Saturday, July 31, 2010


We now have some follow through to Thursday’s swing low and unlike the last two times, this one is not taking the shape of a bear flag. As I explained last week in the nightly reports, and this week on the blog in "Hoping for a Break" , I was looking for smart money to run the May pivot followed by a quick reversal as my final buy signal.

The failure to follow through to the downside is a sign that someone was in the market buying all that the technical and emotional retail traders were selling.

Now we need two more things to happen before we can be reasonably sure the intermediate cycle has indeed bottomed. First, we need to complete a weekly swing low. That will happen this week if gold can hold above $1155.90 and move above $1194.50.

We also need to break the pattern of lower lows and lower highs. Gold will do that if it can trade above $1204 next week.

I know that 6 weeks of negative returns are frustrating but the reality is that this has been one of the mildest intermediate pullbacks of the entire bull market. Gold dropped a mere 8.6% and miners only 14%. That’s almost unheard of for this volatile sector.

Several weeks ago I showed subscribers this chart of the public opinion poll for gold.

During this intermediate leg up, sentiment never really got extremely bullish on gold. On top of that, neither gold nor miners got very stretched above the 200 day moving average. I said at the time that was a recipe for a very mild correction and that is exactly what has unfolded.

I think there is a very good chance gold put in the intermediate low this past Wednesday and we are now headed higher into the strong demand fall season. (Gold sentiment has since dropped below the level we saw at the February intermediate low. A definite sign we are nearing or at a bottom.)

From time to time I will see posts on the blog or on the internet questioning the wisdom of investing in miners as they have underperformed gold. To begin with, miners have not underperformed gold, not by a long shot. What happens is people take a short little piece of history where the miners have underperformed for one reason or another, and wrongly assume this period of underperformance is representative of the sector during the entire bull. 

Since the bull started, miners, as represented by the HUI index, have increased over 1100% whereas gold has gone up 400%. The reality is that miners got quite a bit ahead of themselves during the first 10 years of this bull market.

There is a reason why miners lagged a bit during the last C-wave and that had to do with skyrocketing oil prices that were compressing profit margins. There is a reason why miners are struggling now too. Let me explain.

First off, don’t forget we had a huge move off the November `08 bottom. That was a 250+% gain in one year. From time to time you might see a single stock do that but for an entire index to make that kind of move in a year is almost unheard of.

A move of that magnitude has to go through a consolidation period at some point. That is exactly what miners have been doing this year; they are consolidating that monster rally.

Miners have now made four attempts to break through resistance in the 500 area. In the process they have formed a giant consolidation stretching all the way back to March of `08. As many of you may have noticed the larger these consolidations are the bigger the rally tends to be when the breakout finally comes (I’ll show you a really big consolidation at the end of today’s report).

Another thing that has been holding miners back is the law of regression to the mean. All financial assets obey this law. Gold and miners are no exception. When anything, whether it is gold, miners, oil, or housing prices, stretch too far above the average, eventually the law of regression to the mean pulls it back down. In the next chart you can see this in action.

In volatile sectors the moves up can get pretty stretched, as you can see. I’ve found that about the most any sector can stretch is 50-60% above the 200 DMA before gravity pulls it back down. And like a rubber band, the further one stretches above the norm the harder it tends to snap back. In the mining sector that almost always means a move back to, or even below, the 200 day moving average. 

What we really need to take away from the above chart is that the 200 DMA has now had time to “catch up”. Miners are setup for the next big move higher and they can now do it without the law of regression to the mean acting to drag them back down.

Incidentally, when we see the rubber band has gotten extremely stretched, that is the time we want to sell. Unfortunately most traders and investors do the exact opposite. They buy high and sell low because they are being controlled by their emotions. During these intermediate corrections the calls to sell by analysts and bloggers will get intense, but that simply isn’t how one makes money in this business. You buy when it’s hardest to buy and you sell when it’s hardest to sell. Professionals understand that in order to make money you buy into dips in bull markets. And about every 5-7 months we will get one of these dips in gold. They happen like clockwork.

For the last couple of weeks I have been trying every way I can think of to make investors understand this, so they can take advantage of this opportunity and so they don’t make the mistake of selling during a normal corrective period. Many have taken advantage of the “opportunity” and hopefully many more will before it’s too late. And judging by the number of "Old Turkey" investors on the blog, a big percentage of subscribers have now switched from trying to trade the bull to just riding him.

Invariably, what happens though is that most people simply can’t buy into the correction. They have to wait till it “feels” good before they can buy. Unfortunately by that time a big part of the rally is over.

Warren Buffett said it perfectly. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Folks we are now at that point where it’s time to be greedy.

I’ve mentioned many times in the past that I’m not a big believer in patterns. Too often they end up morphing into something else or just outright fail like the head and shoulders top did recently on the S & P. There are however a few patterns that I do pay attention to and they include triangles, which are often consolidation/continuation patterns, crawling patterns (also continuation patterns) and T1 patterns, again a continuation pattern.

We saw a great example of a triangle pattern last year right before gold broke out above the `08 highs.

We saw a text book crawl pattern recently in the dollar.

And we’ve seen multiple T1 patterns form as gold has progressed through its bull market.

I think we are probably seeing one form right now, although not in gold. This T1 pattern is forming as the miners are consolidating that huge move out of the `08 bottom.

The first leg up tacked on 350 points. Second legs in T1 patterns usually gain almost as much as the first leg. That puts the HUI at roughly 850 by the time this T1 pattern reaches its top. That is a huge move up from where the HUI was on Friday (425) and another reason why I think this C-wave is going to run into the spring with another corrective sideways move late this fall (gold’s next intermediate cycle low). 425 points is way too big of a move to unfold in only 3-4 months. The law of regression to the mean would pull it back down before it ever had a chance to raise that far. No, I think it’s probably almost a given that this next phase of the C-wave is going to unfold in two stages and correspond to the dollar moving down into its 3 year cycle low.

Then as gold moves into its D-wave decline, which will mirror the dollar’s bounce out of the 3 year cycle low, we should see the HUI complete the T1 pattern with a test of the consolidation zone, which incidentally will tell us when to get long again for the next A-wave advance.

Oh and before I forget, how’s this for a really big consolidation pattern?



  1. Great comments, as always.

    Any interest in the Ag complex? Wheat is going through the roof. Corn/beans sure to follow. Not a question of if, just when, so a B&H approach (DBA/MOO) seems like a nice complement to PMs.

  2. I'm sticking with PM but I expect all commodities will benefit as the dollar moves down into the 3 year cycle low.

  3. this is just another GREAT read...loved the detailed charts in this report Toby. Enjoy the way you look at , analyze , and interpret the mkts. thx. Robert

  4. Toby - I clicked "here" to subscribe but it took me to "SMT Discounts" not Gold Scents.

  5. strange that gold was neutral and gold stocks were down when the dollar broke down below .81 when the dollar bounces you may get the real low in gold, since it had no buyers with the dollar sell -off.

  6. It's the same thing.

  7. no Toby bashing?

    shorts must have been busy covering at loss today as acceptance set in

    Keep up the great work!

  8. I had the same problem - Discount SMT - what is that?

  9. Toby,

    If the USD goes down in this 3 year cycle, would the stock market rise seeing as how the two are inversely correlated?


  10. There is a point where it becomes detrimental, Remember the dollar was collapsing in 08 but it didn't help the markets. It just stoked inflation in the form of spiking oil. The same will happen again. It's not possible to print prosperity.

  11. Toby,

    Great analysis, totally with you on the longer term picture on gold. However, after the last 2 big runs in gold (2005-2008 time period), the first had a year of consolidation and the second had a large move down. We just had a large run from 2008 to 2010, wouldn't it make sense for another rest for a year or so in gold or another big decline. I do think by 2015 we will see ridiculous prices (high prices) in gold, but might we go down first.


  12. Well gold has been consolidating for 8 months. The bottom line is that sentiment is too depressed on gold to continue too much lower, and it is deep in the timing band for an intermediate bottom.

    Don't forget we are now heading into the strong demand season.

    All in all I would never risk being "out" at this point.

    Actually I only sell at C-wave tops and we just don't have that yet.

  13. We also have just seen the dollar drop Mid June to now from 88 to todays very oversold 80.56, yet gold dropped with it mid june to now $1260 to $1160. Seems odd that Gold would run while the dollar bounces up, considering how big the dollar could bounce from here, BUT , I also believe that Gold hasnt finished the c-wave up. Has it bottomed its current leg down though? Maybe the dollar bounce here will bottom it near 1144 mid august? Does that fit extended cycle time??

  14. Gold is already very deep into the timing band for an intermediate bottom (26 weeks. 25 is usually about the limit) so I kind of doubt we will get one more push down but anything is possible.

  15. Toby,

    I was looking at weekly charts and seeing a high around May 2006, then it didn't start a breakout again until August of 2007. Another top in March of 2008, then a decline into November of 2008 before the start of the big move. We just had another top in June of unless that top gets taken out soon I wouldn't put NEW money in Gold. We have a potential double top in Gold, so I am cautious...but that is why you get paid the big money Toby.


  16. This comment has been removed by the author.

  17. Well for me personally I don't buy into breakouts. Invariably that strategy leads to draw downs. In bull markets a better strategy is to buy the dips.

    We get one of these dips about every 5-6 months. I don't like to waste them :)

  18. Latest from the Great Rich Russell.

    "To wind it up, I don't care for the stock market's action, but I do like gold's action. Gold and cash, that's where I want to be. And I'd be happy if my subscribers would copy my position."

  19. Toby...right nxt to your article on Kitco is this one...

    Gold and Silver Shares are About to Collapse! - by Ronald Rosen , Aug 3 2010 3:54PM

    may the best man win!! ( i hope its you, I am 80% invested)

  20. Toby,

    whats your opinion on ronald rosen prediction(he has been predicting the same dramatic decline from august 09)

    What do you think about the opinion that gld etf may have divierted all money from gold miners and they may not benifit as they should have otherwise.

  21. I think Rosen can't see the future any better than anyone else. Apparently worse than most.

    Pure nonsense. Just ignore it.

  22. Toby,

    You use bullish/bearish sentiments as one of the signals in looking for tops and bottoms.

    Which indicators do you use specifically? COT?

  23. Toby,

    What do you think about the opinion that gld etf may have divierted all money from gold miners and they may not benifit as they should have otherwise.

  24. Reminder...when the gold stocks catch a bid and really get moving, it doesnt take much liquidity to get them moving , FAST! The gold etf sdiverting $$ from miners doesnt fit Tony's explaination in this post on HUI and GDX charts...which looks right on. Just look at charts of IAG , EGO , and CDE...they CONSOLIDATE from $14 to $19. Imagine when they catch fire! Keep up the good work Toby...your conviction vs. Rosen is solid. Robert

  25. I only can agree with you.

    We are almost on same page, man....

  26. Hi Toby,

    I have long term core holdings in precious metals for precisely all the reasons you talked about.

    I still have a nagging issue though about the downside risk to gold. We are assuming that the gold bull exists because of Bernanke and his printing press.

    I am new to your blog so please bear with me if I am asking a question which you may have already addressed before.

    If suppose Bernanke stops the printing because of political pressures especially with the Nov elections looming.

    What is the likelihood of this happening?

    And if it does happen, will it impact the bull market in gold? Would it signal the moment to exit gold?

    Many thanks in advance.

  27. Will Ben quit printing? Does the phrase "not a snowballs chance in hell" give you a clue?

    The Fed has been trying to turn the business cycle for 10 years with the printing press. To giveup now would mean they would have to admit they were completely wrong and they caused all the problems.

    I don't really see much chance of that happening, do you?

  28. This comment has been removed by the author.

  29. One can always find reasons to doubt the bull. I guarantee one will even be abe to do it when gold is over $3000. ...Or you can quit making nonsense excuses and just ride the bull.

  30. The printing might stop not because the Fed wants to stop but rather it will be forced to. But I guess this is highly unlikely.

    In the meantime, will continue to stay with the gold bull.

  31. Toby, looking at your spx chart i would have agreed then, but as of now the SPX chart ( & DJIA ,NDX,etc) show a rising wedge with falling volume and stochastics...these usually crash. With tomorrows jobs report ,dollar at 80.50 possibly turning up,etc maybe this cycle ends a lot shorter that the reg 8+ wks you thought?? or just a pullback due along the way?? thx

  32. I've never put any faith in these "wedge" patterns. Mostly because people seem to be able to manufacture one out of any chart.

    To me it just looks like the market is moving higher through resistance levels followed by short consolidations.

    I take sentiment a lot more seriously than I do chart patterns. And no bear market rally has ended before sentiment turned bullish. We are still a long way from that happening.

    I certainly wouldn't suggest someone short this market based on an obscure wedge pattern.

  33. You definitely do stick to your convictions on sentiment along with cycle timing. Thx for that answer...(I still fear the rising wedge W/ Low Volume..haha..been burned along before)BUT...I like your commentary and will watch the outcome... Does your subscription include daily commentary updates?? And is a 1 yr your minimun subscription? I clicked on your "here' tab and only saw a 1 yr. thx

  34. Yes I put out a daily report.

    There are several free reports you can browse.

    If you scroll down a bit on the home page of the blog you will see 3 choices. Yearly, 6 month or monthly.

    I'm just offering a discount on the yearly rate for two more days.

  35. Got 1194 for swing, now above 1204.50 for higher high - great calls, Toby!


Note: Only a member of this blog may post a comment.