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.
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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The gold:oil ratio is nearing the upper limits of its trading band. When this level has been reached in the past it usually signaled a decline in gold (move down into an intermediate cycle low) and a rally in oil was eminent.
Normally I would expect the same this time as gold is very deep into an intermediate cycle and overdue for a major corrective move. There is a problem though. Oil is still very early in its intermediate cycle. Also oil has broken below its prior intermediate cycle low signaling a failed and left translated intermediate cycle is in progress.
Taking into consideration a normal intermediate oil cycle lasts 50 to 70 days, and this cycle is only on day 32, then oil should generally continue lower for another 20+ days.
As oil and stocks have been moving in lockstep lately it's not surprising that the stock market's daily cycle also has 20 or so days before an expected final intermediate bottom.
So if the gold:oil ratio is to regress back to the mean, and oil still has a month before an expected bottom the only way the gold oil ratio can decline is if gold starts to accelerate to the downside, dropping significantly faster than oil.
I've said it before, gold will do everything in its power to draw traders in at intermediate tops. Then it will kick them off at intermediate bottoms.
There are a couple of dependable signals that almost always occur during an intermediate degree decline. The first one is a MACD crossover on the weekly charts. Second; gold almost always dips below the 10 week moving average (50 day moving average).
You can see in the above chart the divergence that is forming in weekly momentum. Gold is now starting to hug the 10 day moving average, possibly in preparation for a move down into the next intermediate cycle low. As the current cycle is now 21 weeks old gold is due, actually overdue, for an intermediate degree corrective move.
Another tell that occurs is a break of the intermediate trend line. That also has yet to occur.
Until we have confirmation that gold has completed its intermediate decline we will remain on the sidelines.
Don't let the perma bulls fool you, this is not a normal correction, and it has nothing to do with Greece or Spain. This is the beginnings of the next leg down in the secular bear market and the start of the next economic recession/depression. And this time it's going to be much much worse than it was in `08.
For months now I've been warning investors to get out of the general stock market. I was confident that once the dollar put in its three year cycle low the next deflationary period would begin and stocks would enter the third leg down in the secular bear market.
Well, the dollar did put in the major three year cycle bottom in May and stocks almost immediately started to head down.This won't end until stocks drop down into the four year cycle low due sometime in mid to late 2012.
Let me explain to you what is unfolding so you don't listen to Wall Street or CNBC and get sucked down into the next bear market.
In a healthy bull market intermediate degree corrections hold well above the prior cycle troughs. Higher highs and higher lows. When that pattern of higher highs and higher lows on an intermediate time frame gets violated it is almost always a sign that the market is topping. We are at that stage now as the market is moving down to test the March intermediate cycle low.
Oil has already violated it's intermediate bottom. Energy stocks are a big part of the S&P and they are going to be a big drag on the index going forward.
In a healthy bull market we shouldn't even come close to testing the March low. Actually this market hasn't been healthy since last summer. That was the point at which I recognized the large megaphone topping pattern that was being driven by a double dose of QE.
Actually QE is the reason the market is in trouble. Just like I said over two years ago, all QE did was give us a brief reprieve and temporarily reflated asset markets. I knew all along it wouldn't create jobs and it didn't. (Well I guess a few bankers got to keep their jobs and pay themselves some big bonuses, but the general population was never going to prosper from QE).
As a matter of fact just as I said it would, QE ultimately spiked commodity inflation, and just as I knew it would commodity inflation has now poisoned the global economy, crushed discretionary spending, squeezed profit margins, and is sending the world down into the next recession.
Unfortunately we are entering this recession in a much weaker state than we went into the last one. Real unemployment is somewhere around 12-15%. It is going to get much, much worse. I often wonder how in the world we could appoint such fools to run our monetary policy. I mean seriously, how many times must they make the same mistake before they figure out they are the cause of our problems?
Ok enough of the Fed ranting, back to the market.
Not only do we have a market that is testing the prior intermediate cycle low when it shouldn't be, but we also have a clear topping pattern in place. Just like in `07 the market managed a marginal breakout to new highs in May that failed to follow through. You can see the same thing occurred in October of `07. This is quite often how markets top...or bottom for that matter. A technical level is breached, technicians either buy the breakout or sell the breakdown. Smart money fades the move and the market reverses. This is exactly how the `07 top was formed. It's also how the market bottomed in `02. And now the cyclical bull has topped with that exact same reversal pattern in 2011.
Once the market penetrates the coming low it shouldn't be long before traders recognize that something is terribly wrong. At that point everyone is going to head for the exits at the same time which should lead to some kind of waterfall decline bottoming around the middle of August. This is when I expect Bernanke to freak out and initiate QE3. I have no doubt the market will rally violently on the news as traders have become conditioned to expect QE to drive stocks higher. I expect we will see the market test and maybe even penetrate the 200 day moving average during the fall rally.
Traders and investors need to start preparing for what's ahead. If you ignored me previously and are still invested in the general stock market, exit, either now, or into the rally that should come off the March lows in the next week or two. Don't get fooled by the analysts who will be telling you the correction is over, it won't be. This won't be over until late July or early August.
Get back into dollar denominated assets as the dollar will continue to rally and gain purchasing power in a deflationary environment.
Once it's appropriate we will transfer assets back into gold and precious metals, but it's still too early for that. Gold needs to move down into an intermediate cycle low before we want to buy. My best guess is gold will dip down to somewhere around $1400 over the next 4-5 weeks. I am monitoring not only the stock market but also the gold cycle in the premium newsletter and will let subscribers know when I think it's time to get back into precious for the next ride up.
For the next week I will re-open the 15 month subscription special. Click here to go to the premium website. Then click on the subscribe link on the right hand side of the home page to go to the subscription options page.
I'm assuming that gold's latest cycle low was the mild pullback on June 2. If that's the case then gold is now in a left translated daily cycle that topped in only two days. It's also starting to form a crawling pattern along the 50 DMA.
Crawling patterns are usually continuation patterns and when they break down they tend to move aggressively down to the 200 day moving average.
Considering that gold is now 20 weeks into it's intermediate cycle, has formed a weekly swing high, and the extreme weakness in the mining sector, I think the odds are high the crawl is going to break down soon and the aggressive part of the intermediate degree correction will begin.
Wednesday's massacre was a serious shot over the bow for the stock market. The market is now in extreme jeopardy of having formed a left translated intermediate cycle. When that happens late in a bull market it almost always signals the beginning of a new bear.
There's no way the market should have sold off like that on Wednesday if this market was still healthy. I'll explain in a minute.
Fundamentally; I think it's starting to become painfully obvious that QE2 didn't work (just like I said it wouldn't). I said over a year ago during QE1 that this wouldn't create jobs or fix any of our problems. It would just make the problems bigger. Ultimately all QE1 & 2 was good for was to allow the bankers to rake in another year of large bonuses and to spike inflation (mostly commodity inflation). I've said all along that commodity inflation would eventually poison the fragile global economy.
I think it's becoming more and more obvious that the global economy is now headed back down. Surprisingly, or maybe not surprisingly an economy with over 10% unemployment couldn't withstand $112 oil, $4.00 gasoline, and surging food costs.
Now the markets are at a critical juncture. The current daily cycle has topped in only three days. That means we are now looking down the barrel of an extreme left translated daily and intermediate cycle. Left translated cycles tend to do serious damage because they have a long time to decline. In this case another 35 to 40 trading days. Left translated cycles are the hallmark of bear markets. This cycle topped in only three days. There has been only one other cycle in recent history that has topped quicker, and that was the September 08 cycle. We all know what followed after that.
A left translated daily cycle is a problem in and of itself but it will also force the next larger degree intermediate cycle into a left translated orientation. Left translated intermediate cycles, especially ones that occur late in a cyclical bull market, almost always trigger a Dow Theory sell signal and the beginning of a bear market.
I've marked the the last two intermediate cycle lows with the blue arrows in the chart below. You can see that the current intermediate cycle has now potentially topped in 7 weeks. Any cycle that tops in less than 11 weeks would be classified as a left translated cycle.
Generally speaking most left translated cycles move below the prior cycle low. That is also a big problem as a move below the March intermediate bottom would almost certainly trigger a Dow Theory sell signal. A move below the March intermediate cycle low would confirm that the next leg down in the secular bear has begun.
On May 15th I posted that we were seeing warning signs and that individuals should exit stock funds in their 401K's if they hadn't done so already. Now that we have confirmation of a cycle failure, not only of the short term degree, but very likely of an intermediate degree it becomes even more important for investors to get retirement funds out of stocks and back into a money market fund.
Folks the odds are now very high that the next leg down in the secular bear market has begun. This is not the time to hope and pray that the market will rebound. This is the time to protect your assets before the storm hits. And it will not just be a squall. This will be a hurricane of titanic proportions. The Fed virtually guaranteed that with QE1 and QE2.
One has to wonder at what point does the Fed finally figure out that every action has consequences and the bigger the intervention the greater the unintended consequences. We got a front row seat to the repercussions of Fed meddling in 08. If Greenspan hadn't tried to abort the tech bubble collapse and recession we wouldn't have had a real estate and credit bubble to begin with. And we would never have had the Great Recession. Bernanke in his infinite wisdom has now set the stage for the next depression and the stock market is saying it has probably begun.
There is quite a bit of speculation lately as to where the impending intermediate cycle decline will take gold down to. Today I'm going to throw my guess into the fire.
Some people expect gold to drop to $1400. Some $1300. Some even doubt that gold will ever go down again. However after watching gold for years and studying its history I think I can safely say that gold never misses an intermediate decline. Next week will be the 18th week of the current intermediate cycle. That means gold is now in the timing band for a bottom. If gold is in the timing band for a bottom a top can't be far off.
In the weekend report I discussed the impending stock market yearly cycle low and three year cycle low in the CRB that are both coming due together this summer. A yearly cycle low in stocks is the second most severe selling event ever seen in the stock market, only exceeded by a four year cycle low, which by the way is due in 2012. The three year cycle low in the CRB is the single most severe selling event for commodities.
By a twist of fate these two major selling events should happen simultaneously this summer. The combination of of these two major cycles bottoming together will almost certainly intensify selling pressure into the stratosphere. In an environment like that fundamentals will go right out the window.
In theory gold put in it's yearly cycle low last January at $1308. Barring something extraordinary I would not expect that low to be violated. However we could very well see something extraordinary.
While the pattern isn't "clean" there is an ongoing T-1 pattern in play on the gold chart that suggests that $1575 probably was the top of the current C-wave and if that is so and the T-1 pattern plays out as expected we should see a test of the the mid-point consolidation during the summer sell off.
That consolidation zone for gold's T-1 pattern comes in at roughly $1225- $1250.
Of course I have no idea if this will play out as we move into the summer but if in July gold touches the $1250 level I think it will be the last great bargain we will get in the secular gold bull market.
