What Happened To Gold?

Please review this post for better understanding of the following Nasdaq chart. Basically I still think there is a very high chance that market finishes this bull run with a climax run. It just follows the script I discussed in January perfectly. The uptrend is still intact and there was no big drop after several distribution days. If there will be a breakout above the red resistance, it will be a climax top and should be sold.


What happened with gold on Wednesday is beyond my comprehension. I don't even want to debate around precious metals too much right now. Plain and simple, after a sell-off of this magnitude, I'm not even touching gold until I become sure again that gold is in a buy zone. Even if by any chance gold rallies up to recent highs, I'm pretty sure it will be sold once again. So, just stay away from gold. We have to wait for another long term for for safer buy spot.

Lowering Expectations

Let's make a brief market analysis. The Nasdaq Composite still looks pretty good, but there are several indictions that a deeper correction is right behind the corner. Distribution days are showing op on daily charts of all indexes. We already have a failed breakout which is a sign of selling into strength. Cyclically speaking stock market's short term cycle is 16 days old and should deep down into low in 2 to 5 days. I expect this low will be quite deep and the next short term cycle will not make a new high, but instead complete a bit shorter intermediate term cycle, before rallying into new highs again.


One very important suggestion comes from small caps. I follow SML index, which tracks 600 small caps. These have clear laggards in last two weeks. While Nasdaq broke to new highs, SML was being caught in a correction already. And when dynamic small caps are left behind, this is usually a very bad sign for general market also. Both my indicators, the stochastics and MFI also suggest a deeper correction is coming in small caps, which are my primary trading vehicle. Not mentioning a plethora of failed breakouts I've seen lately all across the board.


Stock traders should now lower their expectations a little bit. Personally, I'll take the following steps that should keep me out of trouble:

• Trade only the best of the best patterns.
• Keeping tighter stops on open positions.
• Taking less risk on initial positions.
• Selling half at 50% of my usual profit target.
• Trailing the rest of position with a tight stop.
  
• Not holding more than 50% of any position overnight to avoid being hurt by big gaps down in market.

In general I plan to mostly just day trade until conditions improve, taking 7-10% profits when I have them.

Gold is acting exactly as expected after an intermediate term low has been left behind. Yesterday's decisive move out of 33 days long cycle was followed by today's follow through, which of course is a sign of strength. Now, what do I expect of gold in the next couple of weeks? First it will have to face resistance at 175 on GLD. I fully expect it will get broken and then the next resistance is all time highs at 185 on GLD. I don't care whether if it gets broken on the first try or not as I will look to sell my stake around 180. When GLD reaches 180 and possibly 185 the usual 25-week cycle will already be very extended and any tag of new highs will probably be met by a bunch of sellers. For now I'm just holding my positions in DGP and GDX and will look to sell sometimes in the second 8-day cycle if everything goes as planned.

Stocks Down, Gold Up

From my experience cycles can be a pretty useful tool in choppy markets, but during uptrends they can become a little bit difficult to interprete because all correction are so shallow. During last month I pretty much ignored cycle counts, but now it may be time to review them again to gain a better perspective of where we are.

Cycles for stock market are best seen on SPX. I believe the usual 9-week cycle already bottomed, which is denoted with the blue arrow. We should now be on day 14 of a shorter cycle that usually takes about 18 days to bottom. Both indicators that I use, stochastics for momentum and MFI for money flow, show a divergence from price. Distribution days have finally started to show up. Furthermore, in the last few days I saw some strange brief selloffs in highly liquid stocks. And, most importantly, I haven't had a strong breakout in my stocks in the past week. To sum up, I believe a deeper correction now really is coming. I think Thursday's breakout was fake to attract public into buying.


Another bearish signal comes from Nasdaq. This index has become a laggard again. When Dow and SPX outperform Nasdaq, this is a bad sign for momentum traders and general market as well. I expect Nasdaq to correct the most.


So, if money is flowing out of stocks, where can it go? There is only one logical place, which of course is gold. I firmly believe that Thursday marked a bottom of an intermediate cycle that usually takes about 25 days to complete. With 33 days it was a bit extended, but this is normal and actually positive, because it suggests a longer buying period. Besides, dollar tried to rally a little bit, which stopped gold for a few days. But all my signals suggest gold should rally from here. Momentum has not accelerated to the downside, money flow stayed strongly above 20 line and volume nicely subsided. I think gold is ready to launch higher, so I'm giving a buy signal on it.

Following The Plan

It seems like today we will get another strong up day in the stock market. Again, it is getting very, very late in the 9-week cycle, momentum and money flow readings are still flirting with overbought areas and many high quality stocks are extended from their buy points. The general picture is still excellent. I haven't seen such a strong accumulation for about a year. But in the short term market will have to correct 3 to 5% if there is any more upside to come. I think what we are seing today in Nasdaq and hopefully tomorrow in SPX is a short term climax top that shall end the accumulation phase. Nasdaq is at new highs, but technically I give more credence to SPX, which is close to testing last week's high. We had a very nice run in the past month, but now is the time to take some off, especially in high octane names that can get killed during a correction. I'm trigerring a neutral signal on the stock market.


The same applies for gold, which is even more overbought as stocks. Of course, this is a sign of long term strength, but right now I think gold may correct more, somewhere between 5 and 8%, before starting another leg higher. If anyone is thinking about buying gold right now... Good luck. Gold is also on neutral signal. We have to wait for a low risk entry once this extreme sentiment chills out a little bit.

Stock Market's Surprise

Stock market has caught me totally unaware. I certainly did not expect such an extended move to the upside. From technical perspective it seems unrational, but I have to proclaim that one day drop down to the previous consolidation area as a 17 day half-daily cycle low. I could also say that we are on day 19 of an extremely extended cycle, but it is usually better to stick to the normal timing bands and day 17 is much more normal than day 23 or more. So, what can we expect with this new cycle count in place? From the half-daily cycle perspective, the cycle is still young and could rally for two more weeks before bottoming. But the daily cycle is 35 days old and already in stage for a bottom. I simply don't believe we may see much more further upside. Not to mention indicators that have resisted overbought levels since the start of this daily cycle. Furthermore, big volume up days late in the cycle often tend to mark tops. We'll just have to wait for a decline to happen and then see how much of further upside we can expect. As it looks now, decline should be quick and shallow, soon followed by by a higher high.


Let's see how gold is doing. Right now, gold is a laggard. It is making higher highs, but volume and momentum suggest another half-daily cycle decline is imminent. If it bottoms above previous low, I might consider a minor position for a short term trade as volume properties still suggest another higher high.

I usually don't talk about gold miners, but there is a high probability shorting setup developing. Miners mostly follow gold in cycle count but are also affected by stock market. They are the weakest issue of all three. While gold and stocks are making higher highs, miners are way below. There is strong divergence in both momentum and volume and day to day candlestick analysis also exhibits selling into every strength. Any rally up to 54 mark would provide a very high risk/reward ratio short setup. It may happen during current or the next half-daily cycle.

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.

Conditions Improving

Stock market did not provide a decline into the half-daily cycle low as I suspected last week. Instead it stubbornly flirts with the 1300 mark on SPX in an extended half daily cycle. What's more, yesterday SPX made a new weely cyle high, which makes it for at least 16 week top. What this means for the remaining of this bear market remains to be seen as the decline into the next weekly low develops.

Anyway, the current haly-daily cycle is on day 16 and daily cycle on day 32. Both cycles are due for a decline in the next 5 to 8 trading days. I started to incorporate some indicators into my tarding arsenal. I've been studying several over past month or so and found stochastic(5) to be the most reliable momentum oscilator and Money Flow Index MFI(5) as the most reliable accumulation/distribution indicator. Both are just screaming for a decline. In fact, I haven't seen MFI so strongly overbought since the last bull market. A correction is due, but both indicators show strength in the market. Decline might materialize only as a 2-3 day swift drop and then quickly reach new highs. The next weekly low is still at least a month away, so there is plenty of time for another new highs attempt. However, I definitely don't want to buy anything right now. Stock market will correct very soon and shake out many week hands who are buying these "breakouts".


Now on to gold. I use the exact same indicators. Gold also exhibits strength. The half-daily cycle, that usually takes 7 to 9 days, bottomed surprisingly in just six days and and gold is now flirting with 1675 resistance. It wont be breached in the first attempt, I'm almost sure about that. I expect gold will decline in the daily low sometimes in early February within the next two half-daily cycles and everything suggests it should make a significant higher high. I plan to buy the next daily low for a short term trade if MFI bottoms above 20, which would mean a lack of distribuion. However, the next daily low after this should also be a weekly low, which means that gold will probably come down to retest the 1525 area. The next weekly low should also provide the best long term buying opportunity of this bull cycle for another couple of years.

Cycles Theory

My recent trade reviews took me a lot of time, so I haven't been able to make a decent post about the stock market and gold. I think it's time to look at where we are at the moment. I started to implement a cycle theory into my trading, so I'll devote this post to short term cycles in stocks and gold.

On SPX chart below I've marked the daily cycle lows (blue arrow) since the last weekly cycle low (black arrow) and half-daily cycle lows (green arrow) from the last daily cycle low. The usual timing band for the shortest cycle I follow, which is what I call a half-daily cycle, is around 15 days. The current HD cycle is 13 days old and should find a bottom sometimes this week. The current daily cylcle (D) is 29 days old and should find a bottom within its normal timing band between 35 and 45 days. The weekly cycle (W) is 13 weeks old and still has plenty of time to develop as W cycles tend to last from 20 to 25 weeks on average.

My expectation for this week is that stock market will make a swift two to three day drop. How deep will it go is impossible to predict. I guess somewhere between 1225 and 1250 would be a nice level for a bottom. The bottom of the next HD cycle will also coincide with the bottom of the next D cycle, which means that the correction will be deeper. I expect the next HD cycle will top in no more than 6 days and it will not go above highs of the current HD cycle. I also expect the next D cycle will bottom above the bottom of the previous daily cycle as we now have two consecutive HD cycles with higher highs, so there is plenty of support below.

Now, the most important question is whether current weekly cycle has already topped on week 4 at about 1290 level. I think it has. Reasons why I think so are following. First, we are in a bear market. In bear markets weekly cycles tend to top in the first 8 weeks. A later than 15 week top seems almost impossible to me. Second, volume properties simply don't suggest any major accumulation. D and HD corrections are deep, which is not typical for weekly cycles that want to reach new highs. We'll talk about this when current cycle develops a little further.

And now to gold. The biggest question is of course whether gold has already formed long term bottom. I think not. The main reasons are two. First, gold W cycles usually last between 15 and 20 weeks. Previous cycle was 13 weeks long and if current W cycle already bottomed, it should be 13 weeks long also. Two very short cycles in a row are unlikely. Second, the rally out of W cycle should be furious. The current HD cycle we are seeing right now is on low volume and it looks like it already topped on day five, which is also not positive. I think we will see at least two more D cycles before this W cycle finally bottoms. I expect this will happen sometimes in late February or early March.

I know these are pretty bold predictions. I'm actually not too concerned with long term weekly cycles. Daily and half-daily cycles are useful for timing trades. I'm looking to go short both stocks and gold as soon as we get a confirmation that both still have weekly cycle lows to print.

2011 Wrap Up

I thought I could make a short post at the year end to discuss 2011 action in gold and stocks a little bit and to present my expectation for the first quarter or so of 2012.

There is one interesting observation I made while analyzing chart of SPX. It closed the year almost exactly at the price where it opened one year ago. The gain in stocks last year was a flat zero. I think the recent development in broad economics has brought us to the stage when buy and hold approach style of investing into stocks will fail miserably. Every rally in US stocks in last two years has been driven by some political factor, like printing more money to support investment of banks. The main property of such rallies is their lack of longevity. If there is no new technology which would start new wave of hiring and money making from production, there is simply no way we can expect any of these rallies develop into a bull market, like one we witnessed in late 90's.

Thus I still fully expect the year of 2011 was just one giant topping process before a 2012 bear market. I have no clue on earth how long and how deep will it take to bottom, but the first half of 2012 should have a strong downside bias. I don't expect anything near to a 2008 plunge, but correction should still be quite dramatic, taking at least 40% off from current levels.


Gold has clearly completed it's cyclical bull market that lasted from 2008. The easy money times in gold are over for some time and anyone buying "every dip" will probably get completely discouraged until this cyclical bear finally bottoms.

I've been drawing the green and pink trendlines for months now. I expect gold will end its correction on one of those lines, although I am about 90% convinced it will go below the green line. People tend to think that gold is a safe haven when stocks go down, but the massive liquidation event of stocks and gold in 2008 prooves that this is simply not true. If stock market really goes haywire, it will almost certainly take commodities down also. So, I expect gold will bottom in March or April 2012 as stocks complete their second stage bear market correction. In 2008 bear market gold bottomed six months before stocks and it should be the same this time also. As stocks will probably work their way into the third bear phase, gold should consolidate during this period, setting the stage for another cyclical bull market, that should take price of an ounce of gold up to 5000s area. I base this projection on development of past cycles. But then again, this is a bull market. The final stages of all bull markets tend to dwarf even the most optimistic predictions. So, no one should be too surprised if we see gold trading above 10000 three years from now.


My long term strategy for 2012 is simple. First of all I want to preserve my capital in face of weak markets. I have no intention to trade heavily into any direction in any instrument. The real money will be made when stocks and gold bottom and start their next cyclical bull run. It will surely take a lot of patience, but it should pay off heavily. I would also like to say a word about shorting. Everyone knows stocks are in a bear market. Everyone is talking about shorting indices or individual stocks is a way to go strategy in the next couple of months. But from my experience shorting is an extremely difficult task. Permabears consistently get dissapointed for that rare instances when everything lines up for them. I do plan to take some positions in inverse stock market indices ETFs, but they will be small, and everything will have to look just perfect for a bearish setup.

Bearish Intermediate Term

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.

Gold Breaking To The Downside

This is just a brief update on gold market signal. Yellow metal is now officially in SELL mode as it broke to the downside from a four-month symmetrical triangle. The breakdown was so powerful it violated trendline, MA150 and previous swing low all in one session, albeit not on a closing basis. But I believe yesterday's sell off and today's follow through (not seen on the chart) is enough evidence to confirm my thesis that gold shall see much lower prices in the next couple of months. The currect short term cycle should bottom sometime in the next two weeks and rally out of this bottom will tell, how weak gold actually is. So I'll refrain from drawing support lines until I get a taste of the upcoming bounce. For now, my short term target on gold is around 1620, where this cycle should bottom.

Gold Weakening

How things change. About a week ago I've talking about gold possibly setting up for the breakout to the upside. I know many traders like to buy "in the face of an upcoming breakout", just in case price gaps up at the open, leaving latecomers behind. The problem with this strategy is that one presumes a breakout as inevitable. In other words, you become bullish on stock before you even get a bullish sign, which of course is a breakout itself. My experience shows this is a poor strategy. I made this mistake several times and almost always regretted it. But not this time.

In light of this short aside, gold seems to be negating our bullish outlook from the week ago, as it is now on the verge of breaking down. Now again, I'm not saying it will, but last couple of day's action suggests there is more weakness coming for the precious metals. Several ascending trendlines could be drawn. If our interpretation on the chart below is correct, a break below the triangle bound would be a red flag for gold. The final confirmation of failed short term cycle and thus possible continuation of correction would be a close below the last support (green line). We'll get back to this later.


Stocks are not behaving any better than gold. The two-day coil-consolidation right below MA200 broke to the downside on a sell-off distribution day, which is negative, of course. On the other hand, Friday produced a pretty strong reversal, suggesting Thursday was just some panic selling on bad news. We'll have to wait a little bit more for a consolidation and a breakout or a wedging rally, followed by another sell-off. With a little bit subjective view, I suppose price could easily meander between MA50 and MA200 until the end of the year. Definitely not an environment for a momentum trader. Additionaly, there is still no buy signal more than two weeks into the rally, which is sign of caution by itself. I still believe stock market will continue its bear market trend soon.

Gold Has To Decide

I'll start today with gold. Yesterday it sold off, which almost made to post something about gold probably breaking to the downside. But today it is rallying hard back up. I have absolutely no clue on earth what's the next move for precious metals. Luckily we have a pretty decent pattern to watch. The triangle is getting squeezed to the apex and gold will have to make a choice soon.


Today's news driven market is very unfavourable for anyone trying to grab a share of a trend. Not seen on the daily chart below, but intraday charts are ful of wild swings in both directions, causing breakouts and pullbacks to fail, only to reverse later in the day and fail the very next day again. In such environment it is best to stick to the larger perspective and trade longer term swings. There is nothing on charts that would change my mind about stock market being in a cyclical bear. I still expect the current rally will top some time in December and roll over down to at least October lows. The problem is that now we have resistance at previous top but also support at previous lows and MA50. So this chopfest may continue for quite some time, trigerring several false alarms in both directions. I think we should not a expect a textbook technical top. However, I would love to see a failed breakout above MA200, because this would give us a very reliable stop for short positions. All markets still neutral.

Cards Shuffled Again

I must admit the last week's rally in stocks surprised me. I fully expected any bounce will be just a short term short covering rally, but for now the last five days look more like the beginning of a new short term cycle that should move above October high.

First of all, the swing at the bottom was extremely powerful. Second, after a day of mild consolidation, market just slashed through the MA50 on huge volume, closing at the high of the day. This is the basic definition of a follow through day, that often starts a new uptrend. And third, market was able to keep the high levels for the rest of the week, confirming the follow through day.

However, my scepticism still prevents me from announcing a buy signal. A really huge volume on indices is usually not a good sign. Often such too-good-to-be-true-looking FTDs will fail two to five days later. And we are officially still in a bear market. I just don't think that bullish sentiment has been cleared enough to pave the way for new bull market. So, for now stock market will stay in neutral mode. Things should get clearer by the end of the next week. If MA50 stays and maybe even MA200 gets conquered I will start to believe that the bear is at least temporarily over. And I mean temporarily. The biggest problem right now is the leadership. There are virtually no constructive bases in big cap leaders seen at the moment, which means that chances for a sustainable, many month rally, are low. Indexes are being pushed up by oversold stocks, which is usually not a good sign.


Moving forward to gold. I guess we now have a confirmation that many investors see the same picture as we do. Yesterday gold tagged the descending trendline perfectly, sold off a little bit, but stayed mostly neutral for the rest of the day. I suppose this is a bullish sign. A partial retrace-consolidation just below the trendline would set gold, silver and mining stocks for a powerful breakout. I'm starting to lean to the bullish side. The fact that gold is probing resistance levels and not selling off probably means the sellers have been exhausted. If price breaks above yesterday's high, I will definitely buy a stake in precious metals and proclaim a buy signal.

A Reflex Rally

A brief update on the recent action in stocks and gold.

Yesterday stock market indices completed a strong swing low, which is a clear indication that a new short term uptrend has started. I want to stress SHORT TERM as I fully expect the current cycle will top sometime in December. I'm not sure whether we may start making lower lows this year, but January 2012 should be a strong down month. Anyway, stock market is now on neutral signal and I doubt we will get a decent buy signal before spring 2012.


Hard to say what gold is up to. It completed a swing low yesterday also, but today's lack of follow through suggests the current cycle should top below the recent, which means that lower prices may be ahead. We're still waiting for the break of the descending trendline or MA150. A break that should determine gold's trajectory for another quarter or so.

On Time For A Bounce

This week made nothing more than confirm my views from the week ago. Stocks dropped from the bearish topping pattern and should now face some sort of a bounce from oversold levels. The 2600 area on Nasdaq looks like a good spot to look for shorting opportunities. The MA200 now finally and completely turned down. Past analysis that I've made some time ago revealed that when MA200 changes its course, this usually means a long term trend reversal. From my point of view, we are now in a confirmed bear market. What does this mean? It means that every rally should be very choppy and short lived. The tendence to go is now on the downside and so should be our trading strategies. It is still pretty early in an intermediate cycle. Current cycle bottomed seven weeks ago. Cycles in bear market tend to be of a bit shorter duration, but we should see at least ten more weeks of generally lower prices. Only when this cycle bottoms, I will start looking for possible longs.


Gold action is still a bit unclear. On first glance the triangle consolidation looks bullish, but frankly, I don't think gold is going to break out. If stocks are in a bear market and dollar in an intermediate cycle rally, it simply doesn't make any sense for gold to breakout and rally above 2000. But markets often don't make sense, so I'll refrain from any speculation about the direction of the breakout until it really happens.


Even if gold breaks to the downside I have no intention whatsoever to short and precious metals index or stock. If I learned anything in the past two years is to buy bull markets only and short bear markets only. So, my strategy for the next couple of weeks is to try to catch a short term top in stocks and IF gold triangle breaks to the the upside, buy a position in precious metals. Just in case this turns out to be the last obvious consolidation area before the final climax run.

A Test Of October Lows?

Finally, a "bullish triangle" pattern forming on SPX broke to the downside. First, I'd like to say a word about patterns on stock market indices. The simple fact is that in most cases they are completely irrelevant. SPX index is a weighted sum of 500 stocks and any triangle, cup with handle, double bottom or any other pattern formed on such an index is more of a coincidence. It's usually much better to follow the accumulation-distribution pattern which has been strongly in favor of bears recently.

Anyway, I'm almost certain that the first intermediate bear market rally has topped and we should be facing gradually lower prices for at least another 3 months. The first downside target is around 1125 on SPX, where buyers came in during the first decline. In anticipation of these levels I opened an SDS long position (2x inverse SPX). Although I don't believe the October lows will hold for long also, I don't want to make any bold predictions until my first target is met. Any minor rally from current levels early next week should provide an excellent opportunity to open some additional short positions in my opinion.

As seen from the SPX chart above my market direction system has been pretty solid in the past few months. Although it produced several consecutive signals in a very short period of time, which is not desired, it has generally kept me on the right side of the market. I'm especially confident of the last sell signal as these kind of "sell-off - wedging rally" topping patterns have proved as extremely reliable in the past. Also, a triangle on SPX turns out to look like a head and shoulders topping pattern on COMP, which is another strong distribution sign.

I've been talking about the possible triangle formation forming on gold for quite some time. If this turns to be the case I think precious metals are in for a monster rally in 2012. If, on the other hand, gold breaks below MA150, which was a strong support for 2 years, I believe we'll have to draw another support below the September low. Which is quite possible as it better coincides with the anticipated stock market low in early spring 2012. It is still too early to say anything in particular, though. Right now, gold is on a sell signal and should be headed for a corretion.

On The Verge Of Next Leg Down In Bear Market

I think the past two weeks now clearly resolved the issue whether stock market wants to reach new highs or resume its bear market trend. The good-looking rally above MA200 was nothing more than a fake breakout, a classic for bear market tops. As I always say, any positive sign that is reversed, should be treated as double-bearish. Breakout failed, sported a distribution day, then market rallied for a week, before another big sell-off day kicked in. It now looks like indices are drawing some sort of triangle pattern, which in my opinion will break to the downside. Actually, any rally into MA200 or upper triangle line should be an excelent shorting opportunity. We'll look at a bigger picture of when and where this intermediate cycle should bottom when we get a confirmation that the next leg down is underway.


The main reason for weakness in stocks is the dollar, which rallied viciously above MA200. Actually, I believe that dollar should now enter a steep uptrend that should last at least three months and push stocks into new low ground.


Regarding gold, I don't believe that any commodity market will be able to rally in face of a strong dollar. I'm not sure whether gold will go below September's low or not, but I'm almost certain that the current rally is now over and that precious metals in general should be headed for another correction.


I think the following months will rip the stock market apart. I wouldn't be surprised if indices traded 30-40% lower two or three months from now. For quite some time I wasn't sure if the dollar is going to break down and push stocks and gold higher, or it will reverse and lead the next leg down in bear market in stocks. I'm quite glad that things finally crystalized as I expected from the beginning. From now on stocks and gold are on a SELL signal and any rally in stocks should be an opportunity to open some short positions.

Markets Taking A Breather

Yesterday's powerful rally in the dollar suggests at least a short term low has been printed, which means stocks could take a couple of days to consolidate huge gains made in October. Actually, dollar and stocks have been in perfect inverse correlation for the last two months and if trend is to be continued, the fate of the stock market fully depends on the dollar. As the buck is now severely oversold I expect it will break the descending resistance trendline and rally for at least a week. It might even go to new highs, which should drive the next leg down in bear market for stocks. However, if it turns out that the dollar truly is as weak as ti looks, it would turn around quickly, which should push the stock market even higher. Anyway, two consecutive down days that were not bought and a possible trend reversal on USD suggest a stock market may see some weakness ahead. It is on neutral signal from now on.


What does this mean for precious metals? Not much, I think. Gold has been pretty resiliant to the yesterday's huge rally in the dollar and it looks like it wants to beat its own drum. The cycle is still young, the volume on this correction has been low and I expect gold will at least fill the gap at about 174 on GLD. Yesterday's narrow range trading even convinced me to buy some shares of DGP (double gold ETF) as addition to SIVR (silver ETF). However, when and if the gap gets filled, I'll probably just take the profits without hesitation as there is just too much overhead resistance in the 175-180 range on GLD.

Is Dollar Toast?

For weeks I've been touting that stocks are in a cyclical bear market and that current rally should be short lived, meant just to revert bearish sentiment. My arguments for this case have been a cyclical nature of the stock market, a very obvious five month topping process, lack of real leadership and the fact that bear markets usually don't bottom in just one phase.

But the current four week rally actually gives the appearance of a solid new uptrend. First of all, it has simply gone way too far. Not so much in percentage as in retracement terms. Bear market rally simply should not retrace 70% of the previous drop. Mind that NASDAQ is actually only a couple of percents below the bull market highs. Secondly, with the exception of the lack of a valid follow through day near the bottom, it has been a high quality rally. From the beginning of this uptrend, we have witnessed only one distribution and both two day correction were heavily bought as hammer candles followed by instant breakouts indicate. This Thursday's heavy volume breakout above MA200, the final technical resistance level, siggests something significant may be hapenning under the surface.

Mind that such strong late breakout often lead to reversals as big money sells into buying frenzy. So we still have to be cautious. But Friday's action looks more like consolidation than exhaustion, so I suspect new highs will be reached soon. Of course, sooner or later market will have to go into a more significant correction and the rally out of that correction will give us clues whether this bear actually has bottomed on October 1st or not.


The next very important evidence for the bullish stock market case is the dollar. After rallying sharply out of its three year lows, the buck could not find support during correction and is now on the verge of touching the final support line again. If there is any chance that the dollar continues the uptrend, it should reverse and rally violently above MA200. If that doesn't happen in the next week, chances are high that dollar three year cycle topped in only two months, which means that stock bear market is definitely over and that we won't see a decent correction in gold for the rest of its bull market.


Speaking of gold I think the yellow metal will soon give a stab at the ascending resistance line, which we already draw several times, before going into a brief correction (coinciding with the dollar briefly rallying from oversold conditions). It should then consolidate somewhere above MA50 before resuming the uptrend. If (and only if) the dollar is finally toast, I believe we won't get a decent correction and a buying opportunity in precious metals until the next short term spike which could be several months from now. Not to mention that an extreme parabola could also mean that gold bull is over. But it's way too soon to discuss this.


So, the past week completely reversed my expectations for gold and stocks, but that is the nature of all markets as they always fool the majority. That being said I must also point out that almost ALL bear market corrections look like that! Everytime the market falls far off its highs, a rally which will give the appearance of a high-quality uptrend will be produced. When the last bearish analyst throws in the towel, when bullish sentiment reaches extremes and when "everything is fine again", then is the time when the most dramatic plunges happen. So, let's just stay cautions. Day-to-day based analysis is still the best tool.