Sunday, August 2, 2009

Broadening Top in Stocks?

As I believe we are likely to be near the end of this bear market rally from the fall 2008 and March 2009 lows, I admit to looking for chart patterns to support this belief. Because I believe in technical analysis only as a method to support fundamental underpinnings, I really cannot conceive of a new bull market in stocks unless we are going to bypass the needed deflation and head into hyperinflation right here and right now. I find this premise unreasonable at this point in the deleveraging cycle, but own a large core position of physical Gold as my cash equivalent and thus wouldn't suffer if such a scenario were to play out.

My current Elliott Wave count varies slightly from people much better than me at this stuff (like Robert Prechter) but to me it looks like a broadening top could be forming in some of the large US stock market indices like the S&P 500. This is a termination pattern that suggests a reversal is near. The broadening top technical pattern is also akin to a megaphone or reverse expanding triangle pattern. Here's what I am seeing:

We are currently significantly overbought for the short-term in general stocks, but the strong momentum indicated by the RSI suggests that the current upward thrust, once a short-term correction occurs, is likely to be followed by a re-test of the highs to set up a momentum divergence. I think the area of wave 4 on the chart above, 1010-1040, should be the limiting upside target range for the S&P 500.

Once the top is in later this summer or in early fall, a massive leg down in general stocks, corporate bonds and commodities will occur and result in new lows below the fall 2008 and March 2009 lows in these asset classes. The US Dollar will rise during this time frame and I believe the nominal price of Gold will rise along with it. I expect Gold to outperform the US Dollar during this period, as all fiat currencies are sinking relative to real debt-free money.

Just for fun, here's a broadening top example from recent history in everyone's favorite company, Goldmun Sucks:

Wikinvest Wire