Today's FOMC meeting and press conference has the potential to either put in a daily cycle bottom in the dollar index or initiate a waterfall decline into the dollar's three year cycle low. There is a lot riding on this meeting.
Let me explain. Today will be the 26th day of the current dollar cycle. That cycle typically lasts about 20-25 days. So it's already starting to stretch here. The last few days the dollar has been consolidating while it waits to hear what the Fed has to say. I suspect if the Fed clearly states it will close down QE2 in June that will give the dollar the impetus for another dead cat bounce.
Make no mistake though, this will only be a dead cat bounce. Just because Bernanke ends QE2 in June doesn't cure the problem of the trillions of dollars he's already printed. The foolish attempt to print prosperity is going to have dire consequences, it is going to cause a dollar crisis. There's no way Bernanke can avoid that now. The damage has already been done. There's no way to push the toothpaste back in the tube.
In the event that the Fed does clearly state their intention to end QE (and I think this is the most likely scenario) the minor dollar rally should drive a continuing correction in gold and silver. They are due for a daily cycle correction. It will only be a correction though. The dollar catastrophe isn't done yet and Gold's C-wave still has further to go (alot further).
The other scenario, and the one I think is less likely, Bernanke doesn't state a clear intention to halt QE and the dollar tanks. Thus initiating a final dollar crisis immediately.
Only an Keynesian academic would think lasting prosperity can be created, with no unintended consequences, by printing money. But only an imbecile would risk sending the dollar over the cliff that it's hanging on. Bernanke had better say the right things this afternoon or all hell is going to break loose in the currency markets.
For many months now I've been warning we were going to have a dollar crisis and that dollar crisis would drive the final leg up in gold's ongoing two year C-wave advance. We are now on the verge of the panic selling stage of this three year cycle.
On Monday the dollar briefly rallied on the S&P downgrade of US debt (who knew?). That had the potential to mark the bottom of the current dollar cycle. But by this morning the dollar has given back all of those gains and then some.
I've noted in the premium report that the dollar's daily cycle often turns on the employment report at the beginning of each month. The previous cycle bottomed one day after the March report and the current daily cycle topped on the April report.
If this pattern continues then we can probably expect the current dollar cycle to stretch for another 2 1/2 weeks into the May report (give or take a day or two either way).
I seriously doubt gold is going to suffer any meaningful correction as long as the dollar is in free fall, so I expect we are going to see the gold cycle stretch also.
If the dollar does continue lower into the May employment report before putting in the cycle low it would then be set up for a more normal duration decline into the final three year cycle low due on or around the June report.
However with the dollar losing it's chance to rally here gold and especially silver are now at risk of entering a runaway rally.
Stocks: On Friday stocks formed the swing we were looking for to mark the half cycle low.
The bottom came on day 5 of the move out of the coil (usually a coil will reverse in 3-5 days). So if the pattern plays out like it normally does we should see the stock market move to new highs. Now for those of you that are playing the Bollinger band crash trade and/or the VTO trade put a stop below Thursdays intraday low. Technically this is modifying the rules of the trade but there are a couple of warning signs that have sprung up. (More on that in a minute.)
The reason I'm suggesting a stop as opposed to following the normal rules is because if the half cycle low gets violated then the market will have initiated a new pattern of lower lows and lower highs. Don't forget we are only 4 weeks into an intermediate cycle. If the coil pattern were to break down and the market starts to head lower this early in it's intermediate cycle the odds will increase significantly that the cyclical bull has topped and the next leg down in the secular bear market has begun.
As most of you know I've been expecting the secular bear to return sometime this year. I was expecting it to happen a little later but if the coil fails then there is a good chance the bear has arrived a little earlier than I was expecting.
Now here are the warning signs I was talking about. First off, we've seen two large selling on strength days in a row. That by itself is just a mild warning sign because this indicator hasn't been terribly reliable lately, and even when it does get it right it's often early. So take that one with a grain of salt.
The next warning is the action in AAPL. If you recall last week I mentioned that I watch AAPL as a sign of speculative demand in the market. After getting deeply oversold AAPL had a chance to rebound and reverse the pattern of lower lows and lower highs. It has failed miserably and is now on the verge of confirming another lower low.
Another negative is the action in the banking index. The BKX was not able to hold above support at 52, and is now in jeopardy of breaking below the Japan bottom.
All in all I think if the market can't catch a bid next week and breaks that half cycle low the best course of action is to get the hell out of Dodge and ask questions later. It's just way too late in this cyclical bull market to hang around once things start acting iffy. Folks the general consensus is that earnings will reach record levels this quarter. Think about that, record earnings yet the stock market is still 16% below it's all time high.
What do secular bear markets do? That's right they compress P/E ratios over time. We have record earnings yet the market isn't willing to pay the same price for those earnings as it did in 2007. Heck earnings have almost doubled from the 2000 top but the market is still priced lower. Folks what we are seeing is a secular bear market at work grinding away at valuations. Actually not only are we seeing valuations fall but we are also seeing earnings artificially inflated by currency debasement. The market isn't fooled. That's why it's not willing to pay up for those phony earnings.
Now let me ask another question. Do bull markets top on bad news? No of course not they top on good news. What could be more bullish than record earnings? On the other hand what would be more bearish than a market that can't translate those record earnings into higher prices and instead we see the market drop through earnings season?
We've now got two lines in the sand. A break above 1340 and the cyclical bull is still intact. A move below 1300 and the odds are high that the secular bear has emerged from his 2 year nap and is ready to get back to work.
I'm starting to get the feeling that many people have now come to the conclusion that silver is bullet proof. First off let me warn you that we still haven't seen anything that looks like a daily cycle correction yet, and gold is now moving into the latter part of the timing band for that short term correction. When gold dips down into that trough silver is going to follow.
Next let me show you a couple of longer term charts so you can get some idea of just how overbought this market is and how dangerous this is becoming especially this late in the cycle.
In the first chart I've noted that silver has now rallied 100% above the last C-wave peak.
That's much larger than any other C-wave rally. It's pretty rare to ever see an asset rally 100% above a prior peak. That alone warrants caution. I also noted that silver is currently stretched 60% above the 200 DMA, also a new all time high.
I suggested in a nightly report that we could easily see a $3-$6 correction in silver once the move down into the daily cycle trough begins. I have a feeling most people at this point think that's virtually impossible. But is it really? Look at a $6 correction on that long term chart.
A $6 correction is almost insignificant. It wouldn't even take silver back to the 50 DMA. A $6 correction would just be a normal pullback to test the March pivot and ease the extremely stretched conditions.
I'll tell you what else a $6 correction would do. It would destroy all the over leveraged players. It would convince everyone that the silver rally is finished. And more importantly it would set silver up for the final spike higher to my expected target of $50 during the final daily cycle.
Ask yourself, are you so heavily leveraged that a move back to $36-$37 would completely freak you out and knock you out of your positions?
When gold gets this deep into a cycle a move higher by the dollar almost always triggers a correction.
The dollar is due for a short term bottom any time now. I expect this time won't be any different in that a dollar rally will trigger gold's move down into the impending cycle low.
This late in a daily cycle and this stretched above the mean it is becoming increasingly dangerous to keep your foot to the metal (pun intended). If you're driving 200 MPH you might want to slow down to 100-120 for the next week or two.
The S&P is currently forming a volatility coil. I've noted in the past that the initial move out of a coil tends to be a false move that is quickly reversed and followed by a more powerful and durable move in the opposite direction.
The assumption is that the coil will break to the downside early next week as earnings season begins. Stocks are now in the timing band for a half cycle low which also lends credence to the downside theory. Usually the initial move only lasts 2-4 days. So I expect by the end of next week we will see the market start to reverse. Stocks should then enter a powerful uptrend for another 5-7 weeks. This should push sentiment to levels consistent with bull market tops. By this time oil will have spiked high enough to poison the economy. I expect by early June will start to see signs that that the economy is rolling over again. Bernanke in his infinite wisdom will have made the same mistake he did in `08. In the effort to print prosperity all he will have done is spike inflation and collapse the economy again.
My expectation is for the current intermediate cycle to play out as a left translated cycle (top in less than 11 weeks). I think a tag of the upper trend line of the megaphone topping patternwe've been watching for the last year would be a reasonable level to establish short positions in preparation for the next leg down in the ongoing secular bear market.
One caveat: I would not trade a break higher by shorting, expecting a reversal back down. It's too early in the daily and intermediate cycle to expect a prolonged correction in stocks. If the coil breaks up then I would assume that this will be one of those 30% that the initial move is the correct move.
As long as the rally holds into the close we will finally have the breakout from the huge triangle consolidation we've been waiting for. Plus a close above 580.
