Wednesday, March 26, 2014

Wanted to pass this along, "The 64 month bubble pattern"

I read this on 321gold this morning.  It's called "The 64 month bubble pattern" by David Nichols.  There are some interesting correlations to the market today.  I 100% believe that the Fed KNOWS stocks are in a bubble and are "Tapering" as fast as possible without creating a panic to deflate it a bit, or at least stop it from going up at a meteoric rise.  Of course they will fail, and we will likely see a crash that is met by the Fed INCREASING quantitative easing once again.  This article has an interesting analysis and the charts go right hand in hand with the "Psychology of a bubble" chart I posted earlier.  Give it a read, it might save you from disaster.

-Jonathan M Mergott

Friday, March 21, 2014

My Analysis on Bitcoin

Every so often someone comes around with a new and brilliant idea (that is really nothing more than an old idea revisited); to attempt to create money out of nothing.  Bitcoin is the latest version of this.  Now for those of you who still don't know what bitcoin is I will explain it in very simplistic terms, because if you haven't heard of it by now, it might be a bit over your head anyway.  Bitcoin is an attempt at a digital currency that can be spent the same as you use your credit card on or when you use Paypal.  It can be transferred to different accounts, Physical form paper certificates can be delivered to you much like stock.  It is able to do everything you can essentially do with cash and credit.  The added bonus is, it is an alternative to the printed into oblivion US dollar, and it also has no user information attached to the accounts, so you can hold bitcoins in an account without anyone knowing who you are.  The currency increases in quantity at a set rate for a few years where it then will not have anymore ever existing so there is never a risk of hyper inflation.

Sounds pretty cool right?  Just about everything one could ask for in a alternative to the declining USD right?  Except there is still one unanswered question...What is it?  Tangibly?  What is this thing and what about it makes it money?  The answer is, it's computer code.  A complicated algorithm.  The code makes up the program which is in essence what bitcoin is.  For those who don't know what computer code is, here is an example-

And there you have it.  That is money.  Not buying into that theory?  Yeah, me neither.   ("Get your tulip bulbs here, Come one, come all!")  And that's all it is, tulip bulbs.  At the height of the tulip bulb bubble, you could buy some nice real estate for a few choice bulbs or a handful of less than choice bulbs.  Right when a Ferrari dealership announced it has accepted bitcoin as payment for a Ferrari, that was about the highest it ever went, to about $1,200 a bitcoin.  From a technical standpoint, the chart of bitcoin has followed to a "T" the pattern of every bubble in history.  Below is a very well done chart that specifies the steps that make up the psychology of a bubble from the time it begins to the time it collapses.
 The first stage is when the smart money identifies a good buy and begins to get in.  The next stage is when the hedge funds begin to make it there hot new thing and pile in.  Then, those said hedge fund managers go on CNBC and talk their book on how great this company they bought is.  Then, after hearing about it so much, you begin to buy it.  Then your cousin said he's buying some.  Then your neighbor.  Next thing you know, your taxi driver who knows nothing about investing is checking the quotes on a min by min basis.  Then the smart money bails, and things begin to crack.  But don't fear, this sharp move down is a great buying opportunity!  And it will be, for a day or two, but then it fails to get as high as it previously did.  Then it begins to slip.  And then it slips faster.  Now people start panicking, but most still don't sell, because price is already below what they paid for it and they want to wait till it goes back to even.  Now the smart money has started a waterfall because there is no one left who hasn't bought to purchase the shares they are selling.  The hedge funds, are at least smart enough to know a waterfall when they see one and to know that this is not how an asset acts when it is in a bull mode, so clearly it is not anymore and they get out too.  Again, with no one to sell to, causing utter capitulation.  When you've lost 80% of your money and your absolutely freaking out, that's when you will sell, vowing to never touch that asset ever again... (And that's when it will rally strongly)  Just as markets go higher than they should at times, they over compensate as well but will ultimately find its mean.

Now the next chart is the Nasdaq bubble.  Notice every move is exactly like the text book model, from the first bear trap, to the failure to re-reach the old high, to the collapse, and then the doubling of price from the bottom. 
Now look at the chart of bitcoin...
This 50% whack it's had from the high of $1200 to the current price near $600 is far from over. You can see 2 spike lows to $400 that occurred that bounced up and are holding so far. Now look back up at the Nasdaq chart. It did the same thing at $3,000 then broke below and went to $1000. As these two Moving Avgs cross over, I believe we will see this thing start to break wide open. Ultimately I expect price to settle somewhere back at $100.

Now, in conclusion, I want to be clear about my thoughts here on bitcoin:

1. Bitcoin is not the new Gold, or the new dollar. It is based on nothing tangible whatsoever, and it has absolutely no fundamentals.
2. Bitcoin is not a buying opportunity here, or probably anytime in the near future.
3. Whether it be bitcoin or something else, the CONCEPT of a digital currency is not going to go away. Why? The banks LOVE it! Think about it, if there is no paper dollars that exist, there is no need in times of panic to parade the armored trucks around bringing piles of money into the vaults to calm depositors fears that they won't be able to get there money out. In short, in a digital currency world, with no paper to withdraw, there can NEVER be a bank run. Therefore, the ONLY major threat a bank can ever have (Lack of liquidity) essentially will never happen.  

When it's all said and done I believe the future of currency MUST be a return to gold in some way shape or form. But I also believe, given the overall weakness of the Western world's fiscal and monetary status, we will in some way shape or form tie ourselves to the hip with the rest of the western world, knowing that the demise of one equals the demise of all. And I also believe every effort will be made to make a digital currency, so all transactions can be tracked, all wealth and assets can be accounted for and have taxes paid on, and so there will never be a need for the banks to have to panic over capital. These 3 things together would mean a world currency balanced by various western currencies, some gold for stability, possibly real estate as well or other commodity assets, and to make it digital so it is not exchangeable in any other form, or able to be withdrawn from the system. This leads into the final thought...
4. Bitcoin will be a buy if and when it reaches near $100. Buying the Nasdaq after the collapse allowed you to double your money from 1,250 at the bottom to 2,500 in less than 2 years.

"King Dollar" is dead. It was from the first second it was no longer exchangeable for gold. Gold wears the crown, simple as that. You can try and call money jelly beans, or tulip bulbs, or computer code if you'd like, and maybe you'll find some fools who will join you for a fleeting moment, but at the end of the day, and since the beginning of time, "Money is Gold and Silver, everything else is credit". And that's not my opinion, that's Mr. J.P. Morgan himself's.

-Jonathan M Mergott

Monday, March 17, 2014

Gold and it's 2 years of abuse.

August of 2011 saw gold reach $1900/oz and from there it has been all down hill.  Gold and Gold miners got taken to the woodshed.  Miners lost 75-90% of there value and some have gone bankrupt.  But as the dust settles where do we go from here?

Gold itself has made a nice double bottom at the 1180-1200 region right around this past Christmas.  This formation has been holding so far and price has rallied up to just south of 1400 now, making Gold the best performing asset class of 2014 so far.   Now, let me tell you what I SEE, and then I will tell you what I THINK.

Near the end of February, Gold hit 1340 while silver hit 22 and the GDXJ hit 44.  In the 3 or so weeks that followed, Gold has risen to a high of 1390, Silver has FALLEN to 21.20 and the GDXJ is now at 41, after breaking higher up to 46 last week than losing it all.  This is not normal or good action for Silver and the miners.  In a strong bull move, we should see silver outperform gold, and the miners lead and outperform both metals.  The fact that there is a divergence like this tells me a number of things.  First, Gold is still safe haven asset class numero uno.  The money finds, and likes gold the most.  Second, the constant "drifting higher" of Gold is telling me that the majority of this move is mostly short covering, and therefore not sustainable.  As the people who got caught with their pants down rush to cover the positions that have left them vulnerable, unless we see them open new longs as well, (Which we are not seeing in any sizable amount) Then this rally will have an expiration date.   The more price conscious Asian buyers that began this rally are looking at a move higher of $200 dollars in 2 1/2 months and are not going to chase this higher.

Buying is looking like it is drying up as gold has fallen back to $1340 and silver is sitting just under $21.  It has been a nice rally, and the miners particularly as judged by the GDXJ, have risen to a high of 46 from a low of 28 at Christmas time.  That about a 65% profit.  Any weaker longs that have been getting massacred  might see this as there breath of fresh air to finally get out.  After 2 years of going down and down, this market is not going to turn on its head and just start going up and up.  No.  After a 65% move higher in the miners, the Bulls conviction needs to be tested.  Where will they come in and buy?  If they begin to see value and enter the market at a higher price than they previously did at sub 30/share, now you have a higher low and possibly the beginnings of a new bull move.  Now, our major support and resistance zones for the GDXJ are at 50 and 35.  There is no reason to think that we wont drift up to 50, the charts look good as far as I can see, I just personally believe that's a tall order to bet on, and it leaves you a hell of a lot of downside risk with only a couple points profit above you, so I wouldn't recommend buying at this level.  Notice the support/resistance zones on the GDXJ on the chart below.

Notice how there is minor resistance where we are here at 45, but the Major areas we are bouncing off of are 50 and 35.  I believe we will either cease moving higher now and move to test the 35 level, or we drift higher to about 50 and move lower from there to test the 35 level a week or so later.  I have highlighted a few key points on the chart above.  First we can see at the top that RSI has been drifting lower as price moved higher, this is negative divergence and could spell out a correction coming.  Secondly, we can see that the 10 day MA is about to cross below the 20 day MA.  I use EMA in the 10 and 20 settings to get a cleaner look at buy and sell points.  When the 10 day crosses above the 20, stay long until the 10 crosses back below it and price falls below both Moving Avgs, And vice versa.  Notice that simple method would have been very profitable from both sides of the market on the GDXJ in the past year.  Thirdly, I am using what is called a Heiki-Ashi chart.  To explain what the difference between this and traditional candle sticks would take forever so lets just say this, it uses an avg of the current period to again, smooth out the noise in the market so you can hear whats going on.  The result as you can see, is that when price is moving down, all candle sticks are red.  When there begins to show some white candles for a few days, typically that means the decline has halted, and you can now look for a buy signal to get in.  When the move higher halts and the candles begin turning red again, look for your sell signal to get out.  This has been a simple yet effective strategy so far.  

As you can see the breakout higher on the GDXJ was rejected.  The candles have now been red for a few days and looks to possibly break support near 40.  MACD is trailing lower and getting close to the zero line.  Stochastics looks similar to RSI, trailing lower.  Likely we will see the Moving avgs cross down lower, support at 40 break, MACD cross below the zero line, and Stochastics go oversold all at once.  That will be a very accurate signal that we are headed lower. The 34-36 area, (We can call it 35) is the strongest support.  Regardless of what level we go to, look for a strong move from the bulls at support as we dip.  That will probably be the area you want to buy into.  The chart below is how I think this will play out over the course of 2014.

If this prediction is accurate, being able to get in at 35 on this pullback will double your money by the year end as this massive inverse Head and Shoulders bottom breaks out.  I believe this is indeed the final bottom.  The mother of all bottoms.  We are getting ready to soar, but be patient.  The damage done over the last 2 years will take a while before it begins to correct.  Accumulate long term positions on the pullbacks and look for the signals I explained for clear entry and exit points

-Jonathan M Mergott