-- Posted Sunday, 20 August 2006 | Digg This Article
By Jack Chan at www.simplyprofits.org
8/19/2006
In my last special report dated 7/29, I said, “Those in cash remain patient, wait for signals and set ups, and be prepared to be whipsawed a few more times if the signals occur before the major breakout. Conservative folks can simply sit it out until BO#4, you may end up buying higher but it will more than make up for the potential whipsaws short term traders are likely to suffer over the next few weeks.”
Well, for someone who cannot predict the future, I did pretty good. Whipsaws is exactly what we’ve had in the past few weeks.
Our breakout model is still waiting for BO #4.
Stepping back and looking at the $HUI, except for the spike up in April, the gold sector has been pretty much stuck within a 10% range all this year, frustrating both the bulls and bears. The head & shoulder topping pattern has not been negated despite a strong bounce recently.
Gold bulls have been anticipating a contraction on the ratio between the Dow and gold, and most expect this ratio to return to a single digit, because it has happened before, meaning a four digit gold price and a four digit for Dow. So far, the ratio has contracted from a high of 42 in 1999 to a recent low of 17, while a bullish divergence has been developing since 2003. As long as the low of 17 is not exceeded to the downside, we could see the ratio expand once again based on the bullish divergence. And that means the Dow will outperform gold, as sector rotation begins to favor growth stocks over resource stocks once again. This is a total contrast to current general consensus that the resource stocks are just warming up while growth stocks are about to collapse. What do you see?
Another piece of evidence that the commodity bull cycle may be ending is the long term CRB chart. For the first time since the commodity bull began in 2001, we have a MACD sell signal, while prices are threatening to break the five year uptrend. One thing for sure: this is not an ideal time to be investing in resource stocks, not until after a major correction anyways. This long term CRB chart is a stark contrast to the general consensus that the commodity bull is still in its infancy. You make the call!
The four year cycle on growth stocks seem to confirm that we may be returning to the “inversed” relationship between growth stocks and resource stocks, and most market participants may not be even aware of this until the trend is firmly established a few months from now. A special report on this four year cycle is available to subscribers only.
A reminder that we trade our signals and set ups, not our analysis.
-- Posted Sunday, 20 August 2006 | Digg This Article
