Like any paradigm, this one works until it doesn't. So even if I'm right and gold weakens off, this doesn't mean that it doesn't rally higher in the future. Frankly I've got two scenarios in which gold drops in value - one in which 1007 is the (B) wave it corrects from, and the other in which 1033 (futures contract that I chart) is a higher-level "B" wave that would theoretically see an even bigger correction. Not advocating this latter view - but it is something I see in the charts so naturally it concerns me for the longer term.
What about stocks? Apparently many indices show on their weekly charts that they've bumped up against Tom DeMark Setup Trend resistance lines and bounced back down (more info on Tom DeMark's indicators here and of course at TomDeMark.com.) And other analysts are noticing more technical signs of the equities market rally losing steam. After we had already pointed out the Fibonacci levels that equities reacted to a week and a half ago, with the McClellan Oscillator going under the zero line a couple of days ago, There are others blogging about technical red flags. For example, at the blogs of Stockcharts.com, check out these:
MARKET FAILS TEST OF JANUARY HIGH - by the veteran analyst John Murphy at the ChartWatchers blog. Below is just one of his chart from his set of commentaries and charts. (Note - like others, he's talking about an idea for indices to drop to the 50-day moving average as a possible right shoulder for a bullish reverse head & shoulders setup. So he's actually couching it in terms of a pullback that would point to higher rally levels.)
Also:
DOW HITS RESISTANCE - from the ChartWatchers blog
10-Year Treasury Yield Hits Resistance - from the Don't Ignore This Chart! blog
And here's an excellent chart from Andy Askey included with his post Low Volume Pullback to 20 Day Moving Average (5/14/09) at his PTV-Investing Blog, commenting that a pullback to the 50-day moving average would also be about a 50% retracement from the lows. That point neatly ties it all together with Tony Caldaro's looking for a wave B down, as Tony has stated that B waves often (not always, but often) retrace 50% back to their origin.
While we're waiting listening to Raymond Merriman's advice to focus short term and "be happy" (hey, that's never bad advice!), we need to work on being flexible about what the bigger-picture, long term might bring. And not get locked into any one view for where stocks will go after any pullback, especially until there's more clarity about whether deflation or inflation will get the upper hand.
So, is it "necessary" that inflation is the only way stocks can go up now? Well, I won't pretend to be a fundamentals analyst talking head, but that earnings chart from Chart of the Day makes one tilt to that idea, even with that chart being stated in "inflation-adjusted" terms (after all, the Dow-Gold ratio chart hasn't seen the Dow fall commensurately so that's one proxy for thinking that p/e ratios are still relatively high). One comment posted here recently remarked that if earnings go negative, they'll have to adjust the charts - LOL! and that won't be the only type of adjustment happening, will it!
I've posted my $GOLD charts plenty enough here, so let's look at a slightly different index, the $HUI "Gold Bugs Index". I looked at it many months ago, sometime in the fall of 2008. Back at that time, I objected to some of my bullish-gold trading buddies that it looked like $HUI had made an initial drop down from a bearish wedge, diagonal triangle on the daily/weekly chart. The real problem being of course, that once the initial drop retraces a wedge like that, and then makes its bounce, it's vulnerable to another big drop down. Because typically an Elliott Wave diagonal signals that the wedge-shaped wave also completed a larger wave movement. Therefore, the new trend is most likely to the downside for a larger and much deeper correction. Well, check out the monthly chart of $HUI below. The wedge I'd been looking at was just during 2008, but it actually does look like it was the 5th wave completing an entire five-wave movement from late in the year 2000. I've marked the Elliott Wave count as I'm viewing it most likely, including the recent rally as possibly completing a "b" wave up that retraced a Fibonacci 50% of the drop (i.e., just above $334). Notice also, this rally carried it back up to the level where that diagonal had started - a possible re-test of this level.
This chart is a monthly chart so it might be difficult to pick out that 5th wave diagonal, but you can see the bigger picture that I think looks bearish. However, I did mark some alternative views onto the chart in case HUI does something different. But the fifth wave looking like a diagonal wedge causes me to lean toward a more bearish interpretation that has the Gold Bugs Index moving down. If the first drop that I marked as "a" would be even more bearish as a wave 1 down, then the subsequent rally could even carry higher to the .618 retrace to the peak, before seeing another wave down. Given the general chart position however, I don't really expect to see it moving above its Bollinger Band midline on the monthly chart unless it's moving to a more bullish formation instead. We'll evaluate those probabilities if it does move above that midline.
Fundamentally speaking - I also saw another interview on Bloomberg TV, one of a fellow running a company called International Monetary Systems (or "IMS" - wonder if they'll be able to keep that name?). It seems to be a monetary alternative actually, or a sort of electronic money system, that enables bartering transactions especially assisting business-to-business transactions. I know I've mentioned that I view this type of electronically-enabled exchange as being a potentially bearish factor for gold (and probably equities) in this economic environment. This just adds to my interest in following the gold and gold-related charts.
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