Weekly Perspective

I'll make a brief post about my intermediate term projections for stocks and gold. I've made some analysis of past charts and realized that the following months will probably bring us more downside for both issues.

Below is the weekly SPX chart. I've also plotted stochastics and MFI, my new indicators that I use. First thing to notice is the different behavior of both indicators in a healthy bull market in not so healthy bull market. In bull market MFI has a strong upside bias and higher highs and higher lows in index are confirmed by both momentum and volume. Observe that in the past year MFI has been unable to climb into overbought territory. What's more, we are seeing divergence right now, which suggests this cycle might be very close to a top.


We saw a very similar picture in 2008. Suddenly divergences in momentum and volume started to appear and MFI got a negative bias. It wasn't until the first cycle out of final bear market low when MFI went up to 100. Also, pay attention to extremely strong divergence in MFI just before the bottom, even during the strong downside momentum.


2000 to 2003 bear market was not much different. A bear market bottom was indicated by divergence in MFI, followed by an explosive move, that took MFI to 100, which was the first time since the bull market top.


It should be clear by now what I'm pointing too. First, I don't believe we have seen the final bottom. Not by a long shot. Bear market rallies can extend just enough to convince everyone that new bull is just around the corner. Luckily, we can use some volume studies to confirm how much buying was really going on during the rally. As current MFI readings suggest, this rally is fake and should reverse soon. Maybe starting this week.

Second, at the final bear market bottom I expect to see a divergence in MFI. After the final shakeout MFI should get up to 100 in no more than four weeks, which would be our final confirmation. Until I see these signs, I'll be very, very sceptical of buying at the long side.

Let's make the same analysis for gold. We have just witnessed the first weekly cycle in three years that was unable to push MFI above 80. What's more, selling volume seems to be increasing, which is seen from the downtrend on MFI. Plain and simple, I don't believe we have seen the bottom of this correction yet. I expect a strong move to the downside that will push MFI down to zero (and fix it there for some time), followed by a rally and hopefully a double bottom with MFI divergence. Previous cycle was very short (13 weeks), so this cycle could maybe extend up to 25 or 30, thus having enough time to complete the abovementioned scenario. Furthermore, if all this happens close to the pink line, this would be the final clue of another bull cycle starting.