Friday, March 13, 2015

Important post on [USO] with implications on all commodities

In this post from Mid January I modeled a near term bottom of USO which was supposed to be a significant bounce carrying up until at least the level of the prior 4th.  The model from that post is reproduced below.

While we did get a $2 bounce from there, the chart subsequently fell to a slightly lower low @$16.30.  Importantly, blue 5 was a falling wedge and that suggests to me that it was a 5th of a 3rd of one degree higher. 

Well, $20 is not high enough to be considered a proper retracement of W3 and also we need to see 5-3-5, not just a single motive wave here.  So regardless of what followed, that peak was only a of 4.  
All that choppy stuff would normally have created an HT and then a move up into c of 4.   But those running the Euroscam were in such panic that the dollar just kept extending and extending.  It used to look like the best horse in the glue factory and now it was looking like a real store of value relative to the Euroscam.  Of course, when your choice is to either reach down and pick up a pile of partially dried cat crap (the USD) or a big freshly laid and still steaming pile of dog crap (the Euro) you are going to scramble to pick the lesser of two evils.  In truth, there is no good paper money.  There is only bad and worse.

Thus, what we got for the B wave of USO was an almost full downward retracement of A as you can see from the bigger picture snapshot below.  Look how rapid the move up into pink A was.  That was certainly motive.  Then we got the big falling wedge WC which is right now in the throw under.

While this WC characterization of B of 4 is not confirmed until it breaks back up into the channel (1st confirmation) and then final confirmation when it breaks out the top rail, I think the odds are high that it will occur.  Once wave 4 plays out it will be time to go back to the sidelines or to swing short as long as the wave form looks correct (should be 5 fast waves up, easy to read because this is a C wave).  According to the model, we will then get a lower low into 5 as deflation ravages the oil patch.

Now that you know what to look for, playing this should be no mystery at all.  If you want to play safe, just wait for the break back up into the wedge and then buy something like DIG for a ride up to $68 (currently 47.27) or go with something even more leveraged like WTI (currently $5.30, target $11).  Most likely gold and silver will rally along with these commodities so also consider USLV (currently $17.22, price target $55) and finally JNUG (currently $16.76, price target at least $75 and could be much higher).

While it is possible to jog a bit lower as shown above in red before the reversal takes place, this should not be counted upon.  The main thing you need to watch is that lower rail.  When that gets taken out, all commodities and gold (which is in no way a commodity) and silver (partially a commodity) are likely (odds, folks, and never certainties!) going to catch a massive bid as the shorts begin to panic cover.  Nothing goes down forever and no it won't be different this time.

I normally do not espouse buy and hold without stops but if you are not a trader and if you are not leveraged on margin and if you are not speculating in things that can die over time because they are options based then I think you buy any small dip on Monday and just hold for about 3-4 weeks.  That is about how long I think it will take to bounce.  Nobody knows the future and you might go a little underwater for a short time but as long as you will not get spooked out of your position based on volatility over the next 1-2 weeks, this will be showing deep green.  This is far, far closer to a bottom than to a top.

If you must have a "fundamentals" story:
  • All the money is in over priced stocks right now.  That money cannot just go into cash.  The market needs returns.  Pension funds need to make monthly payments and they can either pay from cash on hand or they can keep their cash and hope that they are better gamblers than the next guy.  If they give their cash to pensioners then they have that much less capital to speculate with.  So they really need to continue gambling somehow in order to keep their jobs and that, of course, is the only thing that is actually important to them.  The money coming out of high priced stocks will flow into low priced commodities.
  • Interest rates appear to have begun the next bull wave up.  People will associate that with inflation.
  • Higher interest rates will kill heavily margined market players and so they will get out of stocks while the getting is good.

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