As we move into 2012, the market is characterised by the tips of monetary icebergs of Titanic-sinking proportions. This includes the previously hidden process of rehypothecation, which contributed to the MF Global collapse and the vaporisation of client funds and counterparty funds. The practice of essentially remortgaging inflated paper assets is most widely spread in the UK — with the UK laws being more lax than in the US, US funds were shifted to these jurisdictions as part of a regulatory arbitrage. This changes the nature of counterparty risk and has an impact on the already-precarious steps towards solving the eurozone crisis.

 

The US continues to have its head in the sand, refusing to take the medicine it so freely prescribes to other countries, with an ongoing appetite for debt. Structural economic reform in the US is inevitable and will be painful. The bitter euro pill will be exported to the US. The fast relief rallies are not enough to establish a trend, and volatility will not disappear. The solution is currency debasement and trade wars, both of which will erode the profitability of US companies, which rely on imports to fund their profitable business models.

 

It is against this background that we look at the Dow Jones Industrial Average, gold, oil, our nearest serious competitor Hong Kong, and the Straits Times Index.

 

There is no escaping history with the Dow. The head-andshoulders pattern developed in mid-2011. Downside targets were achieved and an L-shaped consolidation pattern developed. The breakout from the L-shaped consolidation was erratic, with high volatility on the up and down sides. History is important because the neckline trend line for the head-and-shoulders pattern acted as a resistance level. This effectively limits the degree of any rebound rise in the Dow and creates a strong resistance level.

 

The Dow can reach and exceed the 12,800 highs of 2011, but this is most likely to be a bumpy ride. This includes very fast moves to the trend line, followed by very fast retreats from it. Volatility makes longer-term investing difficult.

 

The key weakness in the Dow is the inability to make a clean break from the L-shaped consolidation pattern. Usually, breakouts from this pattern are strong, quickly establishing a stable and reliable uptrend. This not the case with the Dow, and suggests that further negative developments in Europe and the US have the capacity to quickly drive the index to the 11,600 level and retest the 10,600 level.

 

The bulls are confirmed with a strong and sustained breakout above the value of the uptrend line. The bears are confirmed with a consistent testing below 11,600 support and tests of 10,600 support. Failure of 10,600 gives a downside target of close to 9,600. Next year looks to be one of continued struggle, so investors will watch for breaks below or above the key trigger points. Genuine economic growth is difficult and volatility risk is high.

 

Oil is a slippery conundrum. A weak eurozone and US economy should be negative for oil, but in the last months of 2011, it showed strong resilience. This shows the inclusion of two factors.

 

The first is political risk arising from the prolonged Arab Spring and its potential impact on oil supply. The second is the increasing commodity speculation using exchange-traded commodity funds. This means the oil price often reflects wider investor concerns, rather than the specifics of the industry.

 

Oil is dominated by three features. The first is the long-term uptrend line A. This provides a cap for rising prices. Higher oil prices in 2012 use this as a limiting feature. A move above this resistance feature is very bullish and sets prices well above US$115.

 

The second feature is the break above downtrend line B. It is of historical interest because it shows a strong trend reversal.

 

The third is a pattern of horizontal support and resistance. Below US$100, these bands are about US$10 wide. Above US$100, the volatility of pricing behaviour increases and bands expand to about US$12. This increases the speed and volatility of price rises above US$100.

 

For 2012, the best bulls will look for a move above the uptrend line A, with targets in excess of US$130. Moderate bulls look for prices to rise to and then react away from trend line A. This gives targets in the US$115 to US$125 range. Downside targets for these bulls rest on support near US$88. The bears will watch for falls below US$88 support and below US$78 to give downside targets of US$68. On balance, we are bullish.

 

Gold is a currency play. Touted as a replacement for fiat currencies, it remains the ultimate safe haven for governments. This year saw increased buying by central banks in China, India and the eurozone. The speculative pops above the upper trend line are created by uncertainty and increased retail buying using commodity exchange-traded funds (ETFs), either of the synthetic variety based on futures contracts or those that hoard the physical.

 

The weekly charts show two clear trending features. The first is the parallel trend lines. Gold generally trades inside this trading channel and marches steadily upwards. It is a slow rise, with US$2,000 possible in 1H2012. The second feature is the strength of the underlying trend, shown by the steady and consistent separation of the long-term group of Guppy Multiple Moving Averages. This shows steady and reliable investor support. We don’t expect to see gold being dumped any time soon. Euro tensions and US dollar weakness are the compelling driving forces.

 

Short-term opportunities exist, as any deepening of crisis elements have a temporary bullish effect on gold price, with rapid and sometimes reasonably sustained breakouts above the upper trend line. These are trading opportunities. Smart and cautious investors will continue to accumulate as prices rebound from the lower trend line.