Wednesday, June 22, 2011


Make no mistake, the four-day rally we just saw was nothing more than short covering in front of the Fed meeting just in case Bernanke surprised us with QE3. As expected he confirmed that QE2 would end on schedule. The dollar rallied and the market sold off on the news.

Folks, I don't think this is over yet. In the chart below you can see that every intermediate cycle low exhibits some kind of capitulation volume as market participants panic.

We clearly have not seen any kind of a selling climax yet. As a matter of fact volume has been running slightly lower than average. This is not what happens at a true intermediate bottom.

The average duration of an intermediate cycle is between 20 and 25 weeks. Two of the last three intermediate cycles bottomed perfectly in that timing band. The March cycle was slightly shortened by the Japanese tsunami which generated tremendous bearish sentiment in a very short time.

However there is no serious calamity that should shorten the current cycle to 13 weeks. One could claim that the Greek situation is driving the decline, and once it gets resolved the correction will end. I think that's highly unlikely. The market has known for over a year that Greece is going to default. There's no surprise there. I suspect the next Black Swan will come in July as Spain, or Portugal, or Irish bond yields spike, or something completely out of the blue occurs, like an implosion of the Australian housing market. It's in times of stress that flaws in the system break.

Since we don't have any capitulation volume yet, and it's still too early for the intermediate cycle to have bottomed, the assumption is that this correction isn't finished. 

So far the market is still following the template I laid out in "The Bear is Back" post. I expected some kind of counter trend rally to relieve  extreme bearish sentiment levels and oversold conditions. We are getting that rally now (it may have already ended).

Once the counter trend rally runs its course the market should have another leg down, bottoming in late July to mid August. At that point I expect Bernanke to freak out and initiate QE3. That will be the signal for a more durable, and probably explosive rally.

But remember, the most violent rallies occur in bear markets

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  1. Let's see if it violate the previous pivot SP 1248 before it can sure my friend.

  2. Agreed, we need confirmation of a failed intermediate cycle before we can press the bear side.

    That would be the first of three confirmations that a new bear market has begun.

    A Dow theory sell signal and a move of the 50 day moving average below the 200 would finish the confirmation process.

  3. Gary,

    unless the volume picks up this is financial foreplay....4 big volume up days followed by 2 low volume selloffs (extremely low volume today!!!)...we are going higher into july 4th...and in and around july 29th should mark bottom....

    lots of divergences:
    GLD and gold vs miners

    I could go on and on...we are going higher into july then pullback

  4. I really doubt it. I learned several years ago to trust these cycles. When you have an intermediate cycle that topped in only seven weeks, and the daily cycle the top in three days it's almost always a sign of very bad things to come.

    By the way I think it's safe to say that CMHA (commented on the bear is back post) owes me a big apology, and Charles is going to have to eat that crow pie himself. :)

  5. volume and copper tell us that no depression

  6. Copper is in a confirmed downtrend and under its 200 day moving average.

    What about that looks bullish to you?

    Depressions are caused by faulty monetary policy. Greenspan started this when he tried to print our way out of a severe recession when the tech bubble burst. Now Bernanke is exacerbating it by trying to prop up the banking system with his printing press.

    This is how depressions are created when policymakers trying to avoid short-term pain create massive unintended consequences.

  7. prices will go up in nominal terms as they have been for the past decade....and watch for a rally starting next tuesday into options expiration july15th and then hard moves down into late july or early august...way too many shorts and bears..

    if you know more liquidity is coming and then so does the market (market, price and volume are ALWAYS right)...the path of least resistance will be to the upside not because of buying but because too much fear and the easiest game for the boys in New York for next is bear hunting

  8. But liquidity is not coming. Bernanke has been very clear, QE2 will end on June 30.

  9. low interest rates, raise debt ceiling and don't kid yourself....the US has been debasing its currency for the last 100 think they will stop now is absurd...this is not a policy put together by Obama or Bernake, this policy of debasing currencies will continue by all countries because it is better to have unreal nominal wealth than a depression for now....I am positive it will end but we will be talking about it after it happens not before...

    I am looking at volume as we speak and all major indexes including 2 canadian indexes....lower volume than yesterday..

    compare data (price and dividends) on Homestake mining (now Barrick) from 1924-1935 and you will see why we are not in or even close to a market top

    NYSE CAD line crashed from 1926-1932 and stayed in a very narrow range until 1943 and reached 1926-1928 highs in 1946...depression ended in 1949

    depression is coming but no technical or economic evidence, remember a depression is a worldwide event, China, India, Australia and Canada not in recession and definitely not a depression

  10. Gary, what's ur reading on sentiment? did the recent rally reset sentiment as you were anticipating or is it back to overly bearish again?

  11. meant continued low interest rates and not lowerer as I think you are as low as you can go.


  12. the greatest hoax and crime...americans believe their dollar still has value..

    1 mona lisa - priceless

    15 trillion mona lisas' worthless

  13. Certainly the government is debasing the currency, no question about that. But that doesn't mean we can't have bouts of deflation during periods where Bernanke shuts down the presses.

    I think we proved that in 2008. And we got a whiff of it last summer.

    Bernanke has been crystal clear that he is going to turn off the presses at the end of June. I expect the deflationary forces to slam back down on the global economy in July. As the economy is already starting to roll over I think deflation/recession will be irreversible at that point.

    Bernanke will certainly start to print again, probably in August, and it will almost certainly trigger a violent bear market rally, but it won't heal the economy. As a matter of fact it will just damage it further as it will start to spike commodity prices again into a oncoming recession.

  14. Gary what have you been smoking? The markets are completely manipulated and controlled. One word describes this thing: rigged. The controllers are now overtly rigging things out in the open now. I don't know why people are trying to be bearish here. It ain't gonna happen. Period. Bernanke and the Fed are attempting to deflate the markets in orderly fashion and are doing an excellent job with the help of their controlling minions like the CME and today the international energy controllers with oil. In true totalitarian orwellian fashion, oil dropped big time in the morning allowing select insiders to get out first, and then the "official" announcement from the planners about the oil being released! What more do you need than this to tell you that the markets are manipulated? However, these same actions are the kind of actions that cause people to buy precious metals. You said that the transition was complete and you've gone Prechter on us here.

  15. Noah,
    If the markets are rigged, and the government can prevent any major decline, then explain to me how in the hell we just went through the second worst bear market in history.

    Folks, it doesn't help anyone to use manipulation as a crux for why your trades don't work. All it does is give you an excuse not to become a better trader since you think there is a higher power controlling everything.

    I don't think anyone will disagree, me included, that short-term manipulation happens. Obviously it does. But the long-term trends cannot be manipulated. The markets are simply too large for any entity to control them.

    The fact remains that we are in a secular bear market and have been since 2000. Nothing the government does can change that. As a matter of fact anything they do will almost certainly exacerbate the bear market.

    Gold is in a secular bull market. Nothing the government does can change that either. As a matter of fact any attempt to manipulate the bull will only cause it to rise faster and farther than it would naturally.

    These are the facts of reality. You can either deal with them or ignore them. Hint, ignoring them will almost certainly cost you money.

  16. Gary,

    I hinted that Bear Hunt season was on and that todays' decline was very low volume and was setting up the bears for the woodshed and I am think this is the way it will be for the next 2-3 months...the blogs on your other site were exactly the bears the boys in New York are was like amateur hour at the comedy are absolutely right the bigger trends (some stock indexes) cannot be changed and will end or pay off (gold/silver) bigger than any one expected...

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  18. I'll say it again, I have learned over the last several years to trust cycles. There have been countless traders that have disagreed with me and every one ended up losing money.

    Now is it possible that this intermediate cycle has warped so badly that it is going to form a bottom seven weeks early? Sure it's possible, anything is possible in this business. But it is such a low probability event that I can't bet on it.

  19. So was it amateur hour, bull hunt season for the boys from the Street today?

    Like I said, I've learned to trust these cycles. 99 times out of 100 fighting them will cost you money.

  20. Hello JS??

    You didn't answer my question. Was it amateur hour, comedy central, bull hunt time on Friday?


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