Is the US dollar doing a double top?

Most of the Analysts I read consider the US dollar in a bear market. However, the dollar moved from 74 to 86 from December to now and then is making a small formation that looks like a small double top. The double top is a sign of a loss of strength of the underlying issue being traded and the formation is confirmed when/if the second peak breaks below the trough between the two peaks. In this case, it would be a break below 85. Double tops are notoriously unreliable for prediction.

Longer term, the dollar may be setting up for an even bigger double top (see the second graph), where the confirmation point is 74.

Contradictions.

Brokerage houses tend to be optimistic. That is perhaps what fueled a letter I got telling me to expect a rally in stocks. Buy, buy, buy is the conclusion. The first graph shows the tea leaves the technicians read. The Market is clearly oversold, so we had a 200 piont rally in the DOW.

The second graph shows what the economists see. While, M3 is no longer published by the government, it can be calculated and M3 is falling at a rate not seen since the Depression. Today's discussion on Seeking Alpha (The Consequences of M3), tells us that government is driving us into economic depression. How is it done? While, the FED pursues a loose money policy on the surface, underneath, a small Agency requires the banks to put up 15% capital as reserve for every loan they make. That, of course, precludes the bank from making any money. So, while the FED pretends to follow a loose moinetary policy, the OCC counters it and is driving the banks into either supporting the regime in buying treasuries or fail.

The consequence is stagflation and eventual collapse if the regime is not removed. The last graph shows the gold price during the 70s and during this decade. It is earily similar. The graph predicts an explosive rise in gold prices to as much as $6,000/oz of gold.

What now?

What a difference two weeks make. My last two posts on the economy, gold and the Stock Market touched on the topics of the increasingly grim looking European debt, predicting a breakout of gold past 1162 and topping out of the Stock Market.

So, what happened? Gold broke out and set new highs, the debt crisis identified and the Stock Market is teetering again.

What else has happened? While, gold set new records (1284), gold mining stocks lagged the increase in gold price. That suggested a drop back in gold price was coming and sure enough: gold dropped back to 1175 and finished the week at 1176. That sets up a powerful buying opportunity.

What about the economy and the Stock Market? The economy continues to sputter, but IMO it is early to expect a crash. It is like there is an evil spirit that continues to give the Obama regime advice to do the wrong thing. To be sure, the regime welcomes the crises it creates, these crises are excuses to grow the government and destroy Capitalism. Also, economic stagnation is hoped to deter inflation.

The Obama regime sounds like the Greek officials in the early stages of their boondoggle, when they trumpeted that they could borrow all they wanted to borrow at 3% interest. At some point though, that changed and changed all of a sudden. As the Obama regime prints money and kites checks to pay for the deficit and the takeover of business, it is setting the stage for the destruction of the dollar. All these trends will keep sending gold higher. At present, the failure of the Euro drives Europeans into dollars, but the FED opening the dollar window for European banks in fact ties the dollar to the Euro.

Investors are nervous and are selling equity. Interestingly, gold mining stocks have stopped falling, perhaps anticipating a new rally in gold.

How far will the DOW fall this round? Will it settle for a 10% correction to 10,000 or continue toward a 31% correction, back to 8,000? Will it touch 12,000 before it sinks back and leaving the smaller stocks to flounder? We might get an inkling next week.

Why European debt crisis is so deep.

I saw this graph on Seeking Alpha (posted by a Mr Davis) and I understood. European banks have been essentially kiting checks on a big time basis. The debts are hidden, because they are shuffled between the various countries and their banks. This is how check kiting works: A person owes his credit card company $500, but he does not have the money. However, he has four bank accounts. So, he writes the credit card company a check for $500 on bank #1. A few days later he writes a $500 check for bank #1 on bank #2 and so on. This is an unlawful practice, but is essentially what the European Socialist countries have been doing. It works with loans, too. These countries have been borrowing money from each other, but investors have found out and have raised the interest rate the dead beats have to pay. The problem is that the bills can no longer be paid, hence the crisis.

The Plunge

No, I am neither prescient nor do I have a pipeline into the trading centers that have a great deal of influence on stock trading. That said, it appeared to me yesterday morning that the Stock Market was nearing its top and a downward slide was quite likely. This prediction was born out within a few hours.

Today, I would like to discourse not on what was done but how.

If you listen to the pundits on TV, you come away with the impression that what made the Market go down was the fear created by the financial crisis in Europe and some trading errors. Of course, the financial crisis in Europe has been known for a while, though TV pundits tried their best to ignore the IMPORTANCE of it.

What happened was this: The Market was shaky, the DJI rise had become almost flat. It became vulnerable for a retreat. In came the trading houses and put in an avalanche of sales orders. Sophisticated traders have stop losses of 10-15%, so if a stock drops the 10 or 15%, it is automatically sold. This causes an imbalance (too many sellers, very few buyers) and the price of the stock begins to plunge. If you have a stock that is selling for $44/share and you have a stop loss at $36, it means that as soon as the stock goes below $36/share, a sell order will go in. Hyeah, but when will it be executed? The sell order goes into a cue and may sit there, while the price of the stock plunges to $32/share or even below. That is what happened yesterday. Many stocks plunged 50-60% and market makers cleaned them up at a bargain. Was there manipulation? You bet! Eight stocks went to 1 penny or zero for no reason at all, except for the manipulation.

Was early yesterday the top of the Market? We won't know that until the Market rallies again and then goes down. Right now, I would think that the Market will come back, but gold continue to rally after it, too, takes a breather.

I reproduced the DOW and its 300 DMA (top graph) and 200 DMA (lower graph. The top graph shows that the 300 DMA did not penetrate the 50 DMA. The 200 DMA, however, did penetrate the 50 DMA. Therefore, this plunge was more like a stiff correction then the topping out. As the financial crisis deepens in Europe, the Market will shake and gold will go higher.

Has it begun?

Good weathermen are said to perform one more check before forecasting local weather: a quick look outside the window. No point forecasting fair weather if it is raining, knowledge of weather pattern notwithstanding. So it goes with forecasting financial developments.

So, I collected the most-watched financial numbers: the DJI (first graph), the US Dollar (second graph), gold (third graph), GG (the second largest gold miner in the world, fourth graph) and finally, 20 year treasury (last graph). Some of the numbers are quite surprising.

The DOW is nearing a top and no question about it. Stocks of small companies have been savaged now for a month or two and the rise in the DOW is almost flat. The current drop in stock prices is either a final correction before the top or signifies that we have passed the top.

What is astonishing is the continued rise in the value of the dollar, even in the face of rising gold prices. The fall in the value of GG is expected if we are at or near the top of the Stock Market Cycle, but the rapid rise in the value of Treasury Bills defies economic laws. Or does it?

For a while, the Obama regime has dampened inflation by causing a widespread destruction of financial institutions via the use of the 'mark to market' accounting system. The usefulness of this method ran out as the price of gold and oil began to rise. The regime can not raise interest rates without crashing the economy, so it does the only other alternative it has left: buying Treasury Bills. This is called "monetizing" the debt. Essentially, the Treasury can pay itself what it wants to "buy" Treasury Bills. This would explain the quite irrational rise in the price of Treasury Bills, which in turn takes up the value of the US dollar. The purpose of this illusion is to delay inflation and another economic slump till after the election.

The unraveling of Eurosocialism is under way. Well, at least their currency is unraveling. So far, the Greek left is unwilling to accept the conditions to rescue Greece financially and the revaluing of sovereign debt is still under way in Europe. In the US, States are broke and the country's economic troubles continue.

Will stocks now destruct? The volatility indicates that some kind of correction is under way. Whether gold stocks will give up their gain while gold prices rise IS the question. I am going to hold on to mine.