A Melman Minute
By: Leonard Melman
July 18, 2008
One of the most important technical market tests
involves the subject of important reversals, a pattern which is now showing up
in several of the important charts we watch on a regular basis, including the
two we will use for this analysis, crude oil and the Dow Jones Industrial
Average (DJIA). Crude Oil's test involves the sharp decline of about $18.00 (all
prices US$) pre barrel over the past few days and the Dow Industrial's concerns
the sharp rise of almost 700 Dow points, also over the past few days.
One of our favorite charting texts, "How Charts Can
Help You in the Stock Market" by William Jiler, discusses the pattern of a sharp
drop inside an ongoing bull market. According to Jiler, support zones can be
drawn on the chart at the lows of preceding moves (in this case near $120) and,
if the decline does not fall through that support, the move is considered to be
intact. For us, the true test will come when the next rally takes shape and the
important question remains whether that rally, when it occurs, will eventually
exceed the preceding peak.
Therefore, the important points to watch short term for crude are support at
about $120 per barrel and resistance just below $150 per barrel.
As can be seen on the Dow chart, the situation is opposite. Following a period
of sharp declines, a potent rally has carried the average from near 10,800 all
the way to about 11,500 in just a few days. Resistance can be seen in the area
of previous bottoms between 11,500 and 11,700 and, should the decline resume,
the important question would be whether the previous low near 10,800 will hold.
As can be seen, market action over the next several days could be most
significant toward identifying trends and direction.
CAVEAT - Charting is simply another tool to be used for investment analysis. As
always, investment decisions should only be made after prior consultation with a
registered investment professional.
For a change, it seems, we have received news which can be regarded as positive
for the junior mining industry, an industry which has been encountering some
serious problems of late and problems which have adversely affected the share
quotes on several juniors.
An article in the Financial Post points out that the Province of Ontario
recently announced that, as part of a plan to protect forest areas for future
aboriginal and tourist use, the province will undertake a huge mapping project
involving some 225,000 square kilometers of forest.
While the target of the mapping project is to identify lands to be protected,
the mining industry is welcoming the creation of quality maps for an area which
has previously, for the most part, never seen a quality mapping project.
According to Garry Clark, Executive Director of the Ontario Prospectors'
Association, "...If the government feeds a bunch of data in there and can get us
better (drilling) targets, then we're way better off."
To date, only 3% of Northern Ontario has been staked by prospectors.
Markets were startled yesterday to learn that the Consumer Price Index in the
United States rose at the highest rate in 17 years during June, advancing by a
strong 1.1% for the month and bringing the overall rate of price inflation to 5%
during the past 12 months. The annual change rate stood at only 1.4% as recently
as late 2006.
The U.S. Labor Department report also contained the unwelcome news that during
June, American wage-earners suffered the largest decline in inflation-adjusted
wages in the past 24 years. Joshua Shapiro, chief economist at Maria Fiorini
Ramirez in New York noted that the matter was under serious discussion by the
"Federal Open Market Committee" (FOMC) and was quoted by the Financial Post as
noting, "...Most FOMC sem to be deeply conflicted; nervous about the significant
downside risks to growth and the considerable upside risk to inflation."
Our own observation says that the combination of continuing declines in home
equities and a reduction in inflation-adjusted wages is a poor background upon
which to build an economic recovery.
In th meantime, the Fed continues to attempt to resolve the dilemma we have been
noting in this space for several months, that is how to control inflation
without raising interest rates and at the same time how to avoid the economic
crisis which would likely result from increasing rates.
At the same time, the various real estate crises continue to impact several
economies negatively. Reuters just published a report indicating that the U.K.
commercial real estate market could be in serious trouble. According to their
story, during the past year prices on commercial real estate have plunged by 20%
and residential prices are down by a full 10% and they note that after a similar
collapse in real estate values during 1989, "...the U.K. economy was in deep
recession, recording five straight quarters of negative growth in 1991-92."
It appears to us that the important economic problems have yet to be resolved,
and therefore, we suspect that the financial market rallies over the past few
days are somewhat suspect. However, we are quite willing to let the markets
provide us with the definitive answer to such questions.
In today's markets, as of 8:30 AM PDT, gold was back down to near $956 per
ounce, silver and platinum are also lower, base metals are down as a group, but
mining share indexes are close to unchanged. Crude oil has rebounded slightly to
about $130 and securities markets in both the USA and Canada are higher with the
Dow Industrials ahead by about 50 points and the TSX gaining over 120.
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