analysis

Today the question is not whether gold is a good investment but rather if the correction from December is complete and higher prices are forthcoming?

The chart above of the gold ETF (GLD) shows us the uptrend that the precious metal has been in.  It is only investment that has made a post crash 2008 high and it certainly has a lot going for it as we enter this year.  Inflation fears,  currency crisis, debt default, physical supply, and a fundamental loss of faith in government and the financial systems has brought gold followers and analysts from being shunned at social events to at least tolerated today.

A look at the chart shows that gold is in a long term uptrend and is very reflective of the fundamental developments that are transpiring worldwide.  But what about the short term outlook of gold?  Has the lows of December provided the next buy opportunity here or is there lower price still lurking in the upcoming month or two?  While we are long term bulls, there are a few things on the chart that has our short term attention.   Let’s look at a few of the issues.

First off, the arrows on the chart highlight something pretty important when it comes to a volume spike. And that is when they occur the potential for good sized corrections are at their most likely to take place.  The past few years and the arrows on the chart confirm that.  But more importantly is that when they occur at or near the top of the upper channel line in conjunction with MACD and Money Flow indicators turning down, price has always retreated to the bottom of the channel line before initiating a new sustainable bull market run.  Now while that may seem a long way from here, historical precedence argues that it is the most likely course.

The red moving average is the same as the 200 day moving average only it is measured in weeks.  Notice how often over the past three years that price has pulled back at or very close to that average.  The fact that it is now resting at the same area as the lower channel adds weight to the potential of a correction in gold to reach that area.  The fact is that markets do not go long periods of time without testing that all important average.  The chance that 2010 will not test the 200 day average is not very high.

How about the money flow indicator at the bottom of the chart?  Notice that there has not been ONE PRICE BOTTOM during the last three years that did not have the Money Flow Indicator touching the lower price line at the 20 area when gold’s bottom occurred.  This is yet another indicator that has me cautious of calling the all clear for gold over the short term.

How about our MACD indicator?  While this indicator has not been as concise at trend picking, we can see that the times MACD was in a downtrend, gold for the most part followed it down.  Currently this indicator is on the verge of turning down as well.

While I don’t use technical indicators as my buy and sell tactics, I do like to look at them as coincidental indicators when I am suspect of trend direction.  The fact that they are not in bullish mode adds to the concern whether gold has really made a significant bottom.   Finally, if we look at all of the major pullbacks in the past few years, we can see that pullbacks usually do not have one straight line down for 4 weeks and then a resumption of the trend.  In fact, the shortest ones lasted in the 8 week timeframe and others were much longer.

Since the beginning of the month and year, a nice two week rally has unfolded in Gold running gold up from 1075 to the 1160 area at its peak.  As we close out the week, we can see that gold and the 50 day moving average (the blue average line on the chart) are both at the same place in price.  For GLD that price is the 110.80 area.

So where does this leave us on the short term?

While we have re-iterated we are long term bullish on gold, our analysis of the conditions on the chart above leaves us in a NEUTRAL position as it relates to the short term.  Here’s what we are looking at.

Gold ETF Trader

From a short term basis, gold has reached a decision making area.  With the exception of November, which was a blow off month for gold, price usually begins a sideways pull back from mid month to end just in time for options expiration and such.   Therefore should gold fail to exceed last week’s high in the metal and the ETF, odds will favor that an end of month short term low could develop.  From a price perspective, GLD has a gap in price at the 107area and two short term support points (see blue arrows) at 105 and 100.  We would expect a pullback to one of those areas depending on the strength and/or weakness that gold exhibits over the next few weeks.

Also on the short term decision plate is how the 10 and 39 day averages are situation right where price and the 50 day average reside as well.  This merging of price with the 3 moving averages confirms our neutral stance over the short term.    From here we will look to see which way price breaks and will look for a low risk entry when time such an opportunity.

From a medium term perspective and a historic seasonal basis, gold should be closer to the end of this current rally leg than its beginning.  Price has more often than not been in its upper range come February over the history of gold.  With a 540 dollar rally over the past 14 months, it should stand to reason that the potential for a deeper correction than what we’ve seen is a possibility.   If one studies the chart, there is usually a mid-winter sell off in gold.  In strong years the rally can extend into the spring but it is not the norm.  The point is we should expect a correction at or near this time of year.  Rather than guess at its beginnings, we will look to see breaks of the support areas we listed above as increasing the odds of such an event.

With the 200 day average right near 100, a pullback in 2010 towards this area might provide a good set-up entry from a medium term perspective.  This has been a solid buying area the past few years with the exception of the 2008 crash.  It is a rare year that gold or any market for that matter does not visit this key average.  Medium term investors should have cash ready to put to work if such an occasion were to develop.   However, there are important considerations and technical work that needs to be done at the time of each test of key support area and one should not just purchase at that price blindly.

When we think about it, there are really only 4-5 good swing trades per year.  When price patterns, support areas, technical timing indicators and sentiment all line up, it is then that low risk entries are presented to us.   Even a short term trader will notice that the above chart of daily gold only required one or two trades per month for maximum efficiency and profit.

Investors on the other hand who are not worried about the weekly blips but are concerned with the yearly trends should be trimming down their positions this time of year and reducing their exposure, not increasing it in a normal year.  Unfortunately, things are anything but normal these days.  Regardless of that fact history shows that the best performance from the end of winter into the June timeframe is crude oil.

One look at the seasonal chart below shows that the best time of the year to own crude oil is to plan purchases in mid to late February when the seasonal tendencies of crude produces the best rallies usually.   Interestingly enough this is when gold usually takes a back seat to oil in the same timeframe.  If an inflation investor is your modus operandi for 2010, a portfolio rebalancing in February might be an interesting tactic to execute.  If inflation is a problem, oil will follow gold higher.  Indeed, history suggests it outperforms it in the spring.

Over the past week oil has once again closed lower on weakness.  The seasonal chart below shows us that is exactly what we should be expecting during this time of the year.

Seasonal Crude Oil Trend

The key now will be putting together a low risk entry in the same manner we described earlier in the article as it relates to gold.

Crude Oil Futures Trader

When we place the seasonal chart close to the oil chart we can see the inconsistencies with the seasonal at first glance.   However, the most important factor was the late February low was correct in forecasting a great entry price for crude.   The seasonal called for a pullback from April to June which did not occur in 2009.  However the seasonal shows that the second best time to buy crude is the July time frame on the seasonal.  Look how July provided the second best time to buy crude on its chart.

Now we are in a timeframe where crude should become its weakest and if history is with us, should provide a great opportunity mid winter.   Here’s where one wants to look at the extent of the coming pullback.  We know crude should be weak.  There are three key price areas that have produced lows since July.  These are the areas that should be watched for a potential winter low.

In summary barring another crash of epic deflationary proportions as a few advocates have surmised, the gold and oil market should continue to provide a bull market status.  Those heavy in gold might want to consider a trimming of some of the great gains, and shifting a bit into crude oil come mid winter.

At Commodity Trader our focus and emphasis is always on waiting patiently for low risk set-ups in the metals and the oil markets.  Come by and visit our site and check out what we’re specifically recommending.

Join My Free Trading Newsletter for ETF and Futures Trading: http://technicalcommoditytrader.com

Regards
John Winston

As we entered 2009, we had a major asset crash due to the events in toxic debt. In response the Fed initiates major bailout programs. In the loosest monetary policy of modern times, interest rates collapse to a low in late 2009. Look at the interest rate collapse into the end of 2008 on the TBT chart (20 year Inverse Short Bond ETF) As we can see by the chart, today the long term interest rate picture is in a neutral position entering 2010 above the blue downtrend line but above the blue uptrend line. The technical indicators are warning that this current uptrend is losing steam as RSI has turned down and Williams %R is in the process of dropping out of its overbought area (usually a sell signal). This indicator we use has been a good at assisting us to discern where the highs and lows occurred.

Gold Trend Trading

The 50 and 200 day averages are converging right where price is. A break above or below the averages with a subsequent penetration of the trend line would set the next interest rate trend in motion. The direction that rates take will influence many of the other markets. A break higher will portent higher rates and lower bond prices for the USA.

Right around the same time interest rates bottomed last November, the FIRST asset class responds.

Gold bottoms with a November / December spike at the 700 dollar area right when interest rates bottom and takes off on a rally to 1007 in March.

Trend of Gold

The gold chart displays the massive $540 dollar rally that has transpired over the past 13 months. Not only has gold led all asset classes from the depths of the debt hole, but has been the clear winner of the decade in mounting a rally from $251 dollars to $1227 at the peak. So strong has the rally been that the 200 day moving average was only tested once, during the spring lows of April and May. Even the 50 day moving average went from September to December over 100 days without being revisited until the past few days.

The lows for 2009 were the $865 – $870 area in gold. That pullback low was to exactly the same price as the peak of January 21, 1980 when gold touched $875. From that low in spring, gold rallied away from the 200 day average until it reached a point where price was $250 dollars above the average when it peaked at $1227.

Outlook for Correction
There are three probable places for a price low during this pullback. First is the 50 day moving average at the current price area of $1110. This is one potential price zone where a rally might re-establish itself. Should gold bottom in the 1080-1090 area and solidly move above the 50 day average, gold would stage an assault on the upper trend line where a major channel in which price has bounced off the channel three times over the past 13 months.

The second area is the horizontal channel line drawn off the 2007 and 2008 top. We can see how this area points to the price area where gold broke over 1000 to finally rally into higher triple digit prices. This pullback or test of the breakout area would give us a range of about 1020-1040 in price.

The final area is where the bottom channel line, the small blue downtrend line drawn off the March and June peaks and the 200 day moving average converge in price. That would put the price range at about the 950-990 area and will be the most SOLID PRICE SUPPORT area for gold in which gold would still maintain its upward momentum within this channel. Closes below the 930-950 area during 2010 would suggest that the current credit contraction cycle has the potential to bring down the house one more time like it did in 2008.

We expect gold will bottom at one of these three areas between now and mid January and a rally back up to test or exceed the upper trend channel should develop going into mid winter. Depending on the strength of the next leg up will determine how long the rally is to last. Seasonal charts show that corrections usually develop in the mid-February to early March timeframe on average. We suspect a spring peak will lead to what it usually does, a July/August low. Should gold next rally fail to make new highs and then turn lower under the 50 day average or below the low of this current pullback, the potential to test the lower levels we have listed above will be in play.

Going into 2010, the gold market seems to have had only one nemesis, DEBT DEFAULT. The 2007 high at 1033 occurred right at the beginning of the Lehman default announcement. This most recent pullback began within a week from the Dubai announcement and the announcement itself had a 55 dollar pullback day. It is an area that bears watching. We’ve seen the debt situation go from public, to institutional, to financial, and now with the most recent rumblings, NATIONAL. USA, UK, Spain, Greece, Iceland, Italy, and the list goes on, but you get the idea. There are those who feel the situation in China is not to be trusted either. The notion that the global economic recovery is not sustainable or at best in serious question is viable as the longer end of the interest rate curve as we saw on the TBT chart has not signaled a new higher trend rate as of yet. Should the recovery falter at a time of massive credit contraction the liquidation of assets both paper and hard cannot be dismissed. Paper will go and depending on the severity of the contraction will depend on how much gold might be affected.

But what does Dr. Copper say?

There are a lot of analysts who look to copper to gauge economic strength. The chart below shows that copper was the next major commodity to bottom when the feds collapsed interest rates. Copper blew away the completion in 2009 by running from $1.25 to $3.25 in a triple digit gain. And look at the chart. It was virtually straight up all year. Most recently however, the price velocity over the past few months suggests of a price that is running out of steam. Copper is virtually unchanged in the past few months.

Copper Trends

The price high is also coming at a time price location where the 2008 collapse in price began from. Notice the blue arrow line drawn where a price gap occurred and price never recovered. The fact that price has rallied all the way back to this area and is now showing weakness in its price pattern suggests that Copper also is questioning the viability of this recovery. For certain a correction from this area is the odds favored event. Watch the Williams% R indicator as it is just about to fall out of its overbought range.

From a time and price perspective copper looks ripe for a pullback in early 2010. Should copper drop below the lower blue channel line and below the 280-290 area, odds would favor a pullback to a minimum of the 200 day average at the 260 area with potential to trade lower should the recovery falter in the far east. As long as we remain in the channel copper can climb. Should it break below, odds favor a correction.

Crude Oil
Crude double dipped at the bottom by developing a December low and then a subsequent February seasonal low under the 40 dollar area, which if you recall was near the 1991 Iraq invasion high.

Oil Trend

Crude oil is nearing the potential seasonal lows as well. Notice that the current nine straight days drop to under $70 had crude oil at the same price as last June and August. This underscores how important it is to understand not only the trend of markets, but the VELOCITY and STRENGTH of the trends. While it can be said that Crude is almost a double this year that is suggestive that you bought at the bottom. More important is that anyone playing crude since last June who is not a very short term trader has been hard pressed to make a buck. However, its seasonal lows are approaching. As long as oil is above the 59-65 area the uptrend should continue. Any moves down that PRICE AREA anytime but especially by the end of February where the seasonal lows are due would be an excellent opportunity to take a position. The two blue arrows drawn on the chart shows the next key resistance area in crude oil. The 90-110 area should provide the most significant resistance to price in 2010. The current price pattern does not look as bullish as the other commodities, but look for a seasonal low in the coming weeks.

From Year to Year………………….

From the end of last October to mid February, Gold was the place to be. From mid February to mid June Crude was the place to be. From mid June to mid August, copper was the place to be. And since September, it has been Gold, Gold, Gold.
In light of the above paragraph, there are a few ways investors and traders can take advantage of the seasonal tendencies. One is to be overweight the commodity that is in season and the one showing the best strength on the chart. Another is to simply line your portfolio with a mix of these commodities so that each can have their turn providing a lift to the bottom line of your portfolio. And finally for the seasoned trader, take advantage of gold spring selloffs by having some crude plays with those gold profits you take in the winter WHEN the trend changes.

The markets will not be an easy navigating area in 2010. One of the key elements we need to be on guard for is whether the markets will do the opposite of this market, the US dollar.

USD Trend

There has been a potential trend change in the US dollar and some believe will be the “surprise” trade of 2010. Whether that is a correct forecast or not will depend on many variables.
This is where we come in. Over the course of 2010 we will be forever assessing the trends and looking for great chart set-ups to take opportunity by the hand and to brave the adversity coming.

There is a great wisdom that is known by all the great traders and investors and it is this.

“If you do not take advantage of the 4 or 5 good rallies that occur during the year and ride them, then the rest of the market will eventually nibble your profits and account balances away.”

Stop by our website for our Free Gold Trends Trading Analysis

Regards
John Winston
www.TechnicalCommodityTrader.com

Over the course of the past three months, gold has taken the lead from the crude oil market is a normal autumn seasonal pattern. Granted, Oil held up longer than usual and gold rallied longer, but the seasonal trends are still playing.

Let’s look at the gold market first, as it has been front and center. A lot of investors shun gold but a hard look at the commodity market shows that it is one of the lesser volatile commodities. As far as a bubble goes, gold is nowhere near the price appreciations seen in other commodities like copper, sugar, cocoa, orange juice and a host of others.

Technical Trader

We can see that price highs are made in the Jan/February time frame on average, but in bull market legs, have been known to extend into the spring. The gold chart below shows that the mid February timeframe established the winter high, made a temporary low at the beginning of May and a secondary low in the July time frame.

On the other end of the spectrum, the September thru December time period is usually where the best appreciation is witnessed. For the most part, this is how gold behaved this year with the exception that the end of September and early November lows were only mild corrections as the bull leg was strong enough to make these seasonal pullbacks just dips on the chart.

In my August 19th Gold and Oil commentary, I made a case for a bull market rally in gold and targeted the ideal time to begin would be September. Two weeks after that update, gold launched into its best run in quite a while and has become a headline item even in the mainstream press. But what is the outlook going forward ?

Gold has now reached a timeframe where a December pullback is in effect. If things play out a temporary bottom should be seen in mid December or early January and another gold leg up would develop into the early winter. That has been the norm of late. Over the past three years, February has been a pivotal month for price peaks in gold. The seasonal chart above shows that January/February price highs can be important. The stronger the rally, the longer the seasonal extends. The 2007 price peak did not come until the month of May, exceeding the February price peak.

So where are we now in the rally?

First off we can see that the fall rally began right on time at the very beginning of September. We entered the September timeframe with gold just below the 950 area. Seasonal pullbacks occurred at months end in September and October. But the beginning of November bought on a major escalation in price once the 1070 area was taken out on the upside. Here’s what I had to say in our August 19th report regarding gold:

“Moves above the 975-985 area would greatly favor an upside breakout and moves above the 1075-1100 would be indicative that the next leg of the gold market has begun.”

Commodity Trader

From a price perspective gold has support at the 1100 dollar area (plus or minus 25 dollars) and at the bottom of our price channel at the 980-1050 area. All technical indicators confirm of gold’s pullback and if the seasonal tendencies continue to play out, gold should provide one more rally as we work our way into the winter months. The 50 day moving average has not been touched since late August and is due for a visit. This is where we get our first number of 1100 (plus or minus 20 dollars).
The lower black channel line is another area of interest on this chart. It has provided price support in each pullback during the 2009 season and is another area where a potential low might develop. We can see it provided the lows in May, July, Aug, and September. This confirms the importance of this channel line. Just under that channel is the 200 day moving average, a level that provided major support during the April timeframe this year. It currently stands at the 979 area. Coincidentally, it was near this area that the latest leg of this rally began. While that area seems far away we need to keep in mind that the current gold rally began over 13 months ago at the $680 price level. A medium term correction after a $540 dollar move wound be a reasonable expectation as well.

There are a few ways one could play it. First, if your short term oriented or looking for a spot to hop on board, the first area we mentioned, the 1075-1125 area (ideally the 50 day moving average) offers a potential opportunity for gold’s price to turn and would be ideal for a short term play and as it turns out, would put price right near the middle of the channel lines. For those looking to enter, one option is to take the first nibble at this first price area, and a secondary position could be taken should gold make it to the bottom of the channel line near the 1000 area. This would give gold two key areas to bottom in and would be less of a risk using this scale in method for new entrants who have been eager to participate.

The second area of interest is the 200 day moving average and the lower black price channel line on the gold chart above. If we add a plus or minus $25 dollars to this area, we would come up with the 950-1000 area where a potential gold bottom could form. Using the example above, this is where one might contemplate a secondary position.

From a technical perspective both of the areas we’ve mentioned is an important price point on the chart using various methods of calculations for price retracement and support areas. If one is trying to build an entry plan into this market the above EXAMPLE is an excellent way for one to plan and execute a simple entry strategy that has more than one entry point as part of the overall plan. I am not advocating you use the above example, but that you have a plan of your own rather than just enter anywhere on an emotional whim.

In order to be successful in the markets there is really only two things one needs to know. How to enter a market and when to exit one is the bottom line when the scores are tallied. If you have an entry plan, and an exit strategy, your chances of success will be much greater.

Gold Outlook

The 13 month old bull market in gold has an incredible $540 dollar run behind it a short time. This is significant when you consider that for all of history, gold was under $700 at one point last October. The best part of the seasonal run on average is behind us. But that is on average. In bull markets, gold has the tendency to run higher in the mid winter to early spring timeframe. The bullish fundamentals and news of nations and central banks buying gold, the short supply in the physical markets, the rumors of physical shortages at the exchanges, the debasement of paper currencies via the printing press, and the “LOSS OF CONFIDENCE” in world government provides a powerful incentive for potential price increases in gold.

What could derail the train?

It seems there is only one thing that has been able to affect the price of gold to the downside and that is the potential of a mass debt default. This observation is based solely on the fact that the 2008 global meltdown had a direct impact to the price of gold and so far, it seems that the Dubai situation has also coincided with a downdraft. That is not to say that investors wouldn’t flock to gold this time either. They very well might. Suffice to say that should further escalation begin to surface in the debt area, one should be aware of the potential implications for gold. On the bullish side, one can say this. Gold has been the only major financial instrument to make NEW highs since the last debt default.

On the upside……….

From a pure chart perspective in this report, the upper channel line on the gold chart at the 1250 area is an area where we should expect a significant resistance area. Should all the bullish fundamentals come into play and the perfect storm develops for gold, then the breakout above the 1250 area will be even more powerful than the one we saw when gold broke above the 1070 area recently and should provide another leg up into mid winter and or early spring.

On the downside………..

We’ve already pointed out the two key areas to watch (near the 50 and 200 day averages and the upper and lower black channel lines on the chart). Odds would favor that one of these two areas will provide a meaningful or at least a trading bottom for gold. A rally back up from the 50 day moving average that fails to exceed the upper black channel line at the 1250 area would leave the door open for more consolidation in gold’s price over the coming month. Failures at the 50 day average might provide impetus for a test of the lower boundaries of the channel.

The bottom line………..

From a seasonal standpoint, odds favor one more push up into mid winter. We feel the key area to watch price action is at the upper end of this channel line. A failure to move above the upper black channel line would provide the peak for this current leg and a correction into the spring would unfold. A move above this line would suggest the next bull move is underway and would prolong the gold rally into a later timeframe in 2010. We feel that the 1250-1325 is the most important price area over the next few months. Short termers should pay attention to the 50 day and longer term investors at the 200 day average and the lower black channel line. For seasonal players, some profits out of GOLD and INTO CRUDE OIL during the FEB/March timeframe is usually the ideal time for crude to take over the lead in price appreciation. And with that said, let’s look at the crude oil market.

In the seasonal chart below, we can see that the main area where crude oil usually bottoms is the FEB/MARCH time frame on Average. I suspect that all the calls for $100 dollar oil over the past few months has been temporarily delayed due to the seasonal tendencies of the crude oil market. Indeed, the current downdraft is playing right along with these aspects. We can see that coming up, there usually is a slight bounce in December to January, and from there, a major low into late winter. In a bull market, crude can and does sometimes bottom in December and the pullback in winter can at times provide a higher low. Purchases at the seasonal bottom have two key liquidation times on average, April/June and/or October/November.
The weakest part of the cycle as we can see is the October thru February timeframe, a timeframe we have now entered. (months are below this chart…contract month above.)

Commodity Trading

In the Crude oil market, the seasonal tendencies are much more pronounced and to some extent, the timeframes are more consistent.

The chart below of crude shows some interesting seasonal highlights from last year. First and most important is the seasonal low in December, the January bounce, and the final low at the end of February and beginning of March. This was a perfect seasonal move. From there an April move began to pullback, but the bullish action ran it higher into June and crude peaked very late. The seasonal chart calling for a July low was a very short 4 to 6 week affair. However, it did produce the seasonal July low right on time. From that point we rallied right to the end of October and peaked at the 82 dollar area right on the seasonal date for a turn. Since then we have dropped all the way to the 69 dollar area.

The end of December approaches and an initial low is due soon in crude. A look at the chart shows the 65-70 dollar area is a key spot where the 200 day moving average and the current daily trend channel lie. On the technical side, RSI is near the oversold area, and Williams %R is nearing that area as well. A longer term support area is the fat red line just above the 55 area on the chart. Odds suggest that a rally attempt should develop from this 65-70 dollar area. SHOULD OIL MOVE BELOW the 200 day average at$ 65, then the potential for a move below 60 towards the red support line will be a potential area for a late winter bottom.

Look for December or March to provide the lows in crude. March is a great time to trim a few gold profits and funnel them into the crude oil market.

Commodity ETF

These are interesting times for commodity investors and it is important to be looking at all aspects of the markets. Seasonals are so often overlooked, yet they provide a guideline for what to expect and when to expect it. At our website, we are following the seasonal trends of gold and oil always analyzing the price charts looking for low risk set-up trades and/or entries for our subscribers. We invite you to visit our site and have a look.

If you would like to recive my Free Technical Commodity Trader Reports visit my website:

John Winston
www.TechnicalCommodityTrader.com

October 23 2009

When you get right down to it, no matter what techniques one might rely on for his investment decisions there is one thing that they all have in common.  In order to be successful an investor has to be on the right side of the longer term trends.

We are all bombarded with daily charts and sometimes weekly, but looking at the long term monthly charts can reveal areas where price on the long term has historically shown to be important turning or continuation points.  Not only do they give you a perspective or where price has been in the past, it gives you an idea of where price is now in relation to where major peaks and bottoms occurred.

A great example of how a long term perspective can influence an investment or trading decision can be seen in the Corn chart below courtesy of Moore Research, Inc.  http://www.mrci.com/pdf/c.pdf

A quick look at the chart and we can see how the $4.00 area has been a major price turning point in the past.   Over the past 38 years, $4 dollars (with the exception of 1996) had been uncharted territory.

Corn CBOT

I’ve used this example because it is relevant right now as Corn futures are knocking on the $4 dollar area.  But now that we’ve seen a long term chart, we can see how significant this price area is to this commodity.   On the inverse, we can see historically that buying Corn at/near/or under $2 dollars a bushel over the past 38 years was buying when price was cheap.  Of course it’s not that easy buying 5000 bushels of corn and storing in your basement and trying to re-sell it a few years later.  However, I am using corn for illustrative purposes and we will look at the Crude, Natural Gas, and Gold markets after this exercise.  Having viewed the chart we can now see how the $4 dollar area is kind of like a pivot point going forward here.  Either it’s still a long term price point where corn will turn down or it has the potential to become a floor for long term price.  Armed with this knowledge one can at least formulate a decision making process for corn and better understand if the price fundamentals are about to change on a longer term basis.

Now we can also surmise the following after having viewed the monthly corn chart.  First, either corn is at or near a potential major peak in price or the long term fundamentals of supply/demand are changing.  And there’s a third possibility.  The US Dollar’s weakness is affecting the price of corn.  To elaborate on the third possibility, it seems that the commodity and financial markets has become a one way street.  For the most part, the stock and commodity markets all rally together when the dollar is dropping in value and the opposite when the dollar is rallying. During the latter part of this decade adding currency fluctuation into the analysis is a must.

This history of paper money is littered with great dynasties that have come and gone.  Even in the days of Rome, the beginning of the end could be seen in the amount of gold purity that was contained in their coins.  Near the end I read somewhere that the gold coins had less than 10% gold and substitutes like bronze was used in the making of the coins.

Over the 20^th century little by little the same thing has happened to the currency of the United States.  From the confiscation of gold during the great depression, the Bretton Woods agreement to finally Richard Nixon’s removal of the US Dollar from gold, the US Dollar has become nothing more than a piece of paper backed by nothing. On that fateful night Nixon was heard afterward to say “Now……….we are all Keynesians.” About 36 months later the stock market bottomed at 577 and over the next 40 years, would rise to a high of 14,000, gold would move from 35 to 1000 and crude oil from $5 to $150. (At their respective peaks).  And that brings us to the world we live in today.

The status of the American dollar from which the term “it’s as good as gold” comes from, has become a currency that has lost the credibility of the global world and while it is not being reported, a mass exodus is underway by the nations who are holding most of it.  Its rejection will bring profound changes to the wealth and power that the United States once commanded.  The pillars are being removed slowly and while no one has noticed that much, it will be obvious to all when the building finally comes crashing down.

Throughout this global debt crisis, each tool that has been wielded by the Federal Reserve has rendered no results.  At first, we were assured that the situation would be remedied, but we have to ask ourselves, what can the Fed do?  They have fired all of their bullets already.

Today besides other currencies, the world’s basic substitute for dollars is oil and gold.  There is already a move underfoot to no longer price oil in US Dollars, and when that happens, the power of the USA will greatly be usurped.

Since oil and gold play’s such an important part of our financial world and is at the center of headlines, let’s take a look at the long term charts to get a price perspective of where we are at.

First up we have the long term Crude Oil chart.  Recall the importance of the $4 dollar area for corn and we can see that Crude Oil has the same long term PIVOT point with the exception that it’s $40 dollars and not $4.   We can see how IMPORTANT the $40 dollar area is and we can ask the same questions as we did with Corn.

Crude Oil CBOT – NYM

We can see that the 1990 Desert storm spike was right at the 4 dollar area and was a hint of things to come.  Forty dollars has an important element to it as well.  Recall that we had a mini recession in 1991 about a year after oil had hit $40.  Now move over to the year 2000.  Notice we had a peak at $40 there as well.  Shortly after that, we were in a recession.  As a matter of fact, that recession ended not long after the 911 event.  Who in USA can’t forget George Bush telling us to all go out and spend money?

We can see that the collapse from the highs near 150 bottomed just below the 40 dollar area and interestingly we’ve been through the deepest recession in 80 years.  Now once again oil is moving higher but this time from basically the $40 dollar area.  Is $40 the new floor for gold as $20 was during the 80’s and 90’s?  Until proven otherwise, we think yes.   And if $40 is the new $20, is $80 the new $40?  That answer we should have soon as oil is making its second foray into the 80 level with new highs this past week.

The seasonal average for Crude usually peaks in this time frame and it is very possible that Crude could indeed pullback, but it will only do so if the US Dollar bottoms and begins to move up.  November is usually the strongest period for the US Dollar as well so it’s an important test.  In an average year, we probably would peak here and pullback to the 6o dollar area and form a low sometime in the January/February period.

You will notice that there are three channels that have been added to the price chart. Notice this latest consolidation over the past few months in oil has been bouncing off the bottom of that line at around the 65 dollar area.  Then over the past month, we’ve broken out of that range and price has just hurdled $80.

Of particular interest is the second red channel line on the chart.  This line goes all the way back to 1997 and if you look at the price action this line has provided resistance to price in 2005 and 2006.  Now if we look at the price spike of 2007 we can see that once this second red line was exceeded, we rallied to the 100 area and then to confirm the channel lines importance, price pulled back from 100 right back to the top of that trend line at about $85, and then for about three months price oscillated in that same range as oil bounced back to 100, and one more time down to 85 before liftoff to the 150 area.

Therefore, we can conclude that if the oil market is not peaking here and now and it still has legs, then the most likely price event would be for Crude Oil to climb to the 95-100 area and for price to touch that second red channel line on the chart again.

A final observation is that we can see how the lowest two channel lines have provided the highs and lows for crude oil since 1998 with the exception of the 2007 overshoot oil mania and the 2008 meltdown liquidation event.   And since the meltdown low was at the $40 dollar area, we believe that price is now the new floor for oil.  In fact, we think that price action will most likely follow between the two red bottom trend lines between now and February.  If this is the case, we should expect the highs to be in the 95-105 area and the pullbacks to be in the 68-75 area over the next 3 or 4 months.

This brings us to the currency situation affecting the global marketplace.  Up until recently, government debt and printing of money had been done in a somewhat orderly fashion, and for the most part the ravages of inflation were well masked with cheap labor from the developing nations.

But as in the last war (Vietnam) this war was to be no different.   Combined with the fact that USA has given its industrial base to China, the latest war on terror has proved to be a deficit killer.  The final straw of course was when the real estate market collapsed but the cracks and fissures had long been developing.  In fact shortly after the 911 event, when the USA reflated its markets that one final time, the commodity known as gold ended a 20 year bear market and bottomed at the 250 dollar level.

GOld CBOT – CMX

The long term view of Gold shows that as $4 dollars is to corn, and $40 dollars is to gold, the chart above suggests that the $700 dollar area is most probably the PIVOT point for gold.  We can see that although 1980 did have a spike to $875, the chart reveals that 700 (or just slightly above it) was where the price rise was really contained.  The 2006 high was also at 700 and spent almost a year and a half bouncing off that area before it blasted thru to 1000.  Finally, the subsequent 2008 meltdown low was right at the $700 dollar area.  We think the weight of the evidence suggests that $700 is indeed the new pivot.

From this chart we can see that gold’s price has been trading in its second channel from the top and like crude’s drop below its channel to its $40 dollar pivot point, gold’s drop during the same meltdown pierced its channel and dropped all the way to $700, its pivot point.  The subsequent bounce back into its channel for the past 12 months is now reaching the upper boundary of its channel line.  That line is pointing to the 1100 dollar area in the October/November time frame.  Like Crude, Gold is also due for a seasonal pullback at this time of the year.  Therefore we should be cautious when gold reaches the 1100-1150 area should that price level be realized over the next 2-4 weeks.

Now with that said, the question arises as to whether gold could break above that channel line.  Usually channel lines, when broken, are the result of price having tested and bounced off it for a period of time.  In this case, while there have been no price hits on this channel, we see that the highs of 2008 were very close to touching that line.  And the latest bar on the chart is also very close to touching that channel.

Sometimes there are price spikes that develop at these price points.  The 1980 high is one example.  But more to the point, 1983 and 2006 witnessed spikes above the red channel line.   The potential for gold to do the same on this current rally is a strong possibility as well.  The most incredible thing about gold is that it is the only well known commodity to be making NEW HIGHS since the meltdown.

It is an amazing thing that less than 2% of the population own form of gold.  In fact, Doug Casey’s work shows that there is only about 1 ounce of the metal available for each person on earth.

That leads to the next question, how much paper money is there on earth?  At last look in 2008, it was estimated that there would be about $3000 per person on earth should it be divided up equally.  Now there are a lot more complex ways to arrive at what price of gold should be, but even in this simple method it shows that equally speaking, the price of gold should be at least $3000 per ounce.

So what conclusions should we draw from the chart?  First, gold is in a major bull market, it is currently the LEADING market of the world making new historic price highs and appreciating at about a 30% clip per year over this decade.    We can see that a price high in the 1100 (and possibly 1200 on a spike) could coincide with an autumn pullback that usually develops around this time period along with Crude.

The US Dollar as we have mentioned is the wild card that gets thrown into the mix.

USD – US Dollar

The US Dollar’s pivot point seems to be the 80 area.   As you can see, it always provided a support area until interest rates fell to almost zero in order to try and restimulate the US economy over the last few years.   Overall however, we can see that the dollar has a down trending channel that it is following long term.  We can see that while gold and crude are making their way to the next upper trend line, the US Dollar is making its way to the lower trend line.  And this comes at a time when the Dollar enters its usual seasonal rally.

Finally, let’s look at one more chart.  Natural Gas.

Natural Gas – NYM

We list this chart because we have recently made a major low in this energy commodity.  The recent low near $2 dollars was at the low PIVOT point price.  I’ve also highlighted the high PIVOT point on this long term chart, the $10 – $11 dollar area.

During the month of September, Natural Gas made a major low and a spike to the $5 dollar area brings us to the first trend line on the price chart.  We see that beyond this area, the $8 dollar area is the next trend line that price projects.  For those of you watching the Natural Gas market, think of how more confident you might have been in purchasing a Natural Gas investment had you seen where price was on the long term chart.  But if you look closely at the chart, you will see that every time we have ever hit this trend line, price has always BOUNCED off it twice.  In 94-95 there was a double bounce.  The 98-99 low had a double bounce and finally the 01-02 had a double bounce.  If history is any guide, the odds suggest we will get a retest of this area once in 2010 and a long term low will probably be established.  Armed with this knowledge, the next time Natural Gas gets anywhere below the $3 dollar level, buy with both arms.

Now that we’ve looked at the long term charts we can draw some probable conclusions

The Crude Oil market seems to have a new pivot low price of $40 dollars.  It is in a price channel that projects the range to be in the 65-100 dollar area.  The current rally on the monthly charts projects a rally to the 95-100 dollar area.

The Gold market seems to have a long term pivot price of $700 dollars.  It is in a price channel that projects the range to be in the 910-1100 area .  The current rally on the monthly charts projects a rally to the 1100-1150 area.

The Natural Gas market seems to have a long term pivot low price of just above the $2 dollar area.  It is in a price channel that projects the range to be in the 2-5 dollar area.  The current rally on the monthly charts projects a pullback to the pivot line one more time before a long term rally gets underway.

Now that we have the long term price perspectives, we can better focus on our medium and shorter term perspectives.  But those timeframes all have their own support and resistance channel lines and their respective up and down trends within these longer term channels.  If you have an interest in following the trends of these commodities and getting some advice when great set-ups with low risk entries occur, we invite you to visit our website

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By: John Winston