Let's start today with the stock market. Well, it has been a chopfest for sure. Trading in these conditions has become extremely difficult. There are still plenty of high quality setups both long and short, only that most of these setups fail soon after the breakout/breakdown. What bothers me the most at the moment is an unusually huge Friday's volume on all indices. Intraday scan reveals that this volume was genererated in the first minute of Friday's trading day. Prices jumped on huge volume, but collapsed soon afterwards. Big volume is almost never a good thing, especially near recent tops. I think there is a pretty high chance that market makes another dip to test the November lows at 1160 on SPX, then rally into the year end and collapse again in January 2012 in earnest. This scenario seems quite logical. Breakdown from this minor bear flag would force many retail traders to sell. Smarts will be able to accumulate at previous support to ignite a strong Christmass rally. This rally would convince retails that new bull is under way, thus smarts will be able to sell accumulated shares, supposedly on breakout above MA200. A once tested support at 1160 will not become tested again, so prices should just slice through these levels like a hot knife through butter. Sure, just a speculation, but a pretty sensible one. I might short something on a break from this bearish flag.
Now to gold. Way back in September 24 I
posted some trendlines for gold. I think now is the perfect time to review my long term strategy as very important event happened. Gold violated black ascending trendline that has been valid from the early beginning of this cyclical bull in 2009. So, for almost three years gold price obeyed this trendline on every major dip. This trendline is now broken! I think gold did manage to close marginally above it, but daily action suggests there was no real buying at the line or below it. I think we can reasonably expect another dip down. There are basically two options. Gold may bottom at the green line in January or at the pink line in March. Let me explain why I think gold will bottom at the pink line (or below it).
Let's forget about trendlines for a moment and just observe cycles on gold. On the below chart I have marked all the intermediate weekly cycles since January 2009. Green arrows mark bottoms of each cycle and the number below it denotes the weekly length of each cycle. If we make a quick averaging we can conclude that average cycle should last between 20 and 25 weeks. Now, the last cycle that bottomed in September was extremely short, lasting only 13 weeks. History of cycles says that extremely short cycles are often followed by longer ones. History also teaches us that bear cycles tend to be about 25% shorter than bull cycles on average. So, when we sum up all these numbers we realize that cca 24 week cycle that bottoms in March is more probable than cca 16 week cycle that bottoms in January. A very short 13 week cycle should be followed by a longer one and 24 weeks is appropriate length.
OK, let's wrap this up. The bottom line is that I believe January 2012 will be a massacre month for both stocks and gold. Stock market has been topping since February 2011 and will have to convert this into some sort of a dramatic fall sooner or later. If stocks go down, gold won't be able to keep high grounds as cash will be a safe haven for most investors. The same thing happened in 2008 when gold corrected 30% together with stocks. If a plunge of similar magnitude happens we can also expect that all technical levels will get broken in panic selling. But I'm getting way ahead. We'll talk about this when those times come.
Now to gold. Way back in September 24 I posted some trendlines for gold. I think now is the perfect time to review my long term strategy as very important event happened. Gold violated black ascending trendline that has been valid from the early beginning of this cyclical bull in 2009. So, for almost three years gold price obeyed this trendline on every major dip. This trendline is now broken! I think gold did manage to close marginally above it, but daily action suggests there was no real buying at the line or below it. I think we can reasonably expect another dip down. There are basically two options. Gold may bottom at the green line in January or at the pink line in March. Let me explain why I think gold will bottom at the pink line (or below it).
Let's forget about trendlines for a moment and just observe cycles on gold. On the below chart I have marked all the intermediate weekly cycles since January 2009. Green arrows mark bottoms of each cycle and the number below it denotes the weekly length of each cycle. If we make a quick averaging we can conclude that average cycle should last between 20 and 25 weeks. Now, the last cycle that bottomed in September was extremely short, lasting only 13 weeks. History of cycles says that extremely short cycles are often followed by longer ones. History also teaches us that bear cycles tend to be about 25% shorter than bull cycles on average. So, when we sum up all these numbers we realize that cca 24 week cycle that bottoms in March is more probable than cca 16 week cycle that bottoms in January. A very short 13 week cycle should be followed by a longer one and 24 weeks is appropriate length.
OK, let's wrap this up. The bottom line is that I believe January 2012 will be a massacre month for both stocks and gold. Stock market has been topping since February 2011 and will have to convert this into some sort of a dramatic fall sooner or later. If stocks go down, gold won't be able to keep high grounds as cash will be a safe haven for most investors. The same thing happened in 2008 when gold corrected 30% together with stocks. If a plunge of similar magnitude happens we can also expect that all technical levels will get broken in panic selling. But I'm getting way ahead. We'll talk about this when those times come.
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