Tuesday, August 31, 2010

COILS AND THROWBACKS

We have a potential coil forming on the gold chart. As I've mentioned before about 70% of the time the initial thrust out of a coil tends to be a false move soon followed by a more powerful and durable move in the opposite direction. If that holds true then it would be preferable for gold to break out of the coil to the downside.



Today will be the 24th day of this daily cycle. The cycle can last up to 30 days and not be out of the ordinary, so it is possible that the daily cycle didn't bottom on Aug. 24th. I was expecting a push to $1240 before a pullback. We were a bit short of that target on Aug. 18th, but have now tagged it.

If the stock market continues to drop into the Friday jobs number we could see gold drop into another corrective move this week.

Last week silver broke out of a triangle consolidation. It's not unusual to see a throwback to test the upper trend line.


If gold does have another move down into the latter part of the timing band we can probably expect silver to drop back down to at least the $18.70ish level and test the triangle breakout.
 
There are also two gaps on the GLD and SLV chart that are begging to be filled before continuing higher.
 

 
If the coil breaks down watch gold for a swing low this week as a sign of the bottom.

Saturday, August 28, 2010

S&P 950...NOT SO FAST

The better than expected GDP numbers threw a slight monkey wrench in the trading plan (for you traders out there). I was expecting a gap down open that would break through the 1040 pivot. The plan was to buy into that gap with a stop under the morning intraday low. The market did break slightly below 1040 (1039.70) so in theory if one was quick they could have jumped in right there. I doubt anyone was that quick, so I suspect almost no one caught the exact low. Perfect timing isn’t critical though if this is a daily cycle bottom, as we should have at least 2 to 3 weeks of upside ahead of us. I’m assuming the market doesn’t drop back down to test the lows on next Fridays jobs report.

I really doubt it will. I think the jobs report has probably lost its ability to move the market at this point. Until we start to roll over into the next recession we are probably going to continue to see mildly positive jobs numbers for now. When we start seeing 200,000 and 300,000 jobs being lost again then we can look for the monthly jobs report to start affecting the stock market. Until then I think it’s not going to have much effect on stocks. With that in mind I really doubt the market will be coming back down next week in order to bottom on the employment data.

Now before everyone gets all excited let me point out that today was in fact an outside day and as such we don’t officially have a swing low yet. We can’t have a daily cycle bottom until the market forms a swing low. That being said, today was a 90% up volume day. That is a panic buying day and this late in a daily cycle that usually means smart money has recognized a bottom and is rushing to get back in the market.


I realize almost everyone is now convinced the bull is dead and we’ve started back down in the next leg of the secular bear market. Now maybe we have and maybe we haven’t. I’m reserving judgment until I see the last two of my bear market signs come to pass. Namely the 200 day moving average has to turn down and we must get a Dow theory sell signal (BOTH the industrials and transports must close below the July lows). Neither one of those things has happened yet. Until they do we are in no man’s land. As a matter of fact, according to strict Dow Theory the primary trend is assumed to still be in force until a sell signal is given. Since we obviously don’t have that, and aren’t really even very close to it yet, I’m going to abide by the rules and assume the cyclical bull is still alive.

Next I’m going to point out we don’t even have a confirmed down trend yet. So far the market is still making higher highs and higher lows. That is the definition of an uptrend. In order to reverse that the market would have to break below the July low or it will have to bounce out of this daily cycle bottom, stall out, and then move back below Friday’s low (I’m taking some liberties here and assuming Friday did in fact mark the cycle bottom.)


Now let me show you what no one is seeing. And when no one sees it that makes it all the more likely to play out. Of course we do still have the inverse head and shoulders pattern in play. That one actually has been spotted by a few hopeful bulls, but it’s certainly not mainstream yet like the regular head and shoulders top was and still is.

The real pattern, and one I put a lot more faith in than a head and shoulders top or bottom is the 1-2-3 reversal that is in play.



Notice how the initial rally into the August top broke the down trend line. That was #1. Now we are in the process of #2 testing the lows. As long as today’s bottom holds that test is going to be successful. The final piece in the puzzle is a move above the August highs. If that occurs we will have a confirmed trend reversal and the April highs will then be in jeopardy of being surpassed. I know that seems impossible at this point but I would point out that everyone assumed we were back in a bear market in mid `04 also. The market had been making lower highs and lower lows since March. Needless to say everyone was a bit surprised when the Fed cranked up the printing presses into the elections and the market broke out to new highs. I forget, what is happening this year? Oh that’s right, mid-term elections. Hmm…

There is also a yearly and 3 year cycle low coming due in the dollar (more on that in the dollar section of the report). Suffice it to say there will be plenty of liquidity the next several months.More in the weekend report for subscribers...

Wednesday, August 25, 2010

Monday, August 23, 2010

WHY THE DOLLAR IS KEY

Stocks:

The move to a lower low on Friday puts the odds squarely in the “one more leg down” camp. I’ve noticed a couple of patterns emerging in the stock market. The first one is the tendency for a market cycle to bottom on an anticipated news event. The last two intermediate cycle lows bottomed on or one day prior to a jobs report.




The second is the tendency for a cycle to bottom only after a fake out earlier in the cycle.




I’ve been expecting a short daily cycle to balance out the extremely long cycle into the May flash crash (62 days trough to trough). But it doesn’t look like we are going to get one. Every cycle has either run late into the timing band or stretched long. So from here on out I won’t be looking for anymore short cycles (which probably guarantees the next one will be).


So if we factor in the fake out principle and news driven bottom theory we are probably looking at the current daily cycle bottoming next week, possibly Friday (day 40) on the GDP revision. Lately the daily cycles have tended to run between 35 and 45 days with 39 or 40 being the norm.


I think we all realize the revision is going to be bad and common sense would suggest the market should go down. However the market is already in the process of discounting a bad number and has been for 10 days now. I suspect this is going to be one of those sell the rumor buy the news type events. And I expect it is going to catch the bears leaning heavily in the wrong direction expecting the market to act rationally and continue down.

When the market starts to rally out of that cycle bottom we could see a pretty aggressive move as shorts panic and have to cover. I actually expect this will quickly drive the market above the 1130 resistance level. Then it will just be a question of when sentiment reaches bullish extremes as to whether the market can test the April highs. If we start to see large negative money flows (a sign institutional traders are exiting) prior to bettering the April high then there is a good chance the cyclical bull is on its last legs.
 Dollar:
I’m going to spend a good bit of time today on the dollar because it is going to be the key to what I envision unfolding the next few months.


I’m going to start off with the largest 3 year cycle and then work backwards.


 
The last four major 3 year cycles have all run 3 to 3 1/2 years in length. The current cycle is 2 years and 6 months old. Now there is a chance the 3 year cycle could bottom this fall as the current intermediate cycle bottoms. However that cycle is due to bottom in November or early December. That would leave the 3 year cycle a bit short. For that reason I expect the current cycle to run at least one more intermediate cycle into the March – June time frame. This is a big reason why I think the C-wave in gold may have two legs up instead of just one.
 
Next let’s back down to the next smaller cycle – the yearly cycle.

 

I’ve marked the last two yearly cycles in blue (notice how they are making lower lows). The last two yearly cycle lows occurred in December. The current intermediate dollar cycle should bottom in late November or early December. That skews the odds heavily in favor of the next intermediate cycle low not only marking an intermediate bottom but also forming a higher degree yearly cycle bottom in the same end of the year time frame as the last two yearly cycles.

After the aggressive collapse we’ve seen in the dollar over the last couple of months there seems to be little question the dollar has begun working its way down into that yearly cycle low. The only question now is how long before the current intermediate cycle (which began on August 8th) tops. I suspect it will be fairly quickly. As a matter of fact I think the current daily cycle will most likely be the last right translated daily cycle imbedded within the current intermediate cycle.

My best guess as to how far the correction drops would be at least 50% of the recent rally. Most daily cycles do tend to give back at least 50%.
 
 
A 50% retracement would take gold slightly below $1200. If you remember I was expecting smart money to push gold below the May pivot as the intermediate cycle bottomed last month. I explained at the time how big players routinely run stops to trigger heavy volume sell offs that allow them to take large positions into a very liquid environment. With the benefit of hindsight we know this is exactly what happened.
 
Now I don’t think gold will be dropping anywhere close to $1155 during this correction, but I do think there are probably plenty of stops to be run below the psychological $1200 level. So I think we can probably look for gold drop below that briefly as smart money again runs the stops in order to panic retail traders into puking up their shares. My suggestion would be for anyone looking to enter or add to positions to do so as gold breaks through $1200.
 
Let me remind everyone that gold is the single strongest trending market on the board today. It is the only asset still in a secular bull market with unimpaired fundamentals. I did my best last month to convince traders and investors to buy the intermediate cycle low. I suspect many were unable to do so. Those intermediate cycle lows are the single best buying opportunities one gets in bull markets and they only come around once every 5-6 months.
 
The approaching smaller daily cycle low will be the next best opportunity to get long or add to positions in the one remaining secular bull market. If you missed the last one in July I suggest you not make the same mistake twice.


Once this daily cycle tops, which I expect it to do next week, or early the week after, there is a very good chance that will also mark the top of this intermediate cycle. As I’ve illustrated on the chart, I then expect every daily cycle after that to be left translated (tops in less than 10 days), and each to move below the prior cycle low (failed cycle) until the dollar puts in the yearly cycle low later this winter.

It’s been my contention for some time that the only way stocks can rally is if the Fed continues to debase the currency. Remember this is an election year so I think we can pretty much bank on the dollar moving down into the yearly cycle low right on schedule, possibly with extreme prejudice as Ben desperately tries to keep asset prices inflated into the elections.


But as I’ve been saying for a long time it simply isn’t possible to print prosperity. I’ll tell you what else is impossible to control - where the liquidity lands.


Ben would love for all that free money to create jobs, but as we know that just ain’t gonna happen. The next best thing would be for all that liquidity to levitate the stock market. And I think it will to some extent, but there are already problems starting to surface with this plan. Not surprisingly they are the same problems that popped up in `08 as Ben tried to stop the real estate bubble and credit markets from collapsing. I’m sure you’ve noticed the problem by now. That’s right, liquidity is leaking out of the stock market and flowing into the commodity markets.





It’s readily apparent in the above chart that stocks are already struggling as more and more liquidity leaks into commodities. The CRB however is having no trouble what-so-ever responding to the Fed’s printing press. It is rising in lock step with the declining dollar. The fact that the fundamentals are impaired in most commodities just goes to show how much liquidity the Fed is actually dumping on the world.
 
I expect this pattern to continue and accelerate as the dollar moves into the yearly cycle low. I have no doubt we will continue to see a weaker and weaker response from the stock market leading to more and more panic printing by the Fed causing commodities prices to rise and rise.


Commodities are already trying to tell Ben to shut down the presses. As this continues they will soon be screaming for the Fed to shut off the money spigot. I really don’t expect Ben to hear though. He was deaf to what his monetary policy caused in `08 ($147 oil and the collapse of the economy) and I expect he will not heed the warning signs this time either. Which, of course, just means he will get the same result as last time. Eventually his monetary policy will spike commodity prices, especially oil and probably food, through the roof which will destroy the economy all over again.

Gold:
I’ve been looking for a swing high to possibly mark the top of the current daily cycle. Gold formed a swing on Friday that I think probably marked a short term top. If gold is now on its way down into the daily cycle low then I tend to think it will probably bottom along with the stock market sometime next week or early the following week.



My best guess as to how far the correction drops would be at least 50% of the recent rally. Most daily cycles do tend to give back at least 50%.


A 50% retracement would take gold slightly below $1200. If you remember I was expecting smart money to push gold below the May pivot as the intermediate cycle bottomed last month. I explained at the time how big players routinely run stops to trigger heavy volume sell offs that allow them to take large positions into a very liquid environment. With the benefit of hindsight we know this is exactly what happened.

Now I don’t think gold will be dropping anywhere close to $1155 during this correction, but I do think there are probably plenty of stops to be run below the psychological $1200 level. So I think we can probably look for gold drop below that briefly as smart money again runs the stops in order to panic retail traders into puking up their shares. My suggestion would be for anyone looking to enter or add to positions to do so as gold breaks through $1200.

Lest I forget let me remind everyone that gold is the single strongest trending market on the board today. It is the only asset still in a secular bull market with unimpaired fundamentals. I did my best last month to convince traders and investors to buy the intermediate cycle low. I suspect many were unable to do so. Those intermediate cycle lows are the single best buying opportunities one gets in bull markets and they only come around once every 5-6 months.

The approaching smaller daily cycle low will be the next best opportunity to get long or add to positions in the one remaining secular bull market. If you missed the last one in July I suggest you not make the same mistake twice.

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Thursday, August 19, 2010

CLOSE ENOUGH?

Gold is now due for a corrective move. Its rallied 15 out of the last 17 days and is now moving into the timing band for a cycle low. My best guess was that gold might make it to around $1240 before that corrective move began. Today was pretty close.


If stocks have one more leg down before the final daily cycle bottom then a move down by gold at the same time does make for a tidy little theory.

More in the nightly updates.

Wednesday, August 18, 2010

WAITING ON OIL AND THE DOLLAR

A while back (I can't remember when, and I'm too lazy to find and link to it) I mentioned that the daily cycle in oil runs about 50-70 days.

The energy sector is one thing weighing on the stock market right now. Oil needs to turn the corner and join stocks in a new uptrend. As soon as oil puts in the cycle bottom it should provide a big boost to the general stock market.

Today's intra-day reversal comes right in the middle of the timing band for a cycle low. If we get a swing low tomorrow there's a good chance the energy markets may be ready to join the party.


Another requirement for rising stocks, in my opinion, is a falling dollar. Bernanke probably realizes by now he isn't going to be able to print prosperity (I've said all along that simply printing money won't heal the economy or create jobs). However I don't expect that to deter him from further debasement of the dollar. He knows that asset inflation is the next best thing, and I have no doubt he will do everything in his power to keep asset markets inflated.

Ultimately this is going to lead to a currency crisis either late this year or early next as the dollar works its way down into the three year cycle low. But I'm confident unintended consequences are the last thing on the Fed's mind at this point. As is invariably the case politicians are only interested in the short term, which is a big reason why we have such huge long term problems right now.

I think we need to see the dollar break back below 82 in order to push the S&P through the 1100 resistance level.


Once we do that then its just a question of when the dollar breaks through long term support at 80. When it does it will fulfill my last two requirements and signal that the 3 year cycle decline now has its hooks in the dollar.

The other signal besides a break of 80 is a left translated intermediate cycle. A break to lower lows anytime in the next 9 weeks will meet that qualification.

If the dollar happens to do that in the next week or two it will form an extreme left translated cycle. And those tend to turn out extremely bad.

TOO LATE TO CHASE

Today will mark the 15th day of the current daily cycle in gold. Gold has been up 13 out of the last 15 days. It's getting overbought.
 Usually the daily cycle runs about 20 -25 days. At this point it is probably too late to chase the move.
 

There are also a couple of gaps on the GLD chart that need to be filled. The first one is filling today. I expect both will get filled at some point during the coming cycle correction.

If you already have a position then just hang on. If you still need to add I would advise waiting till we see the dip down into the cycle low.

Whatever you do don't short. Remember in bull markets the surprises come on the upside. I think the recent 3 week move has demonstrated that, probably painfully so to anyone who fell victim to the technical chart pattern and shorted the break of the May pivot.

Tuesday, August 17, 2010

S&P, SILVER & THE DOLLAR

Unless something happens in the next couple of hours the S&P is going to form a swing low this morning. That is a prerequisite but not a guarantee of a daily cycle bottom.

Last week I called attention to the volatility coils forming in the S&P and silver. About 70% of the time the initial thrust out of a coil ends up being a false move that is quickly reversed by a more powerful and durable move in the opposite direction.

We are seeing that play out right now in silver. As of this morning silver has completely reversed the initial break and is now in the process of breaking through the $18.50 resistance level.


With the formation of the swing low this morning in the S&P the odds are starting to look favorable that we are now putting in the daily cycle low in stocks. If the coil pattern plays out here like it is in silver, and like the historical stats would suggest (and I think it probably will) then we should see a powerful surge out of this bottom.

The fact that the advance/decline line has already made new highs is a big plus for the bulls.


Usually new highs in the AD line will act to drag the market higher. As you can see in the chart this is exactly what happened after the February intermediate correction.

I wouldn't rule out a move to new highs during this next daily cycle. Remember we are coming off one of the most depressed sentiment levels in the last 10 years. That kind of extreme sentiment can be a powerful base for a big push higher.

Finally I'm watching the dollar closely. Since I don't think stocks can sustain any significant rally in the face of a rising dollar we will have to see the dollar quickly break down. To do so now would not only indicate an extreme left translated daily cycle but also a left translated and failed intermediate cycle.

If you remember the last two requirements I'm looking for to determine if the 3 year cycle decline has it's hooks in the dollar is a move below 80 and a left translated and failed (drops below prior cycle low) intermediate cycle.

If the dollar breaks down here we are going to have confirmation that Bernanke is running the QE presses again and I think we will then be on our way into what will probably be the first of several currency crisis for the US dollar.

Monday, August 16, 2010

SAME MISTAKE AGAIN?

In June I warned the bears that it was dangerous to remain short as the stock market was in jeopardy of putting in a major intermediate cycle low. Most, not understanding cycle theory, didn't listen. The result they got caught in a 11% rally.

Three weeks ago I warned the gold bears that an intermediate cycle low was coming due. Again the bears chose to concentrate on technicals instead of focusing on cycle timing and sentiment. The result? Strike two for the technical traders.

I think strike three is coming. I've warned again that the market is now in the timing band for another cycle low. That doesn't mean it has to bottom today or tomorrow. What it does mean is that the deeper we get into the timing band the the greater the odds become for a bottom followed by a strong rally.

As a matter of fact if the market can add a few more down days it will form a much better right shoulder in the inverse head & shoulders pattern.


I'm afraid the technicals are going to suck in the bears again right as the market puts in a bottom.

If we had seen a large selling on strength day I would be a lot more confident this is the beginning of something more significant. Absent that I think we have to assume that we are just seeing the normal move down into a daily cycle low that occurs like clockwork about every 30-40 days.

On Friday we started to see the McClellan oscillator begin to compress.


Often these compressions are followed by a large move in stocks. As we move deeper and deeper into the timing band for the cycle low the odds are going to increase that the move when it comes will be higher forming the right shoulder of the H&S pattern.

The prudent thing to do is either wait in cash for the cycle to bottom or cover shorts on the first swing low.

Longer term it would be much safer to wait for the Dow Theory sell signal before getting aggressively short, especially absent a large selling on strength day or days.

Ask yourself, do you really want to make the same mistake three times in a row? Selling into a bottom is a tough way to make money...even in a bear market.

Friday, August 13, 2010

BUY BONDS? NO THANKS.

We've had quite the debate lately as to whether bonds are in a bubble or not. I actually think they were in a bubble, but the bubble has already popped.

First off know that bond cycles tend to be very long and reverse very slowly. So we aren't going to see bonds just collapse like a stock market crash and all of a sudden we have interest rates pushing 15%. That just doesn't happen in the bond market.

Know also that 25 to 30 years is about as long as a bond cycle ever lasts.

Now take a look at the following charts.


That is a 29 year bull market, complete with a final parabolic move out of the trading range on the Fed's ill fated attempt to artificially control long term rates.

I have news for you, when ever the government tells you it is going to force the market to do something you can pretty much get on the other side of that trade with virtual impunity. (Remember what happened when the SEC banned short selling in financials) Markets are just too big for anyone to change a secular trend. Any attempt to do so will just hasten what would have happened anyway.

As you can see Bernanke did just that. The Fed's attempt to control long term rates just accelerated the final move resulting in the bond market immediately reversing and now even after a year and a half interest rates are still 140 basis points above the "Bernanke bottom".


I believe the recent rally over the last few months is the initial echo rally (a bear market rally) that will top and roll over before making new highs.

Ask yourself, would you lend money at 4% for 30 years to a country that is actively trying to debase it's currency and is so deeply in debt that we will never be able to pay that debt off without even further currency debasement? Don't forget you would be buying into a market that has been in a steady uptrend for 30 years.

Of course you wouldn't.

I know there are plenty of analysts that will argue for the continuation of a 30 year bull, but then those same people expected the tech bubble to continue for eternity and these are the same analysts who had convinced themselves that there was a shortage of real estate in `05 & `06. At secular bull market tops the masses will always be able to manufacture nonsense reasons for why the bull will continue indefinitely. At secular bull market tops common sense gets thrown out the window.

Human nature never changes. I can also guarantee that the top of the gold bull will be no different. If you think bond bulls, real estate bulls or tech bulls were ridiculous I can assure you they won't hold a candle to the absolute insanity that will reign among gold bugs when the secular gold bull tops.

Wednesday, August 11, 2010

BULL OR BEAR

I'm getting flooded with emails wanting to know if I think the bear is back. Let me repeat again my three requirements.

1. Stocks have to move below a yearly cycle low. They did that in July. So this one is a check mark for the bears.

2. The 50 DMA must cross below the 200 DMA and the 200 has to turn down. We have half of that condition met. The 50 has crossed below the 200. Half a check mark for the bears.

3. We must get a Dow Theory sell signal. In order for that to happen both the industrials and transports must close below the July low. That clearly hasn't happened yet.


Until that happens we are stuck with only half the conditions and the market remains in no-mans land between those two lines in the sand.
 
If the red line gets crossed by both the Dow and the trannies I will have no problem calling the bear. But until it does there is simply no need to second guess what the market is going to do before it happens.
 
The mathematics of the short side don't require one to catch the top of rallies in order to make money.
 
Just as an example selling short at the recent top (1120) and covering at 600 (I'm assuming a bear market) would garner one 46%.
 
However a more cautious trader could wait for the signal that the bear has returned and sell short at 1000, cover at 600 and still make 40%. Is 6% really worth the gamble that you might be early to the trade? No of course it's not. A sophisticated trader understands this and waits for proper confirmation before he goes all in on a bear market.
 
I think we are probably headed into the daily cycle low. If the coil plays out true to the stats then we will get that bottom in the next 1-4 days.
 
If however the dollar has put in an intermediate cycle bottom then we would probably not see a final bottom for 2 to 3 weeks (the daily cycle usually runs between 28-40 days give or take a few in either direction).
 
Since today was the 28th day stocks are actually now in the timing band for that low. It just remains to be seen whether the cycle will bottom early in the cycle as the coil suggests or later in the cycle as is typical of most cycles.

COILS IN S&P AND SILVER

We now have a volatility coil forming on the S&P and silver. Contrary to what one might think the initial move out of a coil, although it is often aggressive, usually ends up being a false move soon to be followed by a more powerful and durable move in the opposite direction.




Yesterday was the 25th day of the daily cycle in stocks so it is possible that stocks are dropping into a slightly early daily cycle low.

The dollar is bouncing which may signal a slightly early daily cycle bottom there also. However that opens up the possibility that the dollar could have another entire daily cycle before the larger intermediate cycle bottoms.

The total lack of any selling on strength days during this rally suggests that a breakdown out of the coil will be reversed soon as the odds suggest. In the last 5 years only one intermediate rally has topped without at least one of these large negative money flow days. With no sign of smart money selling yet it is unlikely the intermediate rally is finished.

And sentiment still hasn't reached bullish extremes either. Intermediate rallies don't usually end until sentiment reaches extremes and that includes bear market rallies.

Tuesday, August 10, 2010

STILL A BEAR

Contrary to what some would have us believe the dollar is still in a secular bear market. Yes I will be the first one to admit that it is currently in a cyclical bull phase (I said so when the 50 crossed above the 200 and the 200 turned up) ...the same applies to the stock market by the way.

But there is nothing on any chart that suggests this is anything other than a really big bear market rally. The pattern of lower lows and lower highs is still intact.

I've marked the 3 year cycle lows with red arrows and drawn in a line at 3 year cycle tops. So far each red arrow is lower than the last and each top has failed to move above the previous one.


In order for the dollar to end it's bear market it will have to break that pattern. We do have a window of opportunity in the next year. If the dollar can hold above the April `08 low at the next 3 year cycle bottom then we will have half the pattern broken. It would then have to rally above 90 in order to completely reverse the secular bear trend.

However the current 3 year cycle is again extremely left translated(topped in less than 18 months). Most of the time left translated cycles move below the prior cycle low. You can see the previous two cycles were also left translated and both dropped below the previous 3 year cycle low.

Cyclically speaking the dollar is now in a weak position and the odds are greater than 50% that we will see the dollar drop below 71 sometime next year.

Also contrary to what some would have us believe sentiment on the dollar is hardly bearish. The 6 month rally has done it's job and skewed sentiment back to the extreme bullish side of the boat. At the recent top sentiment was as bullish as it was during the brief deflationary period in `08/`09.


Chart courtesy of www.sentimentrader.com

As you can see in the above chart even the virtual collapse over the last two months hasn't pushed sentiment anywhere close to the levels that are needed to put in a major bottom. I suspect that won't occur until we drop into the 3 year cycle low and generate some real fear that the dollar is toast.

As a reminder we saw exactly that kind of sentiment on the Euro recently. At the time virtually everyone had become convinced the EU was going to unravel and the Euro was going to fade into history. We need to see that kind of sentiment in the dollar before we can put in the 3 year cycle low. As you can see we aren't even close yet.

So for the time being it's still a secular bear market.

Sunday, August 8, 2010

SOMETHING BIG IS BREWING

Now that we have a weekly swing low and a higher high I think the odds are heavily in favor of the intermediate cycle bottom being in place for gold. Just like all the calls for a market crash back in June, the calls for sub $1000 gold are probably going to be a bit premature. I really doubt we will ever see $1000 gold again during this bull market.

It was simply getting too late in the intermediate cycle for gold to have enough time to make it all the way back to $1000. Just like we had run out of time in June for the head & shoulders pattern in the stock market to have any realistic chance of completing.

This is one of the big drawbacks to relying solely on technical analysis. At bottoms the technicals will always look terrible. If one basis their trades solely on technicals they will forever be selling at bottoms and eventually they will destroy their portfolio.

History has show time and time again that trading based solely off lines on a chart just doesn't give one an edge in the market. I would say the many technicians over the last month have just added even more data to support that conclusion.

Now don't get me wrong, I'm not saying I don't use technical analysis, I do. I just don't use it exclusive of everything else. When cycles, sentiment and money flows are calling for a trend change then I ignore the charts and prepare to change directions. This is exactly how I spotted the stock market bottom and what I think will turn out to be the bottom of the gold correction.

Now I want to take a closer look at that correction, because despite the dire warnings of the gold bears, something pretty amazing happened during this correction.

Over a 6 week period gold pulled back a very modest 8.6%. That was considerably less than the 17% correction the stock market suffered and in fact one of the mildest intermediate declines of the entire secular bull market.

Even more amazing was the correction by mining stocks. I know a great many investors and traders became disgusted with miners and probably gave up on them during the last 6 weeks. But the reality is the 14% correction in miners is again one of the mildest intermediate pullbacks of the entire bull market.


I originally thought the HUI might hold above 450 for the remainder of the bull market. Admittedly I missed on that one. It dropped 20 points lower than that and spent a total of 12 days during this correction below 450. All in all though I wasn't too far off :)

What I really want to call attention to is the silver market. I think something big is brewing under the surface in silver.

Invariably silver follows gold and it usually magnifies any move, especially on the down side. So if gold drops 1% silver can be expected to shed 2-3%. At intermediate cycle bottoms silver will almost always fall apart. Often it will slice right through key technical levels. Without fail at intermediate cycle lows silver will look broken.

During the current intermediate bottom however silver did something that up to this point was just unheard of. As gold dropped into the intermediate low silver diverged positively from gold.


As gold was breaking down out of the bear flag on its way to $1155 silver did something its never done before. It ignored gold. As a matter of fact silver just continued to consolidate in the $17.50 to $18.50 range that it has been in for the last 4 months.

Folks something is going on in the silver market. Perhaps we have a supply problem brewing, who knows. What I do know is silver is now acting differently than it ever has before and I want to own a big chunk of silver and silver miners as we head into the final stages of this C-wave.