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.