Friday, July 2, 2010


I'm going to go through some signs that rabid bears might do well to pay attention to because I think the market is very close to a major bottom.  (That doesn't mean we are guaranteed to make new highs, although we might.  Just that we can probably expect an explosive rally soon, even if it ultimately turns out to be a counter trend rally in an ongoing bear market).

First off, way too many people are counting on the head and shoulders pattern taking the market directly down to 850.  Folks, historically these head and shoulder patterns have a success rate of about 50%.  A coin toss, in other words.  Didn't we learn that lesson last July?

Let’s go now to the charts. We have a large momentum divergence that has developed on the daily charts.

Also, notice that the market dropped down to the 75 week moving average yesterday and bounced strongly. You can see this same support during the prior bull.  The 75 week moving average acted as final support during the entire bull market. That level also happens to be the 38.2% Fibonacci retracement of the entire cyclical bull move.  Not an unusual correction in an ongoing bull, on both counts.

Next, we are now right in the timing band for a major intermediate cycle low.

At 21 weeks it's just way to late to press the short side.  You risk getting caught as the intermediate cycle bottoms initiating a violent short covering rally.

And finally, breadth is diverging massively during this final move down.  As you can see the NYMO often diverges at these intermediate cycle bottoms.  The divergence at this point is the largest in years.

Finally, I'll point out that the February cycle bottomed on a reversal off the jobs report.  I think it's safe to say the market has already discounted a bad number so we could see shorts begin covering in a buy the news type trade, even if the number is bad.  And if the number is good, we will see the market gap higher huge, trapping shorts and throwing gasoline on the fire of a short covering rally.

It's just too dangerous to continue pressing the short side at this point.  Better to just step aside and not risk getting caught in the intermediate bottom that WILL happen sometime soon, maybe even on today's employment report.


  1. You are correct about the market being oversold but it doesn't mean bears have to cover positions, especially for positions that are in the money. Instead they should move up their stops and focus on levels where the bear case will start to break down. If the market has entered a new downtrend, or is in the process of making a longer term top, there's nothing wrong with averaging into bearish positions.

    I also still see no reason to worry about getting long gold here since gold is still in a 5th wave with negative divergence on the MACD, and seasonally this is the weakest time for gold. Better just to step aside on gold and wait for a better buying opportunity.

    As for the dollar a secondary indicator on the dollar is the strength of the long term bond market. It would be odd if investors were moving lots of money into long term bonds yet the dollar was truly in jeopardy of making a new low. The chart of TLT looks very strong right now and as long as it remains strong the dollar is likely to break above 88 after this current consolidation.

  2. Great Analysis!! And not a bad comment below it. The two are not mutually exclusive.

  3. Take a look at SLW and ANV, two of the strongest mining stocks since the bottom in 2008. Both are up around 10 TIMES since the lows. SLW has a clear 5 wave up pattern, and negative divergence on the MACD with a gigantic bearish engulfing candle on the weekly chart. Huge bearish engulfing weekly candle on the ANV chart as well. On the daily charts you can clearly see how both stocks were soundly rejected at the 22 level on high volume. Caveat emptor on those two stocks my friends, and the rest of the mining space in general for the near term. These stocks are about to consolidate for a while at best, but more likely are in for a nice little beat down in the near term.

  4. Personally I have to say that EW has to be the most worthless system ever invented. But you could be right about a consolidation. Although unlike every other time since the bull began gold is now consolidationg above support instead of below resistance.

    One simply can't take a chance of being out and missing a move. Old Turkey baby.

  5. Explosive rally soon ... but a counter trend rally ... in an ongoing bear market?? Oh wow, never mind a crystal ball, Toby's got the Hubble telescope to see into the future!! LOL

  6. Toby, you mentioned the 38% Fibonacci level relating to the move up (as shown on your chart). Am I correct in saying that the 1010 level on the SPX is also the 38% retracement of the move DOWN from the 2007 high to the low of 666? That would make this a very significant level?? And yes the 75w SMA looks good - I have been using a 350day SMA on some of my Australian stocks and it looks similar.

  7. I have never read such usless bullshit in all my life. Once again Toby/Gary/Winston/Luigi has got it wrong. The H&S top has broken to the downside, the bears are in control, look out below. If you follow this idiot you have been warned countless times by other posters. And what is this script that you have loaded into this webpage? Why is it scanning my h/d for passwords?

  8. As always you choose to ignore the facts. I've repeatedly warned everyone not to trade the market, long or short and only buy PM.

    It's the only market with the safety net of a secular bull under it.

    But if you insist on wasting your time and money trying to short the market at these levels good luck. You are betting on another credit market collapse then. Since that's what it took for the market in 08to drop significantly lower from the kind of oversold levels we are at now.

    You know you went through all this back in February too and you ended up sticking your foot in your mouth. Do you really want to take that chance again?

  9. LOL it sounds like a newbie is very heavily leveraged on the short side and takes offense to anyone with an opposing view.

    Leverage kills my friend. You better learn that lesson and learn it fast if you want to survive in this business.

  10. Toby,

    You make a solid case for the market to put in an intermediate low.

    I found your chart showing the divergence on NYMO and SPX very informative.

    You pointed out on Thursday the break on the dollar. If the dollar continues it decline, that should give stocks another reason to rally.

    With the SPX dropping for 10 days, Gold demonstrated good strength but eventually did put in a swing high on Monday.
    It looks like we are getting a correction in Gold, the dollar is breaking down, and the stock market is (I guess) close to putting in an intermediate low.

    With that in mind I was looking at some PM’s. I am considering some AGQ., figuring it is suppose to trade at 2 times that of silver and UGL, which is suppose to trade at 2 times gold.

    But after studying both charts, with SILVER behind AGQ candlesticks and GOLD behind UGL’s candlesticks, I find that both AGQ & UGL did not trade at 2 times.
    In fact, they both underperformed (at times) their respective underlying metal.

    (See Charts)

    I wanted to ask if you noticed this on AGQ & UGL.? Are these two ETF’s strictly for day traders?

    I think I’ll just add more SLW & GSS.

  11. You've got it backwards...we're on the brink of collapse.

    Seriously, we're on the brink of war, with the govt buying nearly all our Treasury Bonds (to keep the rates low)...I could go on.

    It's a managed market, not a free one. The management is coming to an end.

  12. I agree with this contrarian view because anotherwell known market timer is predicting that the market will ralley through 2011, but at a more moderate pace

  13. if the head & shoulders pattern's like tossing a coin, it means there's no pattern -- hilarious -- it shows there's no point in trying to fortell stock market action

  14. History says a PURE TA approach to investing shows no long term edge. It is for the most part a coin toss.

    Personally I've found this to be pretty much true. In order to get any edge you need to add sentiment, money flows and cycles to TA and even then it isn't going to be a huge edge.

  15. since the top at 1219 we have only had one 1 week countertrend rally...this is a sign of a weak market.European markets and China will drag US lower despite Ben's printing press imho.Check out the huge reversal candles on the quarterly index charts esp Russell...these will not be reversed in 1 or 2 weeks...


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