MANIPULATION? LET'S HOPE SO

We’ve been having quite the discussion about manipulation on the blog lately. For what it’s worth everyone can believe what they want to believe. What I do know is that no amount of manipulation can stop a secular trend. I think Greenspan and Bernanke have proven that fact explicitly. Between the two of them they have printed literally trillions and trillions of dollars in a vain attempt to halt the bear market. It hasn’t worked and it’s not going to work. All its done is make our problems much worse than they had to be. Ultimately the secular bear market will not end until stocks become cheap. The longer we fight that process the worse it’s going to be in the end.

But back to the manipulation theme. Just as an example back in the spring of last year the Fed openly stated their intent to artificially hold interest rates down. They were determined to print as much money as needed to support the bond market and consequently drive rates down (interest rates move inversely to bond price). Let me show you what they accomplished.

What they accomplished was to put in a final top in the almost 30 year bull market in bonds.

Let me show you another one. In Sept of 08 the SEC in its infinite wisdom decided to ban short selling in financial stocks. The end result? Financials dropped much farther than they would have naturally.

Folks let me tell you right here and now whenever you see or hear about the government managing any financial asset run, don’t walk, to take the opposite side of that trade.
 
Now the big stink is that gold is being manipulated. For our sake I hope so. It will mean that gold will go up much much further than it would all on its own.
 
If one is interested in the topic they kind find innumerable articles, interviews, papers and speculation purported to “prove” the fact at the GATA website. A website basically dedicated to exposing said manipulation. I guess it’s no surprise they have a mountain of “evidence”.
 
But let me just throw out one warning. This is one of the oldest tricks in the book. As long as one can lay the blame for any mistakes on some mysterious manipulators they never have to take responsibility for any bad calls. Hey it’s not our fault gold didn’t go to $1300 like we said the government is suppressing gold.

Fact is any manipulation to depress price below the natural level of the market will only increase demand. Let's face it no one controls demand. Any attempt to force price lower than where it should fall normally will just bring in more demand from China, India, Europe, investors, etc.

If the governement is actually trying to control the price of gold it just means gold will go much higher than it would normally . We can only hope there is manipulation going on as it probably means gold will go to $10,000 instead of $5000.

SHOULDA, WOULDA, COULDA DEFENSE

I've got to say when I read this I had a good laugh. Apparently the whole premises for these nutty manipulation theories all boils down to the shoulda, coulda, woulda defense.

If it hadn't been for government manipulation then gold shoulda done this. Or gold coulda rallied to ... Or gold woulda been much higher if only....

I asked in my earlier post how gold could possibly rally from $250 to over $1200 and the best response they gave was a "controlled retreat" Seriously? A controlled retreat?

Either gold is manipulated or its not. Why would they retreat? That doesn't make any sense. Are they going to make a controlled retreat all the way to $5000 (which I think is probably a minimum target for the secular gold bull)?

Since 2001 the Dow:gold ratio has dropped from 42:1 to 7.5:1.

That doesn't look like a manipulated market to me. It just looks like a powerful bull doing what bull markets do.

I notice they failed to explain why gold manipulation only appears to work when the dollar is rallying. Now if gold was dropping consistently over a lengthy period while the dollar was also falling then I might buy the whole manipulation theory. But that never happens now does it. When the dollar is falling gold is rising.

If a C-wave wave was capped before it entered the final parabolic move higher then maybe I would buy the whole manipulation nonsense but that also never happens. During the final push in November gold rallied 19 out of 25 days as the dollar was dropping into its final intermediate cycle low. I guess the "cartel" was in uncontrolled retreat mode.

Since 2001 the dollar index has lost a little over 38% of its value. Gold on the other hand has rallied almost 400% in that time but according to GATA that's not enough. Don't forget that during this time oil rallied almost 1400%.

Obviously the first phase of the commodity bull favored energy and base metals. These sectors were rising the most in percentage terms so investors understandably concentrated on these sectors. Now that the second stage of the commodity bull is underway the laggards of the first phase should outperform. That means it's gold's turn to shine. There's nothing mysterious about that, it's just how commodity bulls work. The commodities that underperform during the first phase almost always outperform during the second. Gold is the one commodity that has recovered all of its losses and is now trading not only above the 07 highs but at historic all time highs. Gold is outperforming!

What I would really like is for someone from GATA to answer me why it is that gold can never seem to be manipulated when the dollar is falling? It would seem that the powers that be must not only manipulate the gold market but they also have to manipulate the currency markets all in an attempt to control the price of something that the general population not only doesn't give a damn about but one that the vast majority of the population have never even seen in real life.

This might give you an idea just how aware the general public is of gold. 

I believe that if Greece hadn't run into trouble and taken down the Euro that the dollar index would have rolled over again and we would have seen a second leg up in the gold C-wave.

So I guess the cartel had something to do with the Greek debt crisis in order to drive down the Euro, spike the dollar index, and ultimately bring down the price of gold (wink wink).

Trust me folks gold is going to finish its secular bull market. The Dow:gold ratio will ultimately continue down until we see a ratio of under 2:1 (I actually think we could see gold priced higher than the Dow at some point).

I doubt it will do it in the time frame that GATA has decided is appropriate, but it will do it. Let's face it, all we are talking about here is timing. The folks at GATA require the bull to move at their predetermined pace. Unfortunately this bull, like all bulls, decides just how fast he wants to move and our wishes and desires don't really come into play.

MANIPULATION, FACT OR FANTASY

Amazingly enough...or maybe it's not so amazing, every time gold corrects we see the conspiracy theories flying thick and heavy. I've questioned these theories I don't know how many times and I have yet to receive a logical answer. Now that I think about it, I don't believe I've ever received any answer.

If gold is being manipulated by the powers that be how then in the world did gold manage to rise from $250 to over $1200? I have to say if someone is manipulating the price of gold they are doing a damn poor job of it.

I have to ask, when gold was rallying hard last November, where was the manipulation then? I didn't hear a peep from the conspiracy crowd all month.

When gold was rocketing higher in late 2007 and early 2008 where, were the conspiracy buffs? Was there a conspiracy to raise the price of gold at that time?

How about the monster rally in 2005 and 2006? How could this possibly happen if gold is being suppressed?


Folks, here is the truth. Virtually anything can be tampered with in the short term. It happens all the time. But no one and I mean no one, can halt a secular bull or bear market. Case in point, Greenspan and Bernanke have printed literally trillions upon trillions of dollars in the vain attempt to halt the secular bear market and it has backfired every time. Just like it's going to backfire this time too.


Let me show you three charts.

There's nothing mysterious about the gold market. It's simple, when the dollar is in its secular bear trend gold is in its secular bull trend. When the dollar is in a counter trend rally gold corrects or consolidates.

It really is that simple.

When gold gets extremely stretched above the mean it regresses, just like every other market in the world. Actually, regression to the mean is the one principle in the stock market, or any market, that you can bet the farm on.


When gold enters the final phase of a C-wave advance emotional traders spike the price irrationally far above the 200 DMA. Smart money, noticing what is happening, start selling. There's nothing evil about that. As a matter of fact it's just good commonsense.


Let’s face it, as long as the dollar is falling any attempts at manipulation will fail. When the dollar is rising gold either corrects or consolidates. I don’t see anything nefarious about that scenario.


As a matter of fact often, as the dollar is rising, gold just consolidates. That makes me wonder if there is a hidden group of gold bugs working to prop up the gold market when it should be falling. (wink wink)

Fact is any manipulation to depress price below the natural level of the market will only increase demand. Let's face it no one controls demand. Any attempt to force price lower than where it should fall normally will just bring in more demand from China, India, Europe, investors, etc.

If the governement is actually trying to control the price of gold it just means gold will go much higher than it would normally . We can only hope there is manipulation going on as it probably means gold will go to $10,000 instead of $5000.


So I’d have to say unless you think some mysterious force is also controlling the currency markets and the law of regression to the mean, all in an effort to manage the price of the comparatively small precious metals market, I'm going to suggest one get on with the business of making money and forget about this manipulation nonsense and if manipulation is going on then run, don't walk, to buy gold because it will only lead to much higher prices.

THE GAME PLAN

Stocks:

I’m going to start off with a few breadth charts.

The NYSE new highs – new lows chart is now on a sell signal as both the slow and fast average have rolled over and are accelerating downward.

 

 
 

Everything continues to point to an impending correction. The change in character the last two days is also suggestive that something is different. Instead of opening lower and rising through the day, the market has been gapping up but closing lower. This is a complete about face from what has been happening over the last two months.

I will be monitoring sentiment as the market moves down into the correction. If investors get scared and panic quickly then this should be a short correction. If we were to get a sharp selloff this is what I would expect to happen. I’m talking 50+ S&P 500 points in 3 or 4 days.

If, however, investors have gotten locked into a buy the dip mentality it could slow the rate of decline and we might be looking at something lasting closer to 10 or more days.

I will say that what usually happens after one of these extreme momentum moves is that everyone heads for the door at the same time. The correction tends to be scary but over quickly as everyone panics all at once.

That’s what happened in February 2007 during the mini crash following the runaway move. The market gave back four months of gains in 8 days.

Now I don’t think we are going to give back 4 months of gains (this is only a daily cycle low not an intermediate cycle low), but I do think we could quickly fill the March 5th gap, which would be a 60 point loss. If that happened in 5 or 6 days it should be enough to swing the bullish sentiment all the way back to the extreme negative side of the boat. The market desperately needs to reset sentiment by going through another mini profit taking period and the sharper the correction, the better.

I’ve warned many times that the intermediate correction separating the second and third leg of the bull was only going to be a profit taking correction that would soon be recovered.

However, and as expected, while we were going through the last correction I had multiple traders inform me that this was the onset of another deflationary collapse.

Heck, I’m still seeing articles on the internet predicting another deflationary collapse any day now.

Often these predictions of disaster are associated with some imaginary trend line dating back to the 1970’s or 1980’s. I’ve even seen one site that based their predictions of an impending bear market on a trend line originating in the 30’s.

I have to ask, how many people from the 1930’s are still trading stocks and are there enough of them to really effect the markets? I have no earthly idea why a trend line starting back in the depression should have any significance at all to today’s market. Geez, some of the crazy stuff one sees in this business. It’s enough to make you wonder if common sense is dead.

I must say after watching both the tech and real estate bubbles expand and listening to the irrational reasons analysts gave at the time for why they weren’t bubbles, I have to think common sense is becoming a rare commodity in this day and age.

I’m going to let you in on a secret. Bull markets don’t end because of lines on a chart or Fibonacci retracements or anything technical related for that matter. Bull markets end when a fundamental shift occurs. They end when something breaks. In a secular bear market like we have been in since 2000 that fundamental shift almost invariably leads to a severe bear leg down in stocks and the onset of a recession…or worse.

We saw the first leg of the secular bear begin in 2000 as the world realized tech stocks were ridiculously overpriced, along with Greenspan’s monetary policies spiking the price of oil. The end result was a severe bear market and a recession.

We saw this again more recently as the credit and real estate bubbles burst. This was then exacerbated by Bernanke’s insane monetary response which, of course, did nothing to stop either one of those bubbles from bursting.

All Bernanke’s monetary response did was spike the price of oil to $150 and made sure we would have a very severe recession.

This is still a cyclical bull though and until we have a catalyst in place to kill it there is one game plan that should be followed. That game plan is one that everyone who has the slightest experience in the market should already know. In bull markets you BUY DIPs. And you continue buying dips until you see a fundamental change occur that is going to send us down into the next recession.

So once we enter the correction (it may have started with last Thursday’s key reversal) we want to be buyers of that dip. (I’m going to outline a game plan in a minute).

First off, let me state again that I seriously doubt the next leg down in the secular bear is going to come from a deflationary front.

We’ve already gone down that road. Bernanke proved he can defeat deflation with his printing press. Heck, he proved he could abort a left translated four year cycle with the power of the printing press.

I’m constantly getting into debates with traders pushing the deflation scenario. The fact remains that we had the worst deflationary period in 80 years and Bernanke halted it in 9 months.

Bernanke halted deflation the same way Roosevelt halted deflation in the 30’s by debasing the currency. I can assure you that if the slightest hint of deflation reappears, Ben will crank up the presses again. So I just don’t see deflation as the catalyst for the end of this cyclical bull.

The catalyst for the death of any bull market almost always comes from the area that is experiencing excesses.

In 2000 the catalyst emerged when the tech sector cracked. Everyone had become convinced these companies were eventually going to make unimaginable amounts of money, while amazingly enough overlooking the fact that most of them were making no money and never really had any reasonable shot at ever making any money. They were just burning through capital and at an incredible rate. Once the world woke up and realized the emperor had no clothes, down we went.

This collapse was exacerbated by Greenspan’s printing efforts to ward of the imagined 2000 contagion and had the unintended consequence of spiking the price of oil.

The latest catalyst as I mentioned above came when the overheated real estate and credit markets imploded.

So we have to ask ourselves, where is the excess this time? It certainly isn’t tech. The companies that are left are making money. It’s not the real estate markets. That bubble has already popped. And I don’t believe it is going to pop again. I doubt it’s going to come from the credit markets again, as people and banks are deleveraging now, and for years to come. Besides central banks have already figured out they can fix those problems by changing the accounting laws and by pumping liquidity.

So where is the dam going to spring a leak from this time? What is the area that is experiencing massive excesses that will eventually come back to haunt us?

I would say there are two. One of them is government debt. But I’m not sure that will cause problems though because governments control the printing presses. No matter how much debt they rack up they can always print enough additional money to pay it.

That leads us to the heart of where I think the next catalyst is going to emerge. The one area of incredible excess is the currency markets.

Let’s face it, every country in the world has been running the presses on overdrive since early 2008. This has created an ocean of liquidity covering the globe like no other time in history. It halted the deflationary spiral we were in last year. And it is certainly giving the illusion that good times are returning (heavy emphasis on illusion). But just like the credit bubble felt real nice while it was growing, there are going to be consequences for this excessive liquidity. The piper will eventually have to be paid.

I expect it will start when a small or maybe even a medium sized country's currency gets into trouble. Then, just as subprime infected the rest of the mortgage market, it will spread into other currencies. I strongly suspect the bull market will end when something breaks in the currency markets.

So until we see that happen investors should continue to buy dips and ignore all the Chicken Little’s predicting the sky is falling because we are approaching a trend line from 1932 or because this is the third of a third wave or whatever hokey nonsense they imagine will start the next bear phase.

As I have said, bear markets begin when the fundamentals break down, not when the technicals do.

The Game Plan:

Now with that in mind, and allowing that nothing in the currency markets has broken …yet, we need to plan for how we should proceed. At the moment traders should be mostly in cash as we await the correction into the daily cycle low. Once we get the inevitable correction we have a couple of options.

One, we can invest heavily back into the miners on the assumption that gold’s A-wave has started. That will certainly be an option, but one with a very big condition attached to it.

Gold must break below the February low. If gold doesn’t break below the February low of $1044 I think that option will come off the table.

The reason being that the intermediate gold cycle is going to be short as we go into this stock market correction. Usually this cycle will last about 20-25 weeks. If the cycle bottoms next week or the week after that it would put the intermediate cycle at 14/15 weeks.

Now it’s not unusual for gold to have a short cycle from time to time but if gold hasn’t made a lower low then we will be facing the distinct possibility that we are going to get another bounce that fails to make a higher high followed by a final move to lower lows that bottoms in the normal timing band.

The other possibility would be that February did mark the D-wave bottom and gold is now in a very tricky A-wave advance. This is a possibility but one that is going to be very difficult to game as we won’t really have confirmation unless gold breaks above $1161. And by that time the rally will probably be mostly over as A-waves rarely make new highs.

So while I know gold bugs will jump on a higher low as proof gold has bottomed, cyclically it would be much better if gold makes a lower low as that would have much higher odds of marking a true intermediate cycle low and probably the end of the D-wave.

It would also be a huge plus if the COT report shows a 90+ Blees rating. (The Blees rating is simply a measure of how bullish or bearish commercial traders are compared to the last 18 months and available to subscribers in the weekend reports). That’s not going to happen with gold above $1050.

The next thing I want to call attention to is Bernanke’s goal. It has always been his intent to inflate asset prices. And he’s certainly succeeded so far.

Now let me state clearly that I’m not a believer in the whole gold manipulation conspiracy theory nonsense. If gold were really being manipulated successfully then explain to me how in the world it’s managed to rise from $250 to over $1200 an ounce.

What I will concede is that the powers that be would probably prefer that gold didn’t rise. $1200 gold kind of makes a mockery of their phony CPI and PPI numbers. Now that doesn’t mean they can do anything about rising gold. A secular bull market is a secular bull market and nothing anyone does is going to stop that from running its course. What it does mean is that they are certainly not going to do anything to expedite the process.

What the powers that be do want is for the stock market to rise.

So I think we have to admit that if there is anything the government can do to help that process along they will, or at the very minimum they will certainly not do anything to hinder that from occurring.

So the second investment option when we get close to the bottom of the impending daily cycle would be to just buy the market (probably tech as it’s been outperforming and will likely continue to do so).

If the government wants the market going up then the lowest risk play would be to just take them at their word and go along for the ride.

Buying the QQQQ’s or the SPYDER’s would be, by far, the safest play if gold has not made a lower low and even if gold has made a new low it would still be the safest bet, although probably not the most profitable as an A-wave advance in gold should send mining stocks rocketing higher and would likely double the percentage gains possible in the CUBE’s or SPYDER’s.

So I will be watching gold as we move down into the stock market cycle low. If gold does not make a lower low like we want, then I think we are going to have to assume that we are going to see another failed rally that is unable to break the pattern of lower highs and that will roll over again.

Any positions taken in miners or metals at that point will have to be short term positions. That doesn’t mean those positions won’t rally. Many could rally 15 -20% which would probably be bigger than the stock market but we would have to go into those positions knowing we will be exiting again soon and that the odds are that this is just another deceptive bounce in an ongoing D-wave and not the explosive move of an A-wave rally.

If gold does fail to make a lower low I think the safer bet would be just to buy the market.

More in the weekend report for subscribers.

BUYER BEWARE

The rally off the February bottom is now going on 32 days. This is probably not the best time to chase stocks higher. I’ve been saying for a couple of weeks that the market needs to take a breather, preferably before earnings season as it would then be setup for a strong rally through April.

As the “normal” cycle in stocks lasts on average 35-45 days trough to trough we are now getting very deep in the cycle and in jeopardy of putting in a short term top at any time. We just need a catalyst to halt this incredible momentum move.

I’ve been expecting a runaway move to develop as this rally progressed but this is starting to turn into a parabolic move. Since the February bottom the market has ended higher 68% of the past 32 days and hasn’t closed below the 10 day moving average in over a month.

Compared to the runaway move in 06/07 which averaged 57% up days it’s apparent this rally is getting very overheated.

The leading tech sector is also becoming rather stretched. At $3.00 above the 50 day moving average it’s now in the range that has marked the tops of previous daily cycles.

Not to mention the Nasdaq 100 is only 12 points away from major resistance.

And the SPYDER’s are now bumping up against the declining 200 week moving average.

 

I doubt they will be able to penetrate and hold above this level on the first try.

I suspect the catalyst will come from the same area it came from in January, another leg up in the dollar.

The breakout above 81 today gives pretty good odds that the dollar will now be heading up to test the pivot at 83. That should be an ending move for the current intermediate dollar cycle. The expectation would then be for stocks to rally hard for the next four or five weeks as the dollar works its way down into an intermediate low in early to mid May.

I expect the markets to hang in reasonably well during the impending correction, possibly filling the March 5th gap. Once the dollar begins the trip down we should see an explosive move in stocks and commodities, possibly the final surge higher in this third leg of the cyclical bull market.

I’m expecting the correction in stocks will also correspond to the final leg down in what now looks to be a D-wave decline in gold that will most likely test the $1000-$1025 level. The left translated character of the current daily cycle is also confirming this.

That should be followed by a powerful A-wave advance as the dollar moves down into its intermediate cycle low.

 

For now the best strategy is to sit patiently and wait for the dollar to rally up into resistance at the 83 level and the market to move down into the cycle low. Once that happens we should have a fairly low risk entry for long positions in almost any asset class as the dollar works its way down into the intermediate cycle low. 

DANGEROUS TIMES

This rally in the stock market is now deep enough into the daily cycle that it has become dangerous to chase it any longer. (The average duration trough to trough of a daily cycle is 35-40 days. this rally is going on day 31)

Sentiment has reached bullish extremes, some of which rival the `07 top. Again not the kind of conditions that would warrant pressing the long side any longer.

As much as I would like to see a continuation of the C-wave the odds are starting to pile up against it. It appears that gold is now in the process of putting in a left translated daily cycle. Today's move under the March 12th low is likely suggesting this cycle has already failed.

The bad news is this is starting to look more and more like a D-wave. The good news is that it will probably bottom in the next couple of weeks along with stocks when the market moves down into the next daily cycle low.

We should then begin the next A-wave advance. Those are usually fairly powerful. Often testing the highs in fairly short order.

If miners can hold above their February lows as gold breaks to new lows it would be a very bullish sign that the A-wave was ready to begin.

For the time being the safest position is in cash as we wait for the stock market to correct.

PICKING A TOP

I often see traders trying to pick a top. It seems to be their favorite pastime.

But I have to pose this question. Is it really worth the trouble?

I think when I'm finished you will see that it not only isn't worth the effort but is actually one of the single worst strategies anyone can choose.
 Picking tops is the bread and butter trade of Moe Ronn (our fictional character representing the average impatient trader).

Let's say Moe thinks the market is due to top out and roll over into a bear market based on his interpretation of the fundamentals (either real or imaginary, it doesn't matter).

So Moe decides he's done with the long side of the market and he begins shorting in an attempt to spot the top. He makes repeated attempts to short, taking multiple small losses while he waits for the expected turn.

 Now let's say Moe finally gets lucky and shorts XYZ stock at the exact top of $100. Let's also assume that Moe manages to hold on through the extremely violent whipsaws that almost always occur as a bull market slowly rolls over. This is a huge assumption, but just for the sake of argument we're going to give this one to Moe.
 Let's also assume that Moe manages to exit his short at the very bottom with XYZ trading at $20. Moe just earned himself a very nice 80% return minus however much he lost trying to pick the top.
 Now let's see how John I. Que goes about trading a bear market.

Let's say John also thinks the market is due to roll over into a bear phase and he too wants to short XYZ. First off, John doesn't attempt to try and spot the top. He knows that is a fool’s game. John just goes to cash and waits patiently for a sign that the bear has truly returned.


Eventually XYZ rolls over and sinks below the 200 DMA. By this time XYZ has lost $20 already. At this point John is confident we have now entered a bear market and he sells short XYZ. John also manages to exit his short close to the bottom at $20. John just lost one heck of an opportunity because he was late to the party, right?
 Not quite. In fact, just the opposite.

Consider that the drop from $100 to $20 was an 80% gain for Moe's short. Not bad, not bad at all. But the move from $80 to $20 was a 75% gain for John's short. John only gave up 5% by waiting until the bear clearly declared itself and in the process avoided the many false starts that Moe had to suffer through in trying to pick the top.
 In reality John most likely made more money by missing the top by $20 than Moe did by eventually timing it perfectly.



As I mentioned last week’s article 1-2-3 reversal, the market is due for a move down into a daily cycle low any time now. So the thing to do is sell short, right? What are you crazy?

This is a cyclical bull market and one of the most powerful bulls in history. You have to be crazy to sell short into something like that. Let’s face it, in a bull market the surprises come on the upside. The correct course of action (assuming one doesn’t just plan on riding out any corrections) is to go to cash, wait for the pullback to occur and then buy into the dip.
 If we were in a bear market the opposite would be true.
 Counter trend trading is probably the single biggest mistake that the average retail and professional trader make and it stems mostly from impatience and the inability to just sit in cash.


As long as one trades with the cyclical trend any timing mistakes will eventually be corrected. A timing mistake against the trend will be amplified.


It’s such a simple strategy and if followed religiously, it is a strategy that would improve trading results by probably 10-20% over an entire career.
 Even the best traders are doing good if they can win 60% of the time. Can you imagine what the difference over a lifetime of trading another 10-20% would be? I dare say it would be large enough for Moe Ronn to change his name to Moe Money!

RUN RUN AWAY

Last week I hypothesized that the markets are “On the Brink of an Asset Explosion”. If this is going to play out then we can probably expect to see runaway moves develop in virtually all assets soon.

The rally out of the `06 bottom to the February `07 mini crash is a classic example of a runaway move (chart below). Note the brief measured corrections. Needless to say, if something like this develops soon, one doesn’t want to get caught on the bearish side of the tracks.

This kind of rally doesn’t happen that often, but when it does, it is a ticket to get rich on the long side of the market or poor if you choose to try and fight one of these runaway moves.

We already have, potentially, moves like this developing in multiple markets; technology, small caps, S&P500, platinum, palladium, silver, oil, & gasoline to name a few.

I think we may get a big clue when the markets move down into the now due daily cycle low if the correction is brief and mild like the late February pullback. If this scenario indeed transpires, the odds are going to increase dramatically that all markets are setting up for runaway moves.

I’m expecting that move down to begin at any time, although I think there’s a good chance the markets will hang in until options expiration on Friday.

Next week positive seasonality disappears. That will probably be the most likely period to look for stocks to move down into a cycle bottom.

Tuesday was the 26th day of this rally. That’s deep enough into the daily cycle that we can expect a top at any time. The cycle rarely runs longer than 35 to 45 days trough to trough.

Not only is it getting late in the cycle but multiple other signs are springing up suggesting this rally is starting to run on fumes. Sentiment is starting to skew extremely bullish (contrary indicator), there are signs that institutions are starting to take chips off the table, and breadth is deteriorating.

Next I want to call attention to the fact that the market made no attempt to test the February 5th bottom. I’ve noted previously that there was also no test of the March ‘09 bottom or the last intermediate cycle low in July of 2009.

The Fed has literally flooded the world with liquidity (printed money) and that liquidity is pouring into the markets on every pullback. Apparently any test of the lows is out of the question in this hyper liquid environment.

Fundamentally, we have the setup necessary for a runaway move. These same ultra liquid conditions existed in `06 as the Fed went on a currency debasing spree to avoid a recession. It produced the runaway move shown in the chart above.

And I think we probably have the emotional conditions in place for a runaway move as well. Retail investors are still gun shy of this rally. If this does develop into a runaway move we will have a steady stream of retail money flooding back into the market as Joe Sixpack becomes convinced of the sustainability of the rally and fearful of missing the chance to recover his retirement.

Geez, what a recipe for catastrophe the Fed has created. When this very same liquidity unleashes the next crisis (most likely in the currency markets) which will invite the return of the secular bear. Sad to say, investors 401K’s are going to get decimated again.

If all markets do enter a final runaway move, the S&P could rocket up to the 1300-1400 level in a matter of months. The euphoria from drinking that kind of Kool-Aid will intoxicate most investors and they will not notice the bear when he returns.

And return he will. It simply isn’t possible to create a sustainable long term bull market on a foundation of money printing. We already tried that approach last decade and the end result was one heck of a party followed by the second worst bear market in history.

We now have structural problems in the financial markets that are going to be with us for years, if not decades.

The magnitude of liquidity spewing forth from the Fed simply dwarfs what Greenspan produced from 2000-2007.

Apparently the powers that be can’t figure out that it’s not the size of the dose that’s the problem; it’s that we are using the wrong medicine.

Now I want to see how the move down into the impending cycle low develops. The first correction back in late February dropped a little over 25 points. If the next correction declines somewhere around 25 to 40 points we will probably have a pretty good clue as to our correction size for the duration of any potential runaway move. (The presumption would be that all corrections during the runaway move would fall in a range of 25 to 40 or so S&P 500 points).

Once we get past this immediate correction and reset sentiment, one can probably buy just about any asset class, as I expect a flood of liquidity will flow into virtually everything.

But keep in mind, there are sectors that have been the clear leaders during this cyclical bull.

Of all assets gold was the first one to regain and then move above the `07 highs. As of today gold is still holding well above the previous high of $1025. A quick look at weekly volumes makes it crystal clear what smart money has been accumulating during this bull.

Despite the many energy bulls who would like to flock back into that sector, it’s readily apparent energy is not going to be the leader during this bull. (Rarely does the leader of the last bull lead the next one).

The world is going to be stuck in an on again, off again recession for many years. This sad reality has crippled one of the fundamental drivers of the energy bull, namely demand.

You can see in the chart above that volume is contracting in the energy sector. I expect this will continue as more and more investors come to realize that precious metals are the leaders of this phase of the commodity bull. We will likely continue to see volume leak out of the energy sector and flow into the precious metals as the secular gold bull progresses.

The key continues to be the dollar. Despite all the nonsense about how the dollar will continue to strengthen and that it’s the best of the global currencies, the fact remains that it is simply not possible to print trillions of dollars out of thin air and have a strong currency.

It’s also not possible to rack up trillions and trillions of dollars of compounding debt and have a strong currency. Hey let’s face it, we don’t live in never, never land. Magic just doesn’t work in the real world.

I think the dollar is probably about to get smacked in the face by reality again.

Notice that despite a very strong rally over the last 4 months, the dollar still has been unable to move above the prior intermediate cycle top and now appears to be failing at the downward sloping 200 week moving average.

If the dollar is now ready to move down into the next intermediate cycle bottom (and I think it probably is) it is going to put a strong tailwind behind all assets. Maybe tailwind is too mild of an adjective. It’s probably going to be a hurricane driving everything willy nilly before it.

TIME TO BE AN OBSERVER

Folks there are times when the right thing to do is to just sit and watch. This is one of those times. We really have no edge at all in the gold market right now. Gold is moving down into the daily cycle low and I expect that decline to be exacerbated when the stock market corrects. So there’s no call to try and pick a bottom at this time.

We still lack two confirmations that this is a C-wave continuation, so there's no need to buy this dip yet, epecially if this does turn out to be a D-wave as there will be a lower low by the time the next intermediate cycle bottom arrives.

Now if gold can hold above the prior dip at $1087 it would be a big plus as it would keep the pattern of higher short term highs and higher short term lows intact.

I'm not terribly confident that will happen though as the stock market hasn't corrected yet. When it does it's probably going to add downside pressure to gold and miners.

On the plus side the right translated nature of this daily cycle swings the odds heavily in favor of gold holding above the $1044 low. So once we do put in the cycle bottom gold will have another shot at taking out the critical $1161 level.

It doesn’t make sense to buy the stock market this deep into the daily cycle especially with the negative divergences and money flows popping up (more on that in last night's update). It’s safest to just sit and wait for the correction to unfold and then buy into the dip.

Shorting is probably out of the question as this is one of the most powerful bull markets in history. And it should be, with all the liquidity that’s been thrown at it. The surprises continue to come on the upside. So you are just asking to get kicked in the teeth if you are shorting anything right now.

Folks I think it's time to step back and be a spectator for a while.

SECULAR STOCK BEAR VS. SECULAR GOLD BULL

Since March of 2000, the stock market has been and continues to be in a secular bear market. Beginning in March of 2009, the stock market entered another cyclical bull market.

This means our current stock market is in a relatively short term bull rally within a much longer term secular bear market decline. A really big bear market rally, so to speak.

This cyclical bull will serve to separate the second phase of the secular bear from the third and potentially most damaging leg down in the ongoing long term bear market.

Now that doesn't mean the rally since March 2009 is finished. Obviously it isn’t, as most indexes have recently moved to new highs.

What it does mean is that one can't make a timing mistake and expect to be rescued by the secular trend.

At some point this bull is going to expire and we are going to head back down and break the SP500 lows at 666, either nominally or on an inflation-adjusted basis. I suspect it will be both.

The reason it’s going to do that is simply because we don’t have a fundamental driver in place to power a long term bull market and the Fed’s attempts to defeat the bear are actually just magnifying and prolonging the structural problems.

For instance, from 1982 to 2000, the stock market was in a secular bull market. The fundamental driver for that bull was the personal computer and the internet. Those were world changing new technologies. Millions and millions of jobs were created during this period.

Now that doesn't mean the rally since March 2009 is finished. Obviously it isn’t, as most indexes have recently moved to new highs.

What it does mean is that one can't make a timing mistake and expect to be rescued by the secular trend.

At some point this bull is going to expire and we are going to head back down and break the SP500 lows at 666, either nominally or on an inflation-adjusted basis. I suspect it will be both.

The reason it’s going to do that is simply because we don’t have a fundamental driver in place to power a long term bull market and the Fed’s attempts to defeat the bear are actually just magnifying and prolonging the structural problems.

For instance, from 1982 to 2000, the stock market was in a secular bull market. The fundamental driver for that bull was the personal computer and the internet. Those were world changing new technologies. Millions and millions of jobs were created during this period.

Gold is in a secular long term bull market. This means several things.

First off, we can expect this bull to continue until 1.) The fundamental driver is taken away. This means the printing presses have to be turned off and 2.) We see a final blow off top as the public panics into what they perceive as a “sure thing”.

Until the secular gold bull tops any entry will ultimately turn out to be a winning position no matter how poorly timed as long as one is willing to hold on. Investors would do well to remember that the secular bull will eventually correct any timing mistakes.

A buy and hold strategy is the only sure fire way to make money in a long term bull. It’s not the only way but it is the one that is virtually guaranteed to return tremendous profits.

That being said, it is possible to maximize gains and minimize draw downs if one can recognize where gold is in its wave cycle. As all of the gains occur during a C-wave advance one wants to be fully invested during this period.

Just as importantly one needs to recognize when the C-wave is coming to an end and exit positions before gold enters the inevitable D-wave correction.

 

 

At the moment gold may or may not be entering a second leg up in the ongoing C-wave that began in April of last year.

I will be monitoring the gold market closely over the next few weeks for the confirmations that should determine if gold is going to deliver one more leg up. If a second leg does develop, we then need to be on the lookout for the signs that a final top is approaching and exit positions ahead of the D-wave correction.

The Gold Scents premium service provides a daily email update on the stock market, dollar and commodity markets as well as a comprehensive weekend report that includes Excel spreadsheets of historical and current C.O.T data for numerous stock indexes and commodities with special emphasis on analysis of the ongoing secular gold bull.

CRUCIAL TEST APPROACHING

The rally out of the February intermediate and yearly cycle low has now traveled far enough and long enough that it is due to take a short breather. That breather would be in the form of a short term pullback into the midcycle low.

The initial move out of the July intermediate cycle low lasted 22 days before forming a short term top.

The current rally is now on 21 days old and as you can see in the chart very short term overbought. Traders should now start looking for a brief pause in this market. A move back down to the 1120 support zone is probably in the cards some time soon.

I’m also starting to see divergences in breadth and signs that institutional traders are stepping aside for the moment. More on that for subscribers in Tuesday’s market update.

If we are on the brink of an asset explosion, and I think we are, then traders should be prepared to position long in virtually any asset class as we make our way down into this temporary correction.

I expect the stock market will also exert some influence on the precious metals market when it sinks into the low. As a matter of fact at 21 days it now appears gold has already begun the trip down into its next daily cycle low.

As this short term gold cycle is right translated (topped later than 12 or more days) the expectation is for this move to hold above the last cycle low at $1044. It would be a big plus if gold can hold above the last short term dip at $1087 and keep the pattern of higher short term highs and higher short term lows intact.

If it can, then I would be looking for gold to move above the critical $1161 level during the next short term cycle.

If gold can take out $1161 then the pattern of lower intermediate lows and lower intermediate highs will be broken. That will also force a re-phasing of the last intermediate cycle low from December to February. Again more on that in the subscriber newsletter. Suffice it to say that it is critical this re-phasing take place if gold is going to continue higher and not go through another multi month consolidation phase like it did from March 08 to Sept. 09.

So short term expect some weakness in the stock market which will probably continue to rub off on the gold market, but be prepared to buy the dip as this is not over yet.

ON THE BRINK OF AN ASSET EXPLOSION

I can virtually guarantee that what I’m about to suggest isn’t on anybody’s radar screen. But before I share my prediction, a little background analysis is in order.

There have been seven previous bull markets that were born in the depths of vicious bear markets similar to what we just went through. Each one of those bulls racked up impressive gains during the initial thrust out of the final low. Throwing out the `32 to `37 bull as an anomaly not likely to be repeated, the average gain for the first two legs of bulls with similar DNA as our own has been between 41% and 73%. After the second leg each one of these bulls underwent a mild corrective pullback of 8% to 14%.

I’ve been looking for that pullback since December and we obviously got it from mid January into early February.

Next I’m going to put up a long term chart of the S&P from the `02 bottom to present so we can make some comparisons for what should and should not happen in a “normal” bull market…if there is such a thing. Both bulls were born on the back of massive liquidity injections by the Fed. So it’s not surprising they have followed a similar path…well at least up to now.

Generally we will see the most aggressive moves at the beginning and the end of a bull market. At the beginning smart money piles into perceived value. At this stage of the game retail traders are still too shell shocked from the bear to trust the rally.

Finally towards the end of the bull, retail investors will panic into the market on fears of getting left behind sending the market surging higher. This is of course when smart money is unloading their shares.

You can see that the `02 -`07 cyclical bull followed this script almost to a T. The sharpest rallies occurred from March `03 to early `04 and then again as the market surged out of the `06 bottom into the final top in October of `07.

The cyclical bull we are in right now is about to morph into a completely different animal than just about any other bull market in history. And most certainly this bull will not fit in the same category as the `02-`07 bull. I think we are about to bypass the second phase of a normal bull market and jump straight to phase three, the ending stage.

This is a bull spawned by the printing of literally trillions and trillions of dollars by central banks around the world. You can see by examination of the chart above that this bull has been much more aggressive than the last one, rallying over 70% in its first 10 months.

The recent move to new highs by the Russell, Mid Caps, and Nasdaq suggests that the third leg of the bull is now underway. As most intermediate term rallies last 20-25 weeks trough to trough and this rally is on week 4, we probably have at least 10 to 15 weeks left before we can expect a top.

Now keep in mind that this has transpired while the dollar has been rising. As a matter of fact, the dollar is the key element in what I’m about to suggest.

So next, let’s take a look the dollar.

I’ve marked the last two major 3 year cycle lows with a blue arrow. Now to understand where I’m going with this you need to understand the concept of left and right translated cycles.

A left translated cycle is a cycle that tops left of center. For instance, if the rally out of a 3 year cycle low were to top out in less than 18 months we would consider it left translated. Generally speaking the majority of cycles that top in a left translated manner move below the prior cycle low.

You can see in the chart (above) that the 3 year cycle that began in December of 04 did in fact top in less than 18 months. As expected it broke to new lows at the next 3 year cycle low in `08.

We are currently in the same position in this 3 year cycle as it has obviously topped in a left translated manner. As such, we should expect to see the dollar break to new lows by the next major 3 year cycle low due sometime in 2011.

Now if we zoom in a bit I’ll tie this together with how it relates to what I think is brewing in all asset markets.

There’s no doubt the rally in the dollar over the last three months has been violent (the most violent rallies occur in bear markets). However, as you can see from the chart below, so far the dollar has not been able to move above the peak of the last intermediate cycle.

We now have a failed intermediate cycle in the making. If the dollar fails to break the June `09 highs and continues to roll over it is in jeopardy of succumbing to the secular bear trend again.

Next I’m going to note that last week was the 14th week of the dollar rally. The intermediate cycle in the dollar rarely lasts more than 20-25 weeks so not only is the dollar getting deep into an intermediate cycle and in jeopardy of topping at any time but it’s also contending with the multi-decade resistance level at 80.

Not only that, but sentiment has now turned to extreme bullishness for the dollar and extreme bearishness on the Euro. That is a recipe for running out of buyers of dollars and a prescription for a violent short covering rally in the Euro.

Now remember, the stock market has been rallying despite the dollar. Oil is over $80 despite a strong dollar. Copper is only about 15% from all time highs despite a strong dollar. Gold, the strongest commodity of all, is holding well above the prior bull market high of $1025 in defiance of a strong dollar.

All asset classes are now wound up as tight as a drum. If, or should I say when, the dollar begins the trip down into the next intermediate cycle low all assets are set to explode higher.

As hard as it is to believe I think there’s a very good possibility that the third leg of this cyclical bull could match the first leg and tack on 200-300 points in the next few months.

I think virtually everyone underestimates the effect that the multi-trillions of dollars the Fed has pumped into the system is going to have on all markets.

Unfortunately that’s probably the single worst thing that could happen for two reasons.

First, I’m afraid that not only will the stock market surge higher but so will the commodity markets in an inflationary explosion. It was $147 oil and $4.00+ gasoline that eventually broke the back of the global economy in `08 when it was already reeling from a bursting credit and real estate bubble.

Second, I’m afraid the average investor is going to fall for the hype that the Fed has “fixed” all of our problems. If the S&P is trading north of 1400 it’s going to appear that the coast is clear.

Nothing could be further from the truth, so when the market tops and rolls over into the next bear phase virtually no one will recognize what’s happening and everyone will again get sucked down into the depths of the bear.

Only this bear will be much worse than the last one.

This bear won’t be caused by problems in the credit markets. No, this bear is going to be driven by structural problems in the currency markets and soaring inflation. Unfortunately we aren’t going to fix a currency crisis by printing money. Money printing is going to be the cause of the crisis in the first place.

The only asset class that is going to offer any protection in this environment is commodities. And the one sector that will thrive in a currency crisis is the precious metals.

Not only will gold and silver outperform in the pending inflationary surge, but they will protect investors during the inevitable crisis that the Fed’s insane monetary policy is going to unleash next year.