BEAR'S BEWARE II

In my last article Bear's Beware I warned that shorts were running the risk of getting caught in an explosive rally as the intermediate cycle was due to bottom. Well, it did bottom and bears have watched their profits quickly evaporate as the market has surged out of the intermediate cycle low.

The initial thrust out of one of these major cycle bottoms will usually gain 6-10% in the first 8-13 days. We are now 6 days in and up 6.9% so far. I expect we will see a test of the 200 day moving average before we see any significant pull back. These initial moves out of intermediate bottoms don’t tend to wait around as smart money smelling blood in the street pile in quickly.

It's only the little guy, who doesn't understand what has just happened, that continues to fight the trend change. This is usually about the time that I see the technicians start calling for this or that resistance level or trend line to put a halt to the rally. They are, of course, assuming this is a bear market rally and it will soon be over.

First off, let me say I'm not convinced yet that the cyclical bull is dead. I would need to see the market come back down and break the recent lows first. If both the transports and industrials do that then yes, we will have a Dow Theory sell signal and at that point I would have to assume that the market has begun the third leg down in the secular bear market that started in March of 2000.

Now let me say this, bear markets don’t begin because of lines on a chart. They begin because something fundamental is broken in the economy or financial system. Now we certainly do have a broken financial system, no doubt about it, but then again this cyclical bull was never built on the foundation that we had fixed anything in the financial sector. We certainly haven't fixed anything in the economy with unemployment remaining above 15% if one counts everyone out of work. No this cyclical bull was built on a foundation of massive liquidity. I’m not convinced yet that that fundamental base is broken. Only time will tell.

But even if this is a bear market rally let me assure you that bear market rallies don’t end because of lines on a chart. If you think you are going to spot a top in a bear market rally by drawing a few trend lines or some meaningless resistance level you are just kidding yourself. It ain’t gonna happen. It never has and it never will. Lines on a chart don’t halt bear market rallies anymore than they initiate bear markets.

I’ll tell you exactly what halts a bear market rally. Sentiment! Sentiment, at every single one of those rallies during the `07-`09 market, reached bullish extremes. Not one single rally was halted by a pivot point or resistance level prior to sentiment reaching extreme bullish levels.

Even after the recent surge, sentiment is still so depressed that it’s at levels lower than most of the intermediate bottoms during the last bear market. So let me tell you, if you think the market is going to turn tail and run because it hits the pivot at 1130 or the 200 day moving average, or because you think earnings aren’t going to be rosy, you are going to be sorely disappointed.

If this truly is a bear market then before you even begin to look for a technical turning point you first have to wait until sentiment does a 180 degree turnaround. That just doesn’t happen quickly after the kind of beating we just got.

Trust me, it’s going to take a while for investors to forget a 17% correction and dare to become bullish again. If I had to guess I would say at least 8 to 11 weeks. Even longer if the next half cycle (due around day 15-20 of the rally) and full daily cycle correction (due around day 35-45 of the rally) are strong enough to scare investors again.

The problem with the move out of the February bottom was that we got no corrections and it quickly turned into a runaway move. Those kind of rallies tend to end with some kind of mini-crash. I started telling subscribers there was a high possibility of that back in late March and early April. It happened in Feb. of '07 with the China crash and sure enough, it happened again in May with the flash crash.

Traders become extremely complacent during one of these runaway moves. At the April top sentiment had reached levels more bullish than at the top of the last bull market. As usual, we paid a heavy price for that complacency. But now we've swung 180 degrees back in the other dierection, with sentiment so depressed it even makes the `09 bottom look positively giddy. That my friends is the base for another powerful rally.

Actually I won't be at all surprised if the market rallies back to new highs ... even if we have begun the initial topping process of this cyclical bull. Remember the bear market had already begun in the summer of `07 but that didn't stop it from rallying back up to marginal new highs in Oct. before finally rolling over into the second worst bear market in history.

This idea that the markets can somehow magically look into the future is just ludicrous. I can assure you no one can see the future, and that includes the millions and millions of investors that make up the global markets.

Now let me say this - we already know where the cancer is. Does that mean the stock market will now start to discount the next bear market? In the summer of `07 we knew the cancer was in the credit markets, initially beginning in the subprime mortgage market. Did the market look into the future and discount the unraveling of the global credit markets at that time? No it did not. The stock market rallied to new highs.

Well, we already know what will eventually bring this house of cards down, it's already started just like it had already started in the summer of `07. We are going to have one sovereign debt implosion after another and that is going to lead to the cancer spreading through the global currency markets eventually infecting the world's reserve currency.

But don't expect the market to look ahead and begin discounting the unraveling of the global currency markets. Markets don't do that. What they do is slowly recognize the fact that the fundamentals are broken. Once enough traders realize that, the markets begin to roll over, usually in an extended process taking many months.

I doubt this time will be any different, especially since the central banks of the world are going to fight the bear with a blizzard of paper. Don't make the mistake of thinking the markets have to act rationally. They don't and won't. If the Fed prints enough money markets are going to rise even though the global economy is crumbling all around us.

If you are bearish and determined to pit your stash against Ben's printing press I'm afraid you are signing up for one very difficult time ahead. I seriously doubt we are going to see another credit market implosion like we saw in `08. Without a severe dislocation like that there will be no market crash this time. When the bear does return (and he will eventually) the next leg down is going to be a long drawn out process with multiple violent bear market rallies. Selling short in that kind of market isn't going to be easy. As a matter of fact I doubt 1 bear in 10 will even manage to make money in that kind of environment.

Bear's should be careful what they wish for. I suspect the next leg of the secular bear will manage to destroy both bulls and bears alike.

WHAT'S HAPPENING?

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 Sentimentrader.com 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.

Historically the intermediate cycle averages about 19 to 20 weeks. The vast majority do not run past 25 weeks. At 22 weeks we are very late in the cycle and could bottom at any time.

The average dollar cycle lasts 19 to 20 weeks also. Since the last cycle was short it would not be unusual to see an extended dollar cycle of up to 25 weeks. Weekly MACD has turned down. It is my opinion the dollar has now resumed its secular bear trend into a major three year cycle low due next year.

CYCLE BOTTOM?

I've been waiting for a swing low to mark the daily cycle bottom and likely the intermediate cycle low also.

As long as we close positive today we will have that swing. (We will also have a four day rule possible trend change) I think there's a very high probability that Thursday marked the bottom.

Folks this is just how intermediate cycle bottoms unfold. They always make everyone believe the decline will continue forever. They always bring out the calls for a crash. And they always bring out the trolls on this blog :)

The thing is they also always eventually bottom. Then the market rallies long enough to reverse sentiment back to bullish extremes. In bull markets that means new highs. In bear markets the fundamentals pull the market back down before new highs can be made.

Once I become convinced we have indeed put in the intermediate cycle low (a pretty good tell is when the bears start blaming the rally on the PPT. A sure sign they got caught short at the bottom) then the bounce out of that low will tell us whether we are back in a bear market or whether this has just been a correction in a cyclical bull.

If the market rolls over and moves below the intermediate low (which appears to be at 1014 as long as the swing holds) then yes the markets are back in bear mode. If we go back up and make new highs...well that would be obvious now wouldn't it?

So the next month or two should tell us the true direction of the market.

LONG EVEN FOR A BEAR

The current decline has now lasted longer than even the longest leg down in the last bear market. The longer this goes the closer we get to a significant rally.

As you can see this decline is now 7 days older than any decline during the last bear market. I'll say again that bears hoping the head & shoulders pattern will drop straight down to 850 are probably going to get caught in an explosive intermediate degree rally.

It just doesn't make sense to continue pressing the short side at this point. It's safer to wait for a rally and then sell into it when it looks like it has topped.

We've already had two intra-day reversals. There is a good chance this correction (bull market) or leg down (bear market) has reached exhaustion. At the very least one should tighten up stops so they don't lose whatever gains they might have.

Although any little piece of good news or "surprise" Fed announcement pre-market could send the market rocketing right through stops trapping shorts in a losing position.

That is the risk one takes playing the short side. The powers that be are going to do everything they can to halt the bear and hurt the shorts. I think we can count on at least one more round of QE if not more. Bans on short selling are surely coming again and I wouldn't put it past the government to massage the economic data even more than they already do to paint a better than reality picture.

Before this is all over I even expect Ben to start dropping dollars from his helicopter although they will call it rebate checks again. Whatever it takes, Bernanke is not going to allow deflation.

He already halted the most severe deflationary spiral since the depression in less than a year and aborted a left translated 4 year cycle with his printing press. That has never been done before.

I don't know about you, but I have no desire to go up against that kind of firepower.

And if that isn't enough to convince you the NY times had a feature article by Chicken Little, the sky is falling, end of the world himself Bob Precther.

If sentiment has gotten so bad that the NY Times is giving interviews to Bob Prechter is must be time to back up the truck on the long side.

(no thanks I'll just stick with my miners)

BEAR'S BEWARE

I'm going to go through some signs that rabid bears might do well to pay attention to because I think the market is very close to a major bottom.  (That doesn't mean we are guaranteed to make new highs, although we might.  Just that we can probably expect an explosive rally soon, even if it ultimately turns out to be a counter trend rally in an ongoing bear market).


First off, way too many people are counting on the head and shoulders pattern taking the market directly down to 850.  Folks, historically these head and shoulder patterns have a success rate of about 50%.  A coin toss, in other words.  Didn't we learn that lesson last July?


Let’s go now to the charts. We have a large momentum divergence that has developed on the daily charts.

Also, notice that the market dropped down to the 75 week moving average yesterday and bounced strongly. You can see this same support during the prior bull.  The 75 week moving average acted as final support during the entire bull market. That level also happens to be the 38.2% Fibonacci retracement of the entire cyclical bull move.  Not an unusual correction in an ongoing bull, on both counts.

Next, we are now right in the timing band for a major intermediate cycle low.

At 21 weeks it's just way to late to press the short side.  You risk getting caught as the intermediate cycle bottoms initiating a violent short covering rally.

And finally, breadth is diverging massively during this final move down.  As you can see the NYMO often diverges at these intermediate cycle bottoms.  The divergence at this point is the largest in years.

Finally, I'll point out that the February cycle bottomed on a reversal off the jobs report.  I think it's safe to say the market has already discounted a bad number so we could see shorts begin covering in a buy the news type trade, even if the number is bad.  And if the number is good, we will see the market gap higher huge, trapping shorts and throwing gasoline on the fire of a short covering rally.

It's just too dangerous to continue pressing the short side at this point.  Better to just step aside and not risk getting caught in the intermediate bottom that WILL happen sometime soon, maybe even on today's employment report.

WATCHING THE WRONG MARKETS

Everyone is fixated on the stock market or the gold market. Meanwhile the real story is unfolding right under every one's nose in the currency markets.

Today the dollar broke down violently from the recent crawling pattern that has been forming along the 50 DMA. When these patterns break down they tend to move aggressively, usually down to at least the 200 DMA .

I'm not at all sure the dollar will stop at the 200 DMA though and here's why.

We've already seen a mini-crisis in the Euro. We know the Fed printed trillions of dollars during the period of QE. You simply can't debase a currency that way and not have repercussions.

I suspect we are about to see the crisis that started in the Euro spill into the dollar. (This is how currency problems unfold they tend to spread like a cancer into other currencies.)

Don't forget we have a major three year cycle low coming due next year in the dollar. Just on a cyclical basis the dollar is due to start moving down into that low. But we definitely have a fundamental driver for the move in the Fed's insane monetary policy. Trust me Bernanke isn't going to get off scott free from his printing spree. The market is going to make him pay a terrible price for his foolishness.

That price may be about to come due.

Needless to say once the cancer spreads into the dollar it is going to power the next leg of the ongoing C-wave in gold.

Now isn't the time to let emotions control you, the correction in gold could end at any time. If you aren't on board you will quickly find yourself chasing an overbought market.

Now more than ever investors need to heed Old Turkey's wisdom.