Tuesday, July 27, 2010


I want to discuss something that came up on the blog Friday. An anonymous poster hinted that we were going to see more gold weakness in the days ahead because big money was having to sell  positions. Folks, big smart money traders don’t sell into weakness. These kind of investors don’t think like the typical retail investor who is forever trying to avoid draw downs. Big money investors take positions based on fundamentals and then they continually buy dips until the fundamentals reverse. The fundamentals haven’t reversed for gold so I’m confident in saying that smart money isn’t selling gold, it is using this dip to accumulate.

With that being said there are times when big money will sell into the market and it is why so often technical analysis as it’s used by retail traders doesn’t work. They do so in order to accumulate positions. Let me explain.

When a large fund wants to buy, it can’t just simply start buying stock like you or I would. Doing so would run the market up causing them to fill at higher and higher prices. Unlike the average retail trader, smart money attempts to buy into weakness and sell into strength. (Buy low, sell high). In order to buy in the kind of size they need without moving the market against themselves, a large trader needs very liquid conditions. Ask yourself, when do those kind of conditions exist? They happen when markets break technical levels.

If big money is selling it is because they are trying to push the market below a significant technical level so all the technicians will puke up their shares. By running an important technical level big funds can trigger a ton of sell stops to activate, allowing them to accumulate a large position without moving the market against themselfs in the process. We saw this very thing happen in the oil market recently and also in February as gold bottomed.

Technical traders wrongly assume these breaks are continuation patterns but the reality is that very often they are just smart money “playing” the technical crowd so they can enter large positions. The key to watch for is an immediate reversal of a technical break. When that happens you know there was someone in the market buying when everyone else was selling. 9 times out of 10 it was smart money.

At the moment everyone is jumping on the bear side for gold. Remember we saw this exact same sentiment in the stock market 3 weeks ago. I knew the bears were going to be wrong simply because the market was way too late in the intermediate cycle for there to be enough time left for a significant decline.

The gold bears are going to be wrong also and for the exact same reason. It is just too late in the intermediate cycle for there to be enough time left for anything other than a minor decline.

I'm now waiting, and hoping for a break of the May pivot. I want to play that break if it comes like a smart money trader. That means I want to buy into the break instead of panic sell like most dumb money retail traders will invariably do.

The reason of course is that gold is still in a secular bull market. In bull markets you buy dips.

Also the dollar with the break below 82 this morning is starting to show signs that it is now in the clutches of the 3 year cycle decline. Every C-wave so far in this 10 year bull market has corresponded to a major leg down in the dollar. I'm confident this C-wave will inversely track the dollars move into that major cycle low due early next year.

Sentiment wise gold has now reached levels more bearish than at the February bottom. That means gold is at risk of running out of sellers.

And finally, and most importantly it's just simply too late in the intermediate cycle for gold to have enough time for a significant drop. This is the 25th week of the cycle and the intermediate cycle rarely lasts more than 25 weeks. That puts the odds heavily in favor of a major bottom either sometime this week or next. And don't forget gold is about to move into the strong demand season. Like clockwork gold invariably puts in a major bottom in July or August before the run up into the strong fall season.

The bears are going to be wrong again.


  1. Looks like you got your pivot point Toby !

  2. Getting very close but hasn't quite broken it yet.

  3. Actually now that I look on kitco it does appear that gold broke slightly below 1166.50 this morning.

    I will wait till options expiration tomorrow to finish buying.

  4. Buying gold under $1160. Is it the intermediate low? or does it have further to go?

  5. Could recommend any books for readers to study the wave analysis you use to analyze the markets.


  6. I don't know of any books off the top of my head. You could just buy a one time monthly subscription and then study the terminology document as I have a pretty detailed description of cycles in it.

    No one knows if this will be the final low or not. My advice is to just take your best shot and then hold on. Or if you are nervous about draw downs then wait till we get a swing low on the daily charts. If yo are really the nervous type wait for a weekly swing.

  7. Looks like you got it wrong

  8. does this mean you are buying in @ the 1060 level today (a few hours since your post) or are you waiting for further weakness?

  9. I'd buy gold now and get a house for my kid with 100 ounces down the road.


  10. I did buy the rest of my position today. I don't know if I got the exact bottom or not, I rarely do, but this was close enough

  11. Toby,

    I agree with your thoughts on the big funds breaking technical support in order to buy in bull market. But in bear markets that technique does not work because they are continually losing money over the 1-2 year bear market...and once a short term top is hit in August, they will start losing money for years to come as history suggests we are in for a deflationary depression (which happens every 80-90 years worldwide).

  12. John,
    A deflationary depression can only happen in a monetary system that is anchored to something, like gold. In a purely fiat system it is entirely possible to have a hyperinflationary depression.

    And I don't think anyone can say with a straight face that gold is in a bear market. It is the only secular buill market left.

    Even in the deflationary environment of the 30's gold was the one bull market at the time.

  13. I think the deflationary depression has to come before hyperinflation. Gold is the one true type of money to have and won't get hit as hard...but nonetheless, will get hit. Long term interest rates are suggesting deflation first. Many things point to breaking to new stock market lows in the coming years...so Why no deflation in your opinion. Thanks, and great website.

  14. Because before Bernanke will allow that to happen he will mail checks to every man, woman and child in the country.

    Don't forget Ben halted the worst deflationary spiral in 80 years with his printing press and he did in in 9 months.

    Does that sound like deflation has any real chance of success to you?

  15. Toby,

    Tell me what is wrong with the concepts in this interview? Thanks


    Prechter has been wrong on gold, and many times has been early on markets, but his long term track record has been pretty correct. Problem with him is he has been early on his calls, because he is looking at hundreds of years and missing by a few years in that realm is not really missing the big picture.

    Just trying to discount all arguements and would like to discount his. Thanks

  16. Actually Prechter has significantly underperformed a simply buy and hold strategy for the last 15 years.

    Precther is a shock and awe marketing artist. Which just means he's real good at predicting the end of the world which brings in drooling bears to subscribe to his service.

    But if one actually wants to make money they would be better off just throwing the EW nonsense in the trash where is belongs.

    Probably the biggest favor you could do yourself is to quit reading Precther.

  17. yes, its true, gold is going much much higher.

    if you look at the tape the past 8 years, this situation has played out time and time again. gold breaks a key support area to shake out the weak hands, then rises. nothing has changed to indicate this time will be any different.

    if you are smart, you do not take full positions so you can buy more on this weakness, then sell the trading positions into strength while always maintaining a core holding.

  18. I don't subscribe to his service and am in agreement his short term timing is terrible...but his thoughts mirror several other different sources that are predicting a severe decline in equities. And it seems odd we would have a severe decline in equities without falling prices. I just want to discount his justifications for deflation. Thoughts on those.

  19. Well we are cerainly still in a secular bear market for stocks and have been since 2000. I'm fiarly certian there will be a third leg down and probably a fourth and maybe fifth before it's all said and done. But that has nothing to do with the secular bull market gold.

    As a matter of fact if history is any indication the bottom for stocks should come at about the same time as the top for gold.

    That's when one will want to sell their gold and start buying stocks for the long term again.

  20. as for prechter and his E.W. couldnt agree more...its like a rear view mirror , they keep going back and changing the count to match what happened.

    as for Toby..your contrarian plays are working VERY WELL as of late. My problem is I buy Gold stocks and so even w/gold in a bull..I see Iag and Ego and GG get sucked down. Do you still feel the MKt will recover for 6 to 8 wks? This would help buoy Gold stocks, but I saw HIGH volume down seriously kill metals like AKS, CENX (afterhours), X , and PCX today. And Gold stocks like Iag, GG , ABX etc High volume down says a lot. Toby, your thoughts? Thx Robert

  21. Hi - like your work, thanks. There is all this talk about deflation and its effect. We have a debt crises and as such we cannot afford deflation in dollar terms because then the western world is bust - if not already. Deflation in Gold terms.

    Interesting reads to highlight some arguments are here and which increased my understanding of deflation.


    Mark Faber


  22. Toby, you didn't dismantle Prechters analysis regarding deflation? What was wrong with it.


  23. Toby

    On your cycle work, can the shortest up cycle be 4 weeks (although you would like to see 8 to 11 weeks). I am referring to the S&P move here. We had a short 5 week cycle in 2008 from mid July to mid August. Is it possible we don't rally up to 1150-1220 but stopped yesterday at the open. I shorted that and my stop is at 1118 on the S&P futures right here. If that gets taken out I am long from there.

  24. here is my infallible market timing prediction device (works every time)...
    I just watch the price trend, and when I want to sell with every ounce of my being, and the thought of hanging on any longer makes me want to throw up -

  25. Anon,
    gold stocks will follow gold. We already saw them comletely disconnect from the stock market during the flash crash. Once gold puts in the intermediate cycle low and heads back up miners will go up with it regardless of what the stock market does.

  26. John,
    I already pointed out that deflation in a purely fiat system is a choice not an inevitability.

    We just had the worst deflationary spiral in 80 years and Ben halted it in 9 months. If deflation was an inevitable outcome then how could something like that happen?

    As long as a country is willing to sacrifice its currency deflation can not happen.

    If they government came down to a last resort they would just start mailing checks out to everyone. Does anyone seriously think deflation is possible in that scenario?

    Impossible you say? It's already happened twice. They called it a tax rebate.

  27. Anon,
    In a bear market rally (if this is a bear market) we never roll over until sentiment becomes bullish.

    We have to run out of buyers. At the moment intermediate term sentiment is still extremely bearish, as a matter of fact it's still at levels that tend to halt corrections not begin them.

    Sometimes we can reach those bullish levels quickly if news is bullish or the rally is sharp. Usually though it takes 4-10 weeks before a bear market rally will run out of buyers and the fundamentals drag it back down.

    I tend to watch money flows into and out of the SPYDER's as a sign that big money, money that has better inside information than I do, is buying or selling.

    Almost no tops or bottoms have formed that didn't first show signs that big money was in the market ahead of the top or bottom.

    At the moment there is no sign that big money is exiting. On the contrary they are buying into every minor little dip. Not what I would want to see if I was selling short.

    I've found it's always best to follow behind the train rather than stand on the tracks in front of it.

  28. Sentiment, if I am not mistaken, is very similar looking to the October 2007 to late December 2007 right now. We had a huge high in April 2010, and are ticking back up, but a collapse could come at any time. Best to pick a good spot to short this, and if wrong have a tight stop and go the other way. Looks like the top on Tuesday is a good stop for an intermediate trader.

  29. Toby, if your volume theory is correct, shouldn't volume have trended sharply up into the October 2007 and April 2010 highs. What am I missing?

  30. Bob,
    Actually short term sentiment did get a bit stretched recently but even that has now backed off after the two choppy days.

    What I'm talking about is intermediate term sentiment. We need the market to run out of buyers and if this is a bear market then the fundamentals will drag it back down.

    Intermediate term sentiment is still at levels so low that this is usally were bottoms are put in not tops.

    Bob you are trying to see something that just isn't there. Even the Investors Intelliegince survey showed an increase in bears last week. Does that sound like too much bullishness to you?

    Don't worry I will let everyone know when we reach true bullish extremes. When that happens then we can start looking for signs of a real intermediate top, not just some minor pullback and consolidation.

  31. Anon,
    Volume was trending up into the 07 top. Look at a weekly chart and you will see what I mean.

    I'm not at all convinced this cyclical bull is dead yet so April is kind of meaningless at this point.

  32. Toby,

    3 of the lowest volume days in several months happened right at the October 2007 highs. Also, sentiment is the main driver of tops and bottoms, but you have to be open to outside influences too. Just be open.

  33. http://www.youtube.com/watch?v=zCF1qE86edk

    EW vid

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  35. James Hurst did the premier cycle analysis in the 1960s and used it to turn $10,000 into over a million in a little over 1 year. James Hurst was an electrical engineer and had access to heavy computor systems at the time. He wrote a couple of books ont he subject but the titles slip me. WE hand plotted the cycles back in the early 80s when I worked with Bill Murphy. We had these long scrolls we would roll out on the floor and plot the cycles and trade using them. Every H. L. and Close of the Dow from 1907. Twenty feet long. Exhausting.
    Thank you for the PC.

  36. Anonymous, does your cycle stuff work? If it worked before, does it still work these days?

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  38. Like all tools cycles will fail from time to time. Mostly because a cycle will stretch very long.

    For the most part cycles are worthless for spotting tops...unless the cycle runs deep intothe timing band for a trough then you can sometimes spot a swing high as a top.

    They are much better at spotting bottoms. They are the reason I kept warning bears that the H&S pattern on the S&P would be unlikely to work.

  39. I am not that leveraged but maybe, I'll deleverage a tiny bit more, if gold comes down much $30 or more I'm all in.


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