Gold's Top

Click chart to enlarge

Stock charts typically get a certain amount above their moving average before falling back to reality. For gold, an overbought condition exists when the chart is 40% to 50% above its moving average. It doesn't matter what average you use. The percentages will change, but can still be used as a basis for comparison against each other.

The chart above shows that GLD (gold) is quickly reaching an overbought condition. How far could it go? Every 9 points represents another 10% rise above the moving average shown on the chart above. Therefore, a jump of 9 more points to a price of 125 would put GLD at 40% above its average. A jump of 18 points to a price of 134 would put GLD at 50% above its average. We're not saying that it won't go there. Of course, we don't know. But we do know that if it does reach those heights, particularly if it happens quickly, the chart is setting itself up for a dramatic return to the average.

The last two times GLD corrected, it fell roughly 25% to 30%. A repeat of this kind of correction would put GLD somewhere between $80 to $100 per share. There are few people out there at this point that don't already know that gold is the new hot investment. In fact, infomercials are popping up which are selling gold as the new investment vehicle of choice. The guy at the corner deli just bought some gold for the long term. If that doesn't signal a top in the making, we don't know what does.

In an ideal world, gold would quickly "blow off" to an incredible height (like $134) . From there, the downside risk would be too great to ignore, and people would start heading for the exits, leaving the guy at the corner deli holding the bag. This will surely be a fun chart to keep tabs on.

Gold

Click chart to enlarge

The chart above shows the past 4 years of GLD, which tracks the price of Gold. We would never short a stock trading above an uptrending moving average, but we would lighten up on GLD at this point, and continue to lighten up on it if it advances from this point. We're not saying it can't go higher, but that if it does, it will inevitably return to its current price sometime in the next few months. In other words, it isn't about to get away from any potential buyers at this point. Don't chase it. Although very bullish, this chart looks ripe for a 7%-8% correction (at least to the low 100's).

The Dow

Click chart to enlarge

Is there anyone still reading this blog? We lost interest in the market for a while, but a recent glance at our account piqued our interest again. We're actually in the black since we started the blog in mid July. Barely in the black, but heck, flat is the new up.

Every time the market nears the top of the channel, we get tempted to drop DDM and SSO, but it never spikes high enough to tempt us that much. If we had a quick spike to the area of the red line, we'd sell it all and just wait. We still think that despite all of this recent strength, the market is just finding the top of a new sideways channel in which it will live for the next two years or so.

Before we have any truly sustained (multiyear) bull market, we need new innovation, which doesn't exist right now. When "the next big thing" comes along, this blog will be all over it. Finding the next leaders is what we do best. Well, that, and pointing out when they die.

But for now, the best we can do is stay long with a third of our stock portfolio and try to play the channel with some portion of those long holdings, all the while avoiding overexposure. At some point, the market will hit the top of its new sideways channel and then feel around for a bottom. Maybe sideways from 8,000 to 10,500 for two years? How does that sound? Your guess is as good as ours. We'd like to hear what others think the near term future holds.

More important than guessing the market's next direction is now trying to find that "next big thing." You won't find it any earlier than anyone else. You just have to understand it sooner.

We're most interested in any help we can get in spotting the next major phenomenon. Let's all work together and make the next bull work for us!