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 A Cup of Technical Analysis
(Market Update 09-01)

by Edgar J. Steele

February 12, 2009

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Let's talk a bit today about financial analysis, which can be broken into two broad camps:  Technical and Fundamental.  Technicians (aka Chartists) and Fundamentalists don't let their kids intermarry - that's how broad the divide generally seems to be.

Here is a pretty good article entitled Gold Cup and Handles, which contains an above-average explication and illustration of financial technical analysis: http://news.goldseek.com/GoldSeek/1234452025.php 

That the author buttresses his charts with even a shallow fundamentals discussion is unusual for a  technician (aka chartist). 

My personal preference generally is for a fundamentalist analysis supported and confirmed by a couple of technical charts, but many swear by pure technical analysis.  Most true fundamentalists dismiss technicians as being mere tea-leaf readers, yet unthinkingly incorporate the essence of technical analysis into their own outlooks anyway.

Technical analysis done right reflects mob and individual psychology.

In the above article's case, look at the discussed cup-and-handle-pattern chart business as akin to a new rock climber:  Feeling good, the novice climbs up the rock base, then looks down and shrinks toward safety, clutching at the wall (initial pullback/handle). Considering all that is going on and realizing his position is secure, the climber then clambers to the first rest position (follow-through/breakout), surveys his progress, looks up, looks down, considers all that is going on, the attendant risks and rewards (final pullback) and only then screws up his courage and plunges upward with a burst of energy founded upon his initial success, headed for the peak (blastoff).

Another analogy - the amateur swimmer:  You shrink from the ice-cold water at first, test it by going in up your knees, look back, screw up your courage, then plunge in and swim like hell.  Right now, the precious-metals market is like the swimmer briefly looking ahead after already having rejected the idea of going back ashore, just before plunging in all the way.  For extra points, try to see for yourself the four stages of the cup-and-shoulder formation in the swimmer analogy.  Hint:  We're teetering on the very edge of the blastoff period.  What you've seen going on in the past month or so is just a hint of things to come in the near future.

That's cup-and-shoulders-formation technical analysis.  Like interpreting Nostradamus' predictions, it is much more easily done after the fact, but it can be useful in confirming conclusions derived from fundamental analysis, as is possible today.

What's fundamental analysis? Well, consider the following high-level summary:

With America's money supply doubled by the Fed morons over the past year, and with it about to be trebled or quadrupled in the coming year, as now promised by all the Washington morons as well as the Fed morons, big-time price inflation, which inexorably follows monetary inflation, now is baked into America's cake.

A doubling in price inflation already is working its way through the economic snake, which is about a year long, with even bigger inflation now being shoved in, directly behind it, by both the Fed and the Feds (with the lesser effect by the Feds being designed to distract from the massive money supply increase now being engineered by the Fed).

Seeing all that new fiat money moving through the economy's alimentary canal, just like a snake's dinner swallowed whole, makes the inevitable outcome easy to predict:  snake shit, errr ... price inflation, and lots of it.  The only way to stop it would be to kill the snake and that ain't gonna happen, folks - not a snake with as large a set of fangs as America's military, anyway.

Is it possible that a snake that gorges on a moose after having just downed a rabbit might choke and die on its own overreaching?  Perhaps, but it would leave a bloody mess even worse than the afore-described inevitable result of digestion, however.  Count on a massive pile of price inflation, which is best seen in the prices of precious metals, based upon history. 

It (price inflation) has happened, time and again, to each and every nation empire that has gone down the monetary-inflation route (and they all have gone down that route, men being men, after all), since the first invention of money.  Don't be silly enough to think that America will be any different.

Today's fundamentals are incontrovertible, folks, and technical analysis confirms them.  Even with the massive manipulation of the markets conducted by the Feds and the Fed (one and the same only in the sense that the latter controls the former, not the other way around), we're on a wagon ride straight downhill without brakes.  The only question is where and when we crack up and just how disastrous it finally will be.

Buy gold and silver.  The real thing.  Take possession.  Do not buy the GLD or SLV ETFs unless you like the risk attendant to playing "Old Maid" with a deck that contains mostly Old Maid cards.

I prefer silver, which only now is making a strong upward move to match gold, which itself is about to set repetitive all-time highs.  Silver will retake ground that it already covered two years ago, then match and, likely, outpace gold in setting new highs.

Can't you just feel the precious-metals market scanning the horizon and trembling, about to plunge in for a long, long swim?

New America.  An idea whose time has come.

-ed

Copyright 2009 Edgar J. Steele

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