Wednesday, July 7, 2010


First off, a little history to dispel some myths. I've known that the head & shoulders pattern that everyone is afraid of doesn't actually hold up to testing being little better than a coin toss. Well, Jason Goephert of actually ran the data and it's much worse than a coin toss. The percentage of times the pattern reached it's target was 27% for an average return of -1.2%. Not exactly a great risk/reward setup. Like most of these technical patterns that people take as gospel The H&S pattern when examined under the microscope of history rarely lives up to it's reputation.

Now you see why I don't put a lot of emphasis in lines on a chart. Most of the time they are just... lines on a chart!

Here is what is happening. Roughly every 20-22 weeks the market dips into a major intermediate cycle low. The cycle tends to shorten a bit in bear markets simply because humans can't remain negative as long as we can stay positive. In both cases our emotions become exhausted and need to take a break.

As you can see we are now 21 weeks into the cycle that began at the February low (22 if this week ends up moving below last week's intraweek low).

The same thing is happening in the gold market.

Just like February I expect both cycles will bottom in tandem. At that point gold should take off into the final leg up of the ongoing C-wave. 

The stock market is another question altogether. We are in a secular bear market after all and the stock market could bounce out of the coming cycle low and fail to make new highs before rolling over again. If that happens then, yes, I will call the bear market. But I'm just not prepared to call it as we move into the final ultra negative period of an intermediate cycle low.

We simply have to see what kind of bounce develops out of the coming bottom first.


  1. Ugggh! This is what I'm talking about. If the market's going to rally, then I'd like to see it strongly rally! Else if it's going to go down I'd like to see a big move down. Instead it will just chop back and forth till I go nuts LOL

  2. Toby, the other day you showed that we were on day 48 of SPX negativity which was more than in 08-09. I'm a relative newbie trader (since 2006) - was there anything longer in the 2000-2002 era? If this move holds up today, we could finally be at the end of the intermediate cycle.

  3. There was one 26 week cycle in 01 that ran longer. It was extended a bit by the events around 911.

  4. I've got to say it looks like you bears are about to stuff your foot in your mouth.

    Looks like someone may owe the Tobster an apolegy soon.

  5. Yes but what the heck is gold doing? Shouldn't be leading the charge???

  6. Also, something struck me just now: the market seems to be shooting up a little TOO fast. Other than that slightly odd observation, I will soon be preparing my apology LOL.

  7. The average rally out of an intermediate cycle low is 6-10% in the first 8-13 days. So 4.5% in the first three is nothing out of the ordinary

  8. Toby, I noticed that when 50-day ma crosses 200-day ma, the underlying instruments tend to bounce up a little while, then go downhill from there. Recent examples are eur/usd in February and Shanghai Stock Exchange Composite Index in late March of this year. Could the same thing be happening with SPX?

  9. Actually like the H&S pattern the reality isn't quite as reliable as common consensus would have us believe.

    Most of the time a "death cross" just ends up being a whipsaw

  10. Toby, the million dollar question: if the market goes up from here, wouldn't there be a threat to gold price under the thinking that since all is better, there is less need to go into gold? Or do you see gold rising with the market?
    I think that's a very good thing to point out.

  11. Gold is just dropping into an intermediate cycle low like it's done every 20 to 25 weeks for oh about 30-40 years.

    There is nothing wrong with the long term bull. Gold is just going through one of his shake everyone off periods.

  12. All you perma bear trolls that have all of a sudden disappeared should have listened to TC. Now you are going to watch all those profits evaporate LMAO!


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