The Theory of the Fake-Out Move
-- Posted Friday, 11 May 2007 | Digg This Article
by Howard S. Katz
May 11, 2007, 1:00 pm (Eastern Daylight Time)
The decline of May 8-10 was a false move, a trap. Gold is set to go sharply higher, and this decline is a wonderful buying opportunity. This is the conclusion which follows from my theory of the fake-out move.
Whenever any market has an important move which leaves a dramatic impression in traders’ minds, the prime condition has been met for a fake-out. Most of the time this move will be a decline, but this is not essential.
If at a later time the market superficially resembles the dramatic move but the fundamentals are pointing in the opposite direction, then the secondary condition has been met for a fake-out move.
The classic case of a fake-out move occurred in mid-October 1989 in the stock market. This was very close to the second anniversary of Black Monday. The market had recovered all of its ’87 loss and was back to its Aug. ’87 high of 2700. So two superficial conditions were the same: date and market level. However, the fundamental condition which determines stock prices (the movement of bond prices and hence interest rates) was exactly the opposite. In 1987, the Fed was tightening, and bonds were going down. In 1989, the Fed was easing, and bonds were going up. On the Friday before the 2nd anniversary, the stock market swooned as people who believed that there would be a reenactment of Black Monday rushed to sell. On Monday, stocks opened lower; there was great fear. AND THAT WAS THE BOTTOM.
The dramatic event which has been hanging over the gold market for the past year is the decline which started on May 12, 2006 and carried to June 14, taking $160 off the gold price in a month’s time. As of May 8, we were within hailing distance of the May 11, 2006 high thus giving us agreement with two superficial conditions (date and market level). However, at the present time the fundamentals on gold are very different from a year ago.
A year ago, traders had enormous profits in gold. When central bank selling hit the market, it sunk like a rock. But today that profit taking has been done, and we are ready for another leg up in the very long term trend. Over the past two months, the central banks have again tried to put gold down, but the gold market, up to now, has absorbed their selling.
So when we see the gold market swoon as May 11 approaches, this is very like the stock market’s swoon on the Friday before the second anniversary of Black Monday in 1989. It is a time to buy.
Such swoons generate a great deal of fear. But you should not be afraid. Reason tells us that this is nothing more than a fake-out move, and this is an opportunity to be aggressively bullish.
For more of my thinking and information about my newsletter, The One-handed Economist, please visit my website, www.thegoldbug.net.
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