Anthony Cherniawski

The Practical Investor, LLC

March 16, 2010

The picture above is a basic outline of the broadening top formation as described by John J. Murphy in his book, “Technical Analysis of the Futures Markets,”(pp. 150-152) published in 1986.

He summarizes, “First of all, the broadening formation is a relatively rare pattern.  When it does appear, however, it’s usually at an important market top.  It looks like an expanding triangle with three successively higher peaks and two declining troughs.  The wider price swings are accompanied by gradually increased trading activity.  The resolution of the formation is signaled by the violation of the second low (point 4) after the completion of the third peak (point 5).”

While John compares the broadening formation as a triangle in reverse, I would like to compare it as the inverse of an ending diagonal or wedge formation.  While some broadening formations have a horizontal axis, many have a diagonal axis and fall in the same category.  It is the opposite of a diagonal pattern where volume diminishes as the pattern develops.  In this case, the volume tends to expand with each price swing, giving the appearance of market support for each breakout.  Traders get the surprise of their lives when the market promptly reverses in the other direction.  John Murphy says, “This situation represents a market that is out of control and unusually emotional.”

Let’s look at the major indices to see how this pattern has developed.

What may come as a surprise to many, there are two probable broadening formations in the Industrials.  I call them the parent fractal and the child fractal, an extension of the parent.  The numbers are meant to correspond with the pivots points on the broadening formation, but could also be interpreted as Elliott Wave labels as well. If the Elliot Wave rules apply, we are given a natural limit on point (wave) 5 of 10,881.  Currently, point 5 is lower than point 3 and may not be required to exceed it.   This would be considered a truncation and may increase the probability for a bearish outcome.

The SPX shows a similar profile as the INDU.  Although point 5 has not reached the upper trendline, it has exceeded point 3, which implies that completion is very near.  Applying the Elliott Wave Principles, the natural top for point (wave) 5 may not exceed 1165.

The NDX reminds me of a reverse-engineered ending diagonal.  Both the parent and child fractals have a diagonal tilt that adds credence that the end may be near.  Again, the Elliott Wave Principles suggest that point 5 may not exceed 1957.00.  If this is so, then a reversal may be imminent.

Finally, the Russell 2000, the index which is most loved by speculators, is also nearing completion.  It has a natural target of 705.00, based on guidelines for zig-zag waves.  There is no assurance that this target will be met.

As a further note, the Russell 2000 has rallied 98% from its 2009 low.  The NDX rallied 85.7% from its low last March.  The S&P 500 rallied 73.5% and the Industrials rallied 65.8%.  This indicates that the participation by all investors has been robust.  Since the broadening formation indicates an unusual amount of public participation, it could now be said that the average investor is “all in.”

Many analysts will agree with John Murphy’s comment that, “This situation represents a market that is out of control and unusually emotional.”  In fact, I have been told, “There is something wrong with this market” a number of times by other traders.  The final climax of point 5 may mark the end of this phase of “irrational exuberance” by many investors.

Gold, Silver, Oil and Natural Gas Mid-Week Trading Charts

So far this week has been pretty slow. Large cap stocks continue to lag the market which can be observed by looking at the Dow Jones Industrial Average which still has room to move higher before breaking the January high.

One important thing to note is that volume has picked up this week considerably - particularly on the SP500 and OEX. It’s difficult to say if this volume is a good sign or not.

A lot of stocks and sectors are trading near their January high and this gives traders a reason to unload shares. On the flip side, the several sectors and indexes have broken their January high and this triggers a surge in volume as breakout traders try to take advantage of the new high and momentum. So you can see how the surge of volume is not a useful indicator right now.

Here are some charts of what I think we could see in the coming weeks.

US Dollar Index – Daily Trading Chart

I follow the US dollar index very closely simply because it affects the prices of stocks and commodities. I used a line chart below in order to take out the daily candle stick noise which made it very difficult for our eyes to pick up this pattern.

The chart shows a possible head & shoulders pattern and if that is the case then we should see the dollar start to slide lower.  In turn, this would boost stocks and commodities. This is the fuel that I think could really move the market sharply higher in the coming weeks.

GLD Gold ETF – Daily Trading Chart

The price of gold looks to be setup for a nice bounce off support and the timing could just work out if the US Dollar starts to drop over the next few days. There could be a low risk setup just around the corner.

SLV Silver ETF – Daily Trading Chart

Silver has held up well but today’s reversal candle to the downside scares me a little. The odds are that silver will carry this strong momentum selling down for another 1-2 days. Again, with any luck, it will test support and the US Dollar will start to slide lower.

Crude Oil – Daily Trading Chart

Oil has had a great run the past month but as you can see it’s currently trading at the top of a large trading range. I would like to see a sideways move before it takes another run at the $84 level, but the 7 day bull flag that formed two weeks ago may have been enough to maintain the upward momentum. Again, if the Dollar drops we will see oil rally.

Natural Gas – Daily Trading Chart

This chart is actually very attractive looking. Even if you do not understand how to read charts I think it’s safe to say this one is a no brainer J

I will be closely watching for a potential low risk setup in the coming days.

Mid-Week Trading Conclusion:

In short, stocks and indexes are trading at resistance levels with many of them making new highs and that is great to see.

A lot of things are trading in limbo waiting to see what the US Dollar is going to do. Several months ago I posted some charts showing that 81 would be a key resistance level for the dollar. If it broke above that then 84 would be the next key level to watch. So we just have to wait and see… the hardest part of trading is the waiting.

Gold, silver, oil and natural gas all look like they could continue higher in the next few days if things unfold that quickly. But the market always finds a way to drag out moves so we could still be a 2-3 weeks away.

I hope this report helps give you an idea of where things are at in the market.

If you would like to receive my Free Trading Reports and Analysis be sure to visit my website: www.GoldAndOilGuy.com

Chris Vermeulen

Note the moving average situation. The 100 and 120 week MAs help define the long-term trend. The market moved above the MAs in late 2005 and began its acceleration to the upside. Presently, the MAs are still acting as resistance. The overall price action is bullish as the market has made higher highs and higher lows. Look for a higher low just below 300. The market is sitting on a pivot point (320) and if downside momentum continues, look for a move to 300 or 290.

Volatility continues to decline and we should also note that Ags have been under performing the commodities sector. The next bottom could prove to be the end of this consolidation and the start of a sustained uptrend.

Three weeks ago on February 5^th, we saw an extremely high level of fear in the market with selling vs. buying volume at a 9:1 ratio. We note that in 2009 this extreme level of fear occurred at the bottom of each significant pullback.

Since this panic selling low in February 2010 we have seen stocks and commodities work their way higher, which we expected. Overall the broad market looks as though it’s trying to make a move higher.

Below are some ETF charts of gold, silver, oil and the indexes.

GLD Gold ETF – Daily Trading Chart

Gold lead the market higher in 2009 and also lead the market lower in December of 2009. It looks as though gold could be starting a new trend higher.

You can see the clean breakout of the down channel and then a test of the channel at support.  This type of price action also forms an inverse head and shoulders pattern for those who like trading patterns. J This is very bullish price action.

SLV Silver ETF – Daily Trading Chart

Silver has much of the same chart features as gold, but is slightly skewed.  This is not particularly surprising though, as silver virtually always behaves with less defined chart patterns due to its characteristically funky price action.

USO Oil Fund – Daily Trading Chart

As with gold and silver, oil’s trading chart has formed a pivot low also, but the trend line is much steeper than what I am looking for. I prefer a flatter trend line as price growth is more sustainable.

As you can see in on the USO chart, back in December price rallied at almost the same angle as is currently the case, and then notice what happened. Once the momentum died out the price dropped straight back down. I call steep trends like this a Parabolic Rally.

Scroll up and look at the first chart (GLD) and observe the parabolic rally going into December.  It too suffered a sharp drop straight back down when momentum died out.

Stock Indexes – SP500, Dow Jones, Russell 2000

Last week the market sold down the first half of the week, then bounced back up forming a possible pivot low. The daily chart for these indexes look virtually the same as the GLD, SLV and USO charts above for the past 5 trading sessions.

But, one little thing has me concerned….

When looking at the 5 minute intraday charts (posted below) you can see at the very last minute before the market closed HUGE selling volume flooded the ETFs.  The market ended up losing all of its gain for the day.

With any luck this was just end-of-the-month hedge, mutual fund, etc. portfolio rebalancing.  But I am somewhat concerned that more of this selling could step back into the market Monday or Tuesday.

Weekend Trading Conclusion:

Overall, last week started on a negative note but ended strong after forming a reversal pattern.

It looks as though stocks and commodities have formed an ABC retrace pattern and are now ready to move higher.

How much higher you ask?

Well, I believe 2010 is going to be a traders market. I envision an 8-12 month sideways consolidation (large bull flag) forming. If this materializes then buying on over sold dips, as we did on Feb 5^th, and scaling out on strength at resistance levels will be our goal in the coming months.

A bunch of 4-8% trades is what I’m figuring, but with leveraged etfs we can double and triple those type of returns.  Now that is something to anticipate with delighted optimism!

If you would like to receive my free weekly trading reports please visit TheGoldAndOilGuy at: www.TheTechnicalTraders.com

Chris Vermeulen

HOW TO JUDGE THE “HALF FULL VS. HALF EMPTY” DEBATE

The great guru debate right now: Is the economy in a real recovery, and is a decent job market on the way back? Or are high-profile bears like Harvard’s Ken Rogoff right? Are new debt “shockwaves” set to rock everything?

As always, let’s consult the market… and let’s mind a huge potential “1-2-3 trend change.”

Bulls need the uptrends in companies like Darden Restaurants and Home Depot to remain intact. These uptrends tell us the government’s E-Z-Credit program is keeping the consumer and the banking industry afloat. If the uptrends suffer severe breakdowns, we’ll know the negative effects of the credit bubble are still with us.

And don’t forget to watch copper as a “must hold” asset for the inflationary bullish case. Copper is an essential ingredient in cars, refrigerators, power lines, and electronics. However the economy is performing – good, bad, ugly – you’ll see it reflected in copper prices. As you can see from the chart below, copper suffered a major decline in late January/early February (1). It has since made an effort to climb back to its old high, which failed (2).

We now have a situation where copper is set up for a classic Vic Sperandeo 1-2-3 trend change, just like the euro experienced in December. If copper turns lower – and blows through its recent low around $2.85 per pound (3) – the E-Z-Credit stimulus boom is withering.

Commodities have recovered nicely yet fund flows have not. The assets in the Rydex fund are at levels last seen at the end of 2008. Keep in mind, this study is more anecdotal than scientific. That being said, it is actionable information. The conclusion is that the recovery in commodities hasn’t lead to any recovery in retail (individual investor) sentiment towards commodities.

A strong weekly and monthly close above $80 would imply that the market is going to $90 and that of course raises the possibility of a test of triple digits.

The sentiment indicators are unusually mixed. Commercial traders have been moving more bullish. Just weeks ago they were at a record net short position. They are still net short. While the COT has had bearish implications, the retail public has been consistently bearish. Public opinion is only 44% bulls. The good news for bulls is that we don’t see extreme bullish sentiment. Moderate or moderately bullish sentiment won’t hinder a positive technical outlook.

Note that in the last few months, commercial traders (who are usually early but right) have increased their long positions significantly. In fact, this is the largest commercial net long position in a long, long time. This means that the stronger hands are hugely long the market. We should also point out that public opinion shows only 39% as bullish on Wheat. When will Wheat rise? It is hard to know but there is strong evidence that this market will be higher by summer time.