Wednesday, March 24, 2010

BUYER BEWARE

The rally off the February bottom is now going on 32 days. This is probably not the best time to chase stocks higher. I’ve been saying for a couple of weeks that the market needs to take a breather, preferably before earnings season as it would then be setup for a strong rally through April.

As the “normal” cycle in stocks lasts on average 35-45 days trough to trough we are now getting very deep in the cycle and in jeopardy of putting in a short term top at any time. We just need a catalyst to halt this incredible momentum move.

I’ve been expecting a runaway move to develop as this rally progressed but this is starting to turn into a parabolic move. Since the February bottom the market has ended higher 68% of the past 32 days and hasn’t closed below the 10 day moving average in over a month.

Compared to the runaway move in 06/07 which averaged 57% up days it’s apparent this rally is getting very overheated.


The leading tech sector is also becoming rather stretched. At $3.00 above the 50 day moving average it’s now in the range that has marked the tops of previous daily cycles.


Not to mention the Nasdaq 100 is only 12 points away from major resistance.


And the SPYDER’s are now bumping up against the declining 200 week moving average.
 

I doubt they will be able to penetrate and hold above this level on the first try.



I suspect the catalyst will come from the same area it came from in January, another leg up in the dollar.


The breakout above 81 today gives pretty good odds that the dollar will now be heading up to test the pivot at 83. That should be an ending move for the current intermediate dollar cycle. The expectation would then be for stocks to rally hard for the next four or five weeks as the dollar works its way down into an intermediate low in early to mid May.

I expect the markets to hang in reasonably well during the impending correction, possibly filling the March 5th gap. Once the dollar begins the trip down we should see an explosive move in stocks and commodities, possibly the final surge higher in this third leg of the cyclical bull market.


I’m expecting the correction in stocks will also correspond to the final leg down in what now looks to be a D-wave decline in gold that will most likely test the $1000-$1025 level. The left translated character of the current daily cycle is also confirming this.


That should be followed by a powerful A-wave advance as the dollar moves down into its intermediate cycle low.
 

For now the best strategy is to sit patiently and wait for the dollar to rally up into resistance at the 83 level and the market to move down into the cycle low. Once that happens we should have a fairly low risk entry for long positions in almost any asset class as the dollar works its way down into the intermediate cycle low. 

18 comments:

  1. Toby,

    Looks like Portugal's rating downgrade was the catalyst needed to send the Dollar to currently 81.79 and of course the markets and precious metals lower.

    I am a bit surprised to see the Dollar rally so quickly past 81.

    Do you think the Dollar will continue to rally this strongly up to 83?

    It seems to me that the Dollar rally is based on the uncertainty over sovereign debt crisis -- which does not look to resolve itself quickly. your chart suggests that the Dollar could be heading back down in April.

    I guess what I asking is if this foreign debt is a game changer in that the uncertainty is causing the Dollar to be a safe haven and will continue to be until it is resolved?

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  2. I'm just basing that chart off "normal intermediate cycle lengths.

    Usually the dollar's intermediate cycle will last 20-25 weeks, trough to trough.

    So I'm guessing a couple more weeks before the current daily cycle tops which should then start the dollar moving down into an intermediate cycle low somewhere around week 22-25.

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  3. Toby,

    Great blog!

    Curious: If you feel gold will test $1000-$1025, do you think silver may make it down to say the $15.50 level? Silver has been reacting stronger to swings whether upside or downside lately.

    Thanks!

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  4. My feeling is that since the daily cycle has just begun for both the dollar and gold that we probably will see gold test the $1000-$1025 level. That would also jive with Dec. being the last intermediate cycle low.

    It's too complicated to try and explain in this comment thread but I have gone over it indepth in the daily and weekly reports.

    But to answer your question, yes silver usually reacts stronger to corrections as its a thinner market.

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  5. Toby, great posts, only new to your commentary, but congrats on the hard work with the analysis.

    I'm curious - how do we know that the rally of the USD isn't due to it being in a bull market?

    I ask this because it's made a higher low at 74, divergence on monthly charts, and has now busted through strong resistance at 81.

    Interestingly to see that with the bust-out, commods like Oil and Nat Gas for example didn't massively sell off. Surely the big commercials would've been salivating at the shorting opportunity presented to them.
    Thanks
    A

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  6. The dollar is apparently in a cyclical bull market. That doesn't change the fact that its still in a long term secular bear market.

    At some point the secular fundamentals will resume and the cyclical bull will come to an end.

    The same with the stock market.

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  7. Toby

    The market looks bullish in spite of the divergences etc with the Dow, Wiltshire, Nasdaq and FTSE all breaking out to new highs as I write.

    Its irritating not to be on the long side right now and difficult to stand aside and wait!

    So what signals are worth looking for to tell when the top is in?

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  8. My suggestion isn't to look for the top but just wait for the bottom. It will come eventually and there are signs to look for that big money will be coming back into the market just like they've been exiting this one for the last two weeks.

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  9. Toby,

    Thanks for your post. Looking ahead toward your anticipated peak in stocks and commodities after the wave A run, are you anticipating a longer term drop in the markets following that point? If so, how do you believe gold will hold up in such a correction?

    Thanks.

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  10. My current guess is that the market will continue higher after a brief correction.

    Now whether this cyclical bull will end with this third leg higher or we get another one is anyones guess. I'm expecting it to end with this leg but that doesn't mean we can't go higher still.

    Gold is easy, its in a secular bull market. Once this D-wave ends we will start another ABCD cycle.

    I've gone over all this in detail in recent subscriber updates.

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  11. Toby,

    Love the blog


    You said that

    "The dollar is apparently in a cyclical bull market. That doesn't change the fact that its still in a long term secular bear market."

    I agree that the Dollar is in a Bull Market as evidence that the Dollar has a rising 200 MA.

    What is your rationale that the Dollar is still in a secular bear market? Is that based on the fundamentals?

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  12. Yes fundamentals. The US is so deep in debt we have no hope of ever paying it off except by printing money. That's not a recipe for a real sustainable bull market.

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  13. Toby,

    What do you make of today? A possible beginning to a trough or a momentary setback?

    Thanks!

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  14. The market is due for a move down into a daily cycle low. I have been pointing out the many divergences in breadth and extreme bullish sentiment in the dialy updates for a couple of weeks now.

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  15. Gold @ $1000-1025? Not so fast. My feeling is that gold is about to move higher, not down. Any extraneous event could derail your prediction and now we have one in the newly negative swap spread and in the effective downgrade of the U.S. soveriegn debt by S&P market-derived indicator, to aa+.

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  16. Of course anything is possible but the daily cycle in the dollar has just begunand it's broken out of the bull flag consolidation.

    At this stage of the bull market gold is still tethered to the dollar. So until the dollar is ready to resume the secular bear trend gold is going to be under pressure although it is making new highs in most other currencies which probably explains the relative strength lately.

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  17. Toby, you are using Gary's work, to make money.

    These are not your thoughts.

    Your are a cheat.

    Plagiarism, as defined in the 1995 Random House Compact Unabridged Dictionary, is the "use or close imitation of the language and thoughts of another author and the representation of them as one's own original work."

    SHAME.

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  18. Gary and Toby are the same if you haven't already figured that out by now.

    ReplyDelete