As I promised, I am updating the article I first had published in August 2011 telling you that the weekly Super Chart was showing that there existed a huge, potentially devastating Head and Shoulder Down formation. I have waited patiently for that formation to either begin to fulfill or to fail.
I am most grateful that the formation, a truly very powerful one for this type, has failed. As of the close last Friday (1-20-12) the Super Chart flashed a green BUY signal, eliminating the potential of a market down move that was truly of gigantic proportions.
So, what happened?
Well, if you recall in the article follow-up I posted on 10-3-11, I told you that there had developed beneath the Head and Shoulder formation an up-channel that added a possibly different twist to our original outlook. In that issue I attached the latest chart (9-30-11) so you could see it clearly. I am inserted that old chart here:
Now I am inserting that S&P Super Chart updated to 1-24-12:
Note three things on this latest chart:
1. I have drawn in a horizontal line that represents the key resistance level on the chart – at S&P 1290;
2. The latest close was above this Key resistance level (closed at S&P 1316;
3. There is a green dot at the S&P 1234.95 level, the blue line on the chart. (Trust me it is there, though you may have a bit of trouble seeing it clearly)
It is this close above the resistance and the Green dot that tells me that the Head and Shoulder formation is “broken.”
The green dot also is a clear BUY signal from the Super Chart that reverses the last Red dot, recorded on September 9, 2011. I give great attention to these red and green dots (Red meaning a SELL and Green meaning BUY), as over the last nearly 40 years of keeping my Super Chart, it has only signaled 20 trades!
Now, most of these trades have lasted as short as 5-10 months or some much longer, as in the case of the five year BUY signal generated in 1994! This reversal signal occurred in only 4½ months, not the shortest one, but close to it. My take on this shorter period is that an unusual “outside influence” has occurred, much like the 1987 very short period between reversals and, again, the 1990 reversal of 4 months.
I won’t rehash why I think the 1987 and 1990 occurred, but will focus on why I think this one occurred. The simple answer is fear of inflation from the huge amounts of money the Federal Reserve has poured into the financial system. That money had to go somewhere. I believe that it is being used in the stock market to hedge inflation expectation of the really big money investors.
How long will this influence last? How high might the market go? My charts suggest that the upward potential might be at least to the old highs in the area of the S&P 1500 area, quite possibly as high as S&P 1650 or so. This is suggested by the fact that the now controlling formation – the major up-channel described by the two up-slanted heavy black lines – could see the top upline touched as prices move higher.
I have extended the chart so that it ends early in 2013 and you can see that the top upline ends near that S&P 1650 area. Will it go that high? Wish I knew. But, you can watch the progress yourself from the attached chart. I am sending the charts to a list of readers that asked me as a result of the last articles. If you would like the S&P chart (stand alone), too, e-mail me at maxxle@aol.com and I will send you one.
And as every chartist must, let me add a caveat or two.
The European situation is one of the most dangerous financial problems we have seen for over nearly 80 years. Make no mistake about that! If the Euro fails and/or some of the European Union countries go bust, all bets are off. Or, if the political environment for the U.S. goes any more into the socialist orbit and the dollar fails, that too would signal that all bets are off in the possible climb to the S&P 1650 area.
OIL AND GOLD CHARTS
Now, to round off this report, I want to address the two other commodities I touched on last report, oil and gold.
Let’s do the oil chart first. You may recall that it also had a Head and Shoulder formation that was heading for $65 a barrel. But, as you likely also know, the oil charts are very much tied to the S&P moves. And since the S&P has broken the Head and Shoulder formation it had, so too, has oil. I am attaching the current chart here, update to 1-24-12.
Not much to make comment on here, except the current price is at the 200 day moving average (see the 102.78 price), while the S&P weekly chart has already crossed up its 200 day MA at S&P 1267 several weeks ago. Will we cross up the oil 200 day MA? Likely, but keep the caveats I outlined above firmly in mind. Oil will move higher as an inflation hedge move if the S&P continues higher, as expected at the moment. And Iran’s effect? That’s for the crystal ball gazers, not me. Anything can happen when Iran is thrown into the mix.
Now, gold.
Well, folks, this is one of the other really reliable formations. It is called an UP-FLAG formation and to break it also takes a truly unusual event – just as the gigantic flooding of the markets with cash by the Fed reversed the Head and Shoulder formation on the S&P chart – as already stated, a truly formidable event historically! Here is the gold chart updated to today 1-24-12.
The FLAG formation here portends a specific potential higher target, also, much like the S&P Head and Shoulders formation did. In this gold formation, you go to the bottom of the chart, the beginning area of the “flagpole.” For this one, it is the $1,000 level (see the green horizontal line) established over several years before the current major upmove continued, going from the base area of $1,000, all the way up to $1,900 an ounce level.
From the $1,900 high, a correction began and formed several lows (each lower than the previous one) and several highs (each one a bit lower than the previous one). But, you will note that the down-slanting lines that forms the FLAG (see the down sloping red lines) has contained all the correction movement.
The next major move for this formation will begin when we see several weeks of weekly closing prices above the top red line of the flag area. The new target for the move will then be the measure of the distance from the base at $1,000 to the high at $1,900. Add this $900 amount to the place where the price finally breaks out of the flag area and you get something like $2,600 an ounce, or so, as the first target level for this formation!
Now, will that happen? In my opinion, yes, of course, barring some incredible event that would stop it from reaching that level. Remember, it would have to be a truly major event to stop this from happening.
To take advantage of this possible move you can either buy gold or go to the options market and buy calls far out in time and price to leverage your investment.
Is there any risk? I know you’re kidding, of course. Yes, there is risk. Of course, there is risk any time you invest. It is the measure of the reward that should be your true gauge of whether or not to invest in gold. Everyone has a different risk level that can accept, so I suggest you do some homework to see if this one fits your level.
Well folks, for the moment, that is where we are as I see things. Most important? The S&P Head and Shoulders formation has failed – Thank God! Now what we see developing is a future move that has the potential of a major run up to the S&P 1650 area. Barring any major unforeseen collapse of the world’s financial system, that is a move of nearly 375 S&P points!
As the ancient saying says, “May you live in interesting times.”
So, I will see you next column – my guess possibly 60-90 days or so. In the meantime, you can keep in touch via comments here, I will do my best to answer them all. See you then!
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Mahalo for this update Max! I was on pins and needles for the last few weeks and wondering what you would say. It is indeed interesting times, in all markets.