Silver vs NASDAQ vs Bitcoins

Here are three bubble charts for your review.

The first one, silver, rallied from $1/oz to $41/oz at the peak of the bubble in about 8 years, an annual growth rate of about 60%. Note that the metal subsequently lost about 90% of it’s value. Selling at any part during the bubble phase ($10-41) would have been prudent in the long run.

 

Here’s a more well-known, but less severe bubble. This second chart, the NASDAQ composite (internet bubble, anyone?) rallied from about 150 to 5000 in just over 20 years, an annual growth rate of 6-7% per year. Because the bubble was less severe than gold, the NASDAQ ended up losing only 80% of it’s value. However, once again, selling at any point in the bubble phase (2000-5000) would have been prudent in the longer run (i.e. you could have bought back at lower prices such as $1000).

 

Now, take a look at the Bitcoin bubble. It’s up from $5 to $210 (as of 4/9/13) in about one year for an annual growth rate of 4100% or so. As you’ve seen above, the more severe the rally, the more severe the decline, so I would not be surprised to see this drop 90-95% over the next few years. Therefore the strategy is this: if you’re up 100%, sell half you bitcoins to lock in your cost basis. The remaining bitcoins are pure profit, so even if bitcoins drop to $0, you haven’t lost any money. If they keep rallying, you can choose to sell a few to lock in profits.

The conclusion is clear: bitcoins are no less vulnerable to being a bubble than silver was in the 1970s and the NASDAQ was in 2000. The both had amazing fundamentals at the time, and they both crashed 80-90%. Fundamentals change, as well as investor perceptions.

And the bullish drum beat continues…

AAPL has truly gone parabolic in the past few days. If the stock touches $590-$600 today, I would be willing to predict that its run ends this week, and subsequently AAPL starts a 2-4 year downtrend. I predicted a similar outcome with NEP in the face of massive criticism. The pattern on AAPL is almost identical, so I am as confident now as I was back then.

Dare to short AAPL?

These days, you’d be crazy to even think about shorting AAPL, right? They just had killer earnings and are on track to earn $40+/share in 2012, giving them a nice, comfortable valuation. However, the charts point to the notion that a long-term top is right around the corner.

First, on the monthly chart above, note that AAPL appears ripe to complete a 5-wave rally that started in 1998! I would expect a multi-year correction to ensue soon based on this chart alone.

On the weekly chart, you can see that Wave-V from the first chart has subdivided nicely into 5-waves as well. Even on this shorter timeframe, the wave pattern indicates that upside is limited.

 

The daily chart shows a typical parabolic blow off to finish Wave-V. Importantly, recent price action is confirming that a top is very near:

During a climax top, a stock leader that has risen for many months will suddenly take off and run up much faster than it has in any week since the start of its original move. On a weekly chart, the spread from the absolute low to the absolute high of the week in almost all examples will be wider than any price spread in any week so far.

- William O’Neil in The Successful Investor, pg. 80

This weekly candle is on track for being the largest weekly gain in dollar terms, ever. Furthermore, we’ve seen 5 straight days of gains, with today’s price action including a large gap up followed by a large rally. This is typical blow off action, and it implies that the market is becoming too one-sided to sustain further long-term price rises. Look for a multi-month or multi-year correction to start soon.

Today is the day to short SLV

I’ve been waiting and watching for SLV’s typical blowoff move unfold. Today I took a short bet with it, buying Nov 27 Puts. This is obviously a short term play, but when parabolas reverse, the counter-move is usually very fast.

During a climax top, a stock leader that has risen for many months will suddenly take off and run up much faster than it has in any week since the start of its original move. On a weekly chart, the spread from the absolute low to the absolute high of the week in almost all examples will be wider than any price spread in any week so far.

- William O’Neil in The Successful Investor, pg. 80

Notice in the SLV weekly chart above that after rally for months on end, SLV has now blasted higher in a parabolic fashion. It is making it’s fastest gains of the entire move in the past two weeks.

On the daily chart, notice a few interesting features. First, about 5 days ago, SLV gapped way up and then rallied hard for three days. Then today, it gapped up once again. In O’neil’s book, chart after chart from the Nasdaq bubble shows this exact pattern, which indicates extreme bullishness that should reverse very soon.

Trading in EUR/CHF for USD/CHF

Today we arrived at two conclusions: 1) EUR/USD looks bearish. 2) we still like EUR/CHF bullish as discussed a few weeks ago. Thus, we wanted to trade both currency pairs. Of course, we quickly realized that EUR/USD short and EUR/CHF long is the same as trading USD/CHF long. So we did some analysis, and we’re now quite confident in trading USD/CHF long. We’ve switched our EUR/CHF long position to USD/CHF long position.

The chart above (EUR/CHF daily chart) identifies why we were happy to switch out of EUR/CHF long. Notice that the pair bounced of 1.28 as expected, with nice MACD divergence. However, it is testing strong resistance, and just broke an ascending trendline, so it may be under pressure for some time.

The next chart (above) shows why we think EUR/USD is bearish. According to the Elliot wave count, the declines from 1.60 have been impulsive (5-waves) and the rallies have been corrective (in three waves). Currently, it looks like EUR/USD is completing a 3-wave rally to correct the drop from 1.50 to 1.18.

Thus, since we generally like EUR/CHF long, and EUR/USD short, we want to go USD/CHF long:

 

The 15-yr monthly chart for USD/CHF (above) looks rather bullish. First, notice that a 5-wave decline is nearly complete, which indicates a strong counter-trend rally ahead (multi-year). Second, you can see that price is holding at a very strong, long-term trendline (we believe this line will hold, so if price closes below this line on two monthly candles, we will exit the position). Third, Wave-3 ended with a parabolic move. Then, the currency pair went on to retest the parabolic low twice, but so far has not broken it substantially. We think this is quite bullish. Fourth, notice the MACD divergence that could be potentially forming.

Zooming in on the USD/CHF chart (3y weekly chart above), you can see that Wave-5 has formed inside a channel that very closely resembles an ending diagonal, which indicates strong reversal ahead.

While the technicals appear strong for USD/CHF long, the COT data also supports this notion:

First, notice that the 78-week index for Commercial traders of USD are nearing the 100 percentile mark, meaning commercial traders are becoming very net long.

Swiss franc commercial traders are very close to the 0 percentile mark, indicating that they are very, very net short.

Overall, it is a bit frightening to go long USD/CHF when it’s in such a clear downtrend. However, the technicals indicate that it is nearing support, and the COT data shows that we’re taking on the same position as the smart money commercial traders.

Our trade plan is to exit at a loss if USD/CHF closes below the monthly trendline described above for two monthly candles. Our initial upside target is 1.05, and then 1.15.

BIDU goes Parabolic

I think the stock market is topping out. Blogger sentiment is extremely bullish and stock market sentiment is relatively very bullish. In the midst of these sentiment extremes, BIDU is going parabolic. I think this stock is a good short bet, though it could have a bit more upward thrust before reversing.

You can see in the daily chart above that since consolidating after it’s split in May, 2010, BIDU has rallied in a parabolic trajectory. The fact that 5-waves can be traced out tells me that this rally is near an end. Furthermore, when sentiment is bullish and individual stocks are going parabolic, I believe it’s a safe bet to short.

Gold is looking ugly

Gold was all over the news last week as it was raging to new highs. I now think that it may be near the end of it’s uptrend, and I’m shorting KGC (Kinross Gold) as a proxy for gold, with an order to exit if GLD makes a new high.

My first chart shows yearly candles for gold. Notice that we’ve had 10 straight years of higher prices in gold. Gold is the “no-lose” investment today. Even if gold eventually does hit $2,000/oz as many people expect, I think we need an intermediate term correction that creates a down-year candle to shake some people out. Even the massive inflation in the 1970’s only lasted for 4 years. Furthermore, we are seeing the weakest inflation in 44 years, even with the trillions and trillions of dollars that governments are printing. This implies massive deflationary forces which could spell weakness for gold.

 

The next chart shows weekly bars for the past 11 years. From an Elliot Wave perspective, notice that 5-waves have completed. Often times, commodities will have a massive rush as the trend ends, but my thesis is that perhaps we will see an intermediate correction before we get this massive rush. A correction could take gold to the Wave-4 low of $700. There is clear RSI and MACD divergence, but these have yet to be confirmed.

The daily chart above shows a very interesting phenomenon that occurred last week as the media was excessively bullish on gold. Notice that price broke out above the previous high and stayed above there for several days, enough to convince people that it was a real breakout. Then today it gapped lower, trapping all the bulls badly. If this false breakout is significant, we should not see a new high, and thus I am placing my stop at that level.

One other interesting chart which shows the excessiveness of gold’s rally is the weekly candles of gold priced in euros. Notice the clear parabolic nature of that rally. Once again, no matter how badly the press portrays the situation, parabolas are unsustainable. Either gold will tank, or the euro will rally, or both.

Finally, take a look at the daily chart for KGC. Most gold stocks have slightly underperformed gold, but not nearly to the extent that KGC has. Its relative strength to GDX (a gold stocks index) has been weakening ever since gold bottomed in 2008. Since gold stocks tend to leverage moves in gold, I see KGC as a good stock to short; if gold drops, KGC should drop harder than most gold stocks, and if gold rallies, KGC may continue to underperform, thus lowering my risk.

It’ll be interesting to monitor what gold does in the near future. It’s obviously too early to call a long-term top in gold, but I’ll try to catch a rising knife at this point. If gold makes a new high, I’ll know that I’m wrong on the short-term.