Once started with quantitative easing it’s very difficult for an economy to get off of it. As with many drugs, the high is great but the hangover comes the next morning and the repercussions are unknown. This is unchartered territory where you have a major devaluation of the world’s reserve currency. For every action of the central banks there are reactions.

Now we’re seeing a reaction with sovereign debt issues resurfacing in Europe as tensions grow over debt restructuring, bank bailouts, and budget issues. Borrowing costs are rising because unlike the Fed, the European Central Bank didn’t purchase debt. The ECB will need to address these concerns of a declining dollar and rising borrowing costs leading to a potential liquidity trap.

This may lead to a replay of the May flash crash where there were reports of banks refusing to lend to each other. It’s the beginning of a global trade war where countries engage in competitive protectionism through currency debasing. Interventions and market manipulations lead to market crashes.

A weak US dollar is an additional tax on the American consumer as many are still faced with poor job opportunities and falling home values. A devalued US currency puts pressure on emerging markets, which need a strong dollar to make their products competitive.

Today gold and silver made a breakout from the three-week consolidation from early October. In early October, I mentioned precious metals would have a pullback. Over three weeks gold pulled back and this latest quantitative easing has pushed the price up to the upper resistance level again. This isn’t a point where I buy or add to positions as during the past two years gold has made 20% to 30% runs and given about half of those gains. In this market — where interventions and manipulations are occurring — chasing markets could be treacherous. Taking profits when the news and the consensus is bullish is the disciplined trader’s approach. When everyone else is comfortable I get cautious.

One lesson I’ve learned as a trader is that if you don’t know what the trend is, don’t make a guess. Even a four year old child who looks at a price chart on gold can spot the uptrend.  However, in the  case of the major market indices- where you have a declining 5o day moving average below the 200 day moving average, and when you are seeing poor price volume action- it is best to be cautious. There can be impressive rallies before a bear market begins.  The Dow Jones Industrial Average is overbought and has crossed the 200 day moving average on light volume.  This has come after major bouts of selling from institutions including the infamous “flash crash in May.”

The way I measure how excited a market is through volume.  A break above key support or resistance on low volume indicates that the move was not convincing and should send warning signs as a “fakeout”.  This market is indicating that the moves higher are basically due to a lack of sellers and any further news items which may be negative will bring the bears back out.

Housing is an area which is seeing very little demand right now.  This is the industry which initiated the financial crisis we are in and it should be showing signs of strength in an economic recovery.  Much of the rise in housing was the result of government intervention in the form of tax breaks offered to buyers.  The rise in treasury prices and the weakness in housing indicates that many people are not borrowing.

Although housing appears to have a double bottom, I am a bit suspect of the lack of volume.  It would be premature of me to call a buy signal on housing, especially since it has not tested the 50 day moving average as resistance after the bearish death cross of the 5o day crossing the 200 day.  Housing needs to turn positive before any real rally can begin.  Right now housing stocks are still bearish and a convincing break above the indices would change my mind, but the probabilities of that occurring with these overbought conditions and lack of volume are low.

There was a report this week about executives of bailed out banks who were paid $1.6 billion dollars of taxpayers money.  As investors realize the staggering debt and the stagnant economy we are facing because of high taxes and increasing government intervention into the private sector, there will be major move away from cash and towards gold and silver.  At that point gold and silver could move significantly higher.  I believe that time may be closer than many sources would have you believe.

To summarize, some indexes have broken the moving averages to the upside but on low volume, as I have shown in the first chart.  To me, this indicates that smart money is staying on the sidelines until the trends are more observable.  Right now, my bias is that this rally is  a fake-out and I will not become bullish again until I see a break above 10,600 on the Dow as well as a bullish golden crossover of the 50 day crossing the 200 day moving average to the upside.  Volume is a crucial part of this equation.  If there is some major accumulation coming coupled with the 50 day moving average sloping higher, then I will reconsider my position.  However, at the moment I am still bearish on the markets and am bullish on silver and gold.

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