Thursday, October 21, 2010

Correct Me If I'm Wrong

The long-awaited, overly-predicted correction in Gold, Silver and mining stocks has now begun.  After the smash on Tuesday for 30 bucks in Gold we have what appears to be a continuation pattern with today's further drop of additional drop of another $20.  What's a "continuation pattern" you ask?  A highly technical term?  Nah, it means a top below a top followed by a new low beneath a low.  That is the initial condition for establishing a new downtrend. 

The correction ought to be sharp but not very deep.  Gold's 200 Day Moving Average (DMA), which ought to contain the decline, is now at $1,200, suggesting additional downside of about 10%.

The Gold Bugs Index (HUI) has now dropped back below 500, after reaching a false breakout high of 535.  In just a few short days, miners have dropped by nearly 10%.  The HUI's 200DMA is above 450, which ought to cap further reactions to another 10%.  Therefore, the correction is half over already.  Get ready for a terrific entry point! 

In recent news, as predicted in this column, China has suspended exports of rare earth metals.  For a great play in rare earth metals, we have discussed the merits of Avalon Rare Earth (AVARF) http://markostake.blogspot.com/2010/06/avalon-rare-metals-inc-rare-opportunity.html.

As far as the stock market goes, the surprisingly violent bear market rally that has taken place all summer continues, but ultimately all markets must obey "The Law of Gravity".  http://markostake.blogspot.com/2010/10/markets-to-obey-law-of-gravity.html.

The downside leadership in the coming stock market crash will undoubtedly be the financial sector.  The Philadelphia Banking Index (BKX) has continually under-performed every market sector and with economic conditions deteriorating, an inevitable banking crisis looms directly ahead.  Despite all the efforts of our friends at the Federal Reserve to pump out money, it appears that this privately held group has now been relegated to "toothless tiger" status http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

But what about those great earnings reports?  What about the coming Republican take-over of Congress?  Won't these matter?  No!  These are old news and already factored in and discounted.  The markets are looking 6 months ahead and, believe me, they DON'T like what they see.  Markets anticipate.  Once news is understood by the masses, it's WAY too late to matter!

So while that dirigible known as Hindenburg continues to levitate on a cushion of hot air from politicians, it has sprung a whoppin' leak  http://markostake.blogspot.com/2010/08/hindenburg-omen-all-over-financial.html.   Of course, the Omen isn't always right, but why take a chance on getting wiped out?

What's an investor to do here?  Easy.  Hold cash and wait for the correction in commodities, metals and mining stocks.  Then, get ready to get rich as the mother of all bull markets shifts into turbo-charged high gear.

Marko's Take

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