Charts created using Omega TradeStation 2000i.Chart data supplied by Dial Data
I confess. This was a new one on me. I had never heard of a “Bullhorn” pattern. I saw it mentioned first in a weekly article from a gentleman who writes under the moniker of “Thirdeyeopentrades”. “Thirdeyeopentrades” appears to be someone by the name of Robert Cote although I have been unable to find a website. As to the “Bullhorn” pattern, I have not been able to find such a technical pattern in any of the books on “Technical Analysis” that I own nor was I able to find it via “Google”.
This is not to diminish what appears to be a potentially powerful bull pattern. There is a pattern known as the “Megaphone” pattern or broadening top. It is a rare pattern. The Dow Jones Industrials (DJI) appears to be forming a “Megaphone” pattern. However, what appears as a top can also be a huge five point consolidation pattern. Later on in this article, I will show the DJI “Megaphone” pattern.
First the “Bullhorn” pattern. I don’t know whether this might qualify as a new technical pattern but it certainly is potentially compelling. This is a logarithmic chart so I do note it only appears on a log chart. Both gold and silver are exhibiting a bullhorn pattern. I have labeled it according to cycles described by the Aden Sisters www.adenforecast.com. Mary Ann and Pamela Aden write a monthly investment letter known as “The Aden Forecast”.
The Aden gold cycles can be described as follows. It was also described in the August 2013 “Thirdeyeopentrades” newsletter.
-An A wave rise.
-A B wave decline that could retrace a Fibonacci 38-50% of the A wave rise.
-A C wave rise that is the longest of the up moves.
-A D wave decline that could be a strong decline but ultimately holds above the previous B wave decline.
If the cycle is correct then the A wave rise could take gold up to that downtrend line from the September 2011 top. That line is currently near $1,680. This would not be dissimilar to what happened in 2008-2009 that after gold bottomed at $681 it rose until March 2009 to $1,005, which was close to the March 2008 high of $1,014. Gold then consolidated for a number of months (the B wave decline) before it began its C wave ascent. The A wave rise was 47.5% off the previous D wave decline. A similar rise this time could in theory take gold to almost $1,750. However, the downtrend line from the September 2011 top appears to be more likely. At that point, Gold could consolidate forming what might be a large head and shoulders bottom.
If a large H&S bottom formed on gold then once it broke through the downtrend line from the September 2011 top the potential objective could be up to $2,400. In looking at the expanding “bullhorn”, the top of the C wave could potentially go over $3,000.
So how long could it take to play the next A, B, C, D cycle out? Since a possible D wave bottom in February 2001, there have been 4 cycles. These 4 cycles measured from the previous D wave bottom to the next C wave top have been respectively approximately 2 years, 3 years, 2 years and 3 years. So could the next C wave top be seen within 2 years or sometime in 2015? What should follow is a nasty D wave decline. I confess I didn’t see this last nasty D wave decline coming but I will be ready for the next one and hopefully we can all benefit from the next C wave rise.
Charts created using Omega TradeStation 2000i.Chart data supplied by Dial Data
Silver is exhibiting a similar pattern. The A wave rise could take us potentially up to trendline currently near $35. At that point, the B wave consolidation could take place. This could also form a potential head and shoulders bottom pattern. Once the pattern broke to the upside, potential objectives for silver could be as high as $53. If silver were to go to the top of its expanding “bullhorn” in theory the C wave rise for silver could rise to over $100. This is not as improbable as it sounds. If silver were to reach the inflation-adjusted top of January 1980 of $50 silver would today have to reach almost $140. Gold’s inflation adjusted high of $850 in 1980 is today near $2,400.
The DJI is exhibiting what might be a rare “Megaphone” pattern or broadening top.The “Megaphone” pattern is a series of higher highs and lower lows. This is the opposite of a symmetrical triangle that makes a series of lower highs and higher lows. If it is a top pattern as many technical analysts purport then when the pattern completes it falls through the bottom of trendline connecting the lower lows. The thought of the DJI falling below 6,000 and objectives down to…well…let’s just say zero isn’t enough.
Since zero is highly unlikely (but 6,000 is not impossible) then more likely the “Megaphone” pattern could like a symmetrical triangle be a huge consolidation pattern. This suggests that once this D wave is complete the DJI could fall in an E wave decline to the 6,000 zone and the bottom of the “Megaphone”. Once that low is in then the DJI could embark on its next bull market to the upside. This could take one or two years to play out depending on when the top occurs. Cycles indicate that there is the potential for an important long-term cyclical low around 2016. The DJI still has room to move higher within the current “Megaphone” pattern.
The DJI chart is below.
Charts created using Omega TradeStation 2000i.Chart data supplied by Dial Data
Charts created using Omega TradeStation 2000i.Chart data supplied by Dial Data
Bonds are exhibiting a different pattern. Bonds as measured here by the CBOE 10 year Treasury note have broken out of what appears to be a head and shoulders bottom pattern. The pattern has minimum potential objectives up to 3.18%. The 10-year Treasury note is already up to 2.81% so it may not have much further to go. One reason that the Fed may have to continue its bond purchase program known as QE is that China in particular and even Japan are trying to get out of their huge holdings of US Treasuries. Someone has to buy them and at the end of the day, the Fed is the buyer of last resort.
Can the Fed afford to “taper”? The answer here says no. Why? Because the stock market would fall and bond yields would rise further. That is not what the Fed wants. Rising interest rates are already a cause for concern in the bond market particularly the huge interest rate swap market that dwarfs the bond market in size. There are rumours of hedge funds and banks being stressed by the current rise in interest rates. Clever accounting has allowed the large money center banks in the US (and Europe) to cover up the bad debt on their books.
As well, the large international banks are being required to raise their capital levels to comply with new Bank for International Settlement (BIS) regulations. That means either getting rid of assets or raising more capital. The international banks remain under a lot of pressure with fragile balance sheets. Since the financial crisis of 2008, the banks have continued to delay or obfuscate the problems that caused the financial collapse in the first place.
Finally, one has to be concerned about the Fed itself. The Fed only has $55 billion in capital. Against that they hold about $3.6 trillion in US Treasury bills, notes and bonds, and, mortgage backed securities. With interest rates rising it wouldn’t take a large rise to effectively wipe out the Fed’s capital. The Fed cannot exit its position in bonds. Who are they going to sell to? All they can do is continue to expand their balance sheet (and the monetary base) by continuing to buy securities from the financial institutions who themselves have stressed balance sheets.
Since the financial crisis of 2008 there has been QE1, QE2, operation twist and QE3 (although some say there has also been QE4). Each round of QE has been in response to drop in the stock market. Now the Fed has a stock market that could fall as well as bond prices currently falling which in turn could nip any economic recovery in the bud.
Taper? Not likely. Meanwhile gold and silver could be in the early throes of their next strong move to the upside. Does gold smell a crisis in the making?
Copyright 2013 All Rights Reserved David Chapman
General disclosures
The information and opinions contained in this report were prepared by MGI Securities. MGI Securities is owned by Jovian Capital Corporation (‘Jovian’) and its employees. Jovian is a TSX Exchange listed company and as such, MGI Securities is an affiliate of Jovian. The opinions, estimates and projections contained in this report are those of MGI Securities as of the date of this report and are subject to change without notice. MGI Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, MGI Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to MGI Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company.
Definitions
“Technical Strategist” means any partner, director, officer, employee or agent of MGI Securities who is held out to the public as a strategist or whose responsibilities to MGI Securities include the preparation of any written technical market report for distribution to clients or prospective clients of MGI Securities which does not include a recommendation with respect to a security.
“Technical Market Report” means any written or electronic communication that MGI Securities has distributed or will distribute to its clients or the general public, which contains a strategist’s comments concerning current market technical indicators.
Conflicts of Interest
The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of MGI Securities, which may include the profitability of investment banking and related services. In the normal course of its business, MGI Securities may provide financial advisory services for issuers. MGI Securities will include any further issuer related disclosures as needed.
Technical Strategists Certification
Each MGI Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist’s personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist’s compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report.
Technical Strategists Trading
MGI Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein.
Dissemination of Reports
MGI Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm’s technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the MGI Securities website and davidchapman.com.
For Canadian Residents: This report has been approved by MGI Securities which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of MGI Securities in their particular jurisdiction where their IA is licensed.
For US Residents: This report is not intended for distribution in the United States.
Intellectual Property Notice
The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by MGI Securities or the party credited as the provider of the information.
Regulatory
MGI SECURIITES is a member of the Canadian Investor Protection Fund (‘CIPF’) and the Investment Industry Regulatory Organization of Canada (‘IIROC’).
Copyright
All rights reserved. All material presented in this document may not be reproduced in whole or in part, or further published or distributed or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of MGI Securities Inc.
The content on this site is protected
by U.S. and international copyright laws and is the property of GoldSeek.com
and/or the providers of the content under license. By "content" we mean any
information, mode of expression, or other materials and services found on GoldSeek.com.
This includes editorials, news, our writings, graphics, and any and all other
features found on the site. Please contact
us for any further information.
Live GoldSeek Visitor Map | Disclaimer
The views contained here may not represent the views of GoldSeek.com, Gold Seek LLC, its affiliates or advertisers. GoldSeek.com, Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy
or completeness of the information (including news, editorials, prices, statistics,
analyses and the like) provided through its service. Any copying, reproduction
and/or redistribution of any of the documents, data, content or materials contained
on or within this website, without the express written consent of GoldSeek.com, Gold Seek LLC,
is strictly prohibited. In no event shall GoldSeek.com, Gold Seek LLC or its affiliates be
liable to any person for any decision made or action taken in reliance upon
the information provided herein.
