THE GREATEST BULL MARKET ANY OF US WILL EVER SEE

We now have some follow through to Thursday’s swing low and unlike the last two times, this one is not taking the shape of a bear flag. As I explained last week in the nightly reports, and this week on the blog in "Hoping for a Break" , I was looking for smart money to run the May pivot followed by a quick reversal as my final buy signal.

The failure to follow through to the downside is a sign that someone was in the market buying all that the technical and emotional retail traders were selling.

Now we need two more things to happen before we can be reasonably sure the intermediate cycle has indeed bottomed. First, we need to complete a weekly swing low. That will happen this week if gold can hold above $1155.90 and move above $1194.50.

We also need to break the pattern of lower lows and lower highs. Gold will do that if it can trade above $1204 next week.

I know that 6 weeks of negative returns are frustrating but the reality is that this has been one of the mildest intermediate pullbacks of the entire bull market. Gold dropped a mere 8.6% and miners only 14%. That’s almost unheard of for this volatile sector.

Several weeks ago I showed subscribers this chart of the public opinion poll for gold.

Chart courtesy of http://www.sentimentrader.com/

During this intermediate leg up, sentiment never really got extremely bullish on gold. On top of that, neither gold nor miners got very stretched above the 200 day moving average. I said at the time that was a recipe for a very mild correction and that is exactly what has unfolded.

I think there is a very good chance gold put in the intermediate low this past Wednesday and we are now headed higher into the strong demand fall season. (Gold sentiment has since dropped below the level we saw at the February intermediate low. A definite sign we are nearing or at a bottom.)

From time to time I will see posts on the blog or on the internet questioning the wisdom of investing in miners as they have underperformed gold. To begin with, miners have not underperformed gold, not by a long shot. What happens is people take a short little piece of history where the miners have underperformed for one reason or another, and wrongly assume this period of underperformance is representative of the sector during the entire bull. 

Since the bull started, miners, as represented by the HUI index, have increased over 1100% whereas gold has gone up 400%. The reality is that miners got quite a bit ahead of themselves during the first 10 years of this bull market.

There is a reason why miners lagged a bit during the last C-wave and that had to do with skyrocketing oil prices that were compressing profit margins. There is a reason why miners are struggling now too. Let me explain.

First off, don’t forget we had a huge move off the November `08 bottom. That was a 250+% gain in one year. From time to time you might see a single stock do that but for an entire index to make that kind of move in a year is almost unheard of.

A move of that magnitude has to go through a consolidation period at some point. That is exactly what miners have been doing this year; they are consolidating that monster rally.

Miners have now made four attempts to break through resistance in the 500 area. In the process they have formed a giant consolidation stretching all the way back to March of `08. As many of you may have noticed the larger these consolidations are the bigger the rally tends to be when the breakout finally comes (I’ll show you a really big consolidation at the end of today’s report).

Another thing that has been holding miners back is the law of regression to the mean. All financial assets obey this law. Gold and miners are no exception. When anything, whether it is gold, miners, oil, or housing prices, stretch too far above the average, eventually the law of regression to the mean pulls it back down. In the next chart you can see this in action.

In volatile sectors the moves up can get pretty stretched, as you can see. I’ve found that about the most any sector can stretch is 50-60% above the 200 DMA before gravity pulls it back down. And like a rubber band, the further one stretches above the norm the harder it tends to snap back. In the mining sector that almost always means a move back to, or even below, the 200 day moving average. 

What we really need to take away from the above chart is that the 200 DMA has now had time to “catch up”. Miners are setup for the next big move higher and they can now do it without the law of regression to the mean acting to drag them back down.

Incidentally, when we see the rubber band has gotten extremely stretched, that is the time we want to sell. Unfortunately most traders and investors do the exact opposite. They buy high and sell low because they are being controlled by their emotions. During these intermediate corrections the calls to sell by analysts and bloggers will get intense, but that simply isn’t how one makes money in this business. You buy when it’s hardest to buy and you sell when it’s hardest to sell. Professionals understand that in order to make money you buy into dips in bull markets. And about every 5-7 months we will get one of these dips in gold. They happen like clockwork.

For the last couple of weeks I have been trying every way I can think of to make investors understand this, so they can take advantage of this opportunity and so they don’t make the mistake of selling during a normal corrective period. Many have taken advantage of the “opportunity” and hopefully many more will before it’s too late. And judging by the number of "Old Turkey" investors on the blog, a big percentage of subscribers have now switched from trying to trade the bull to just riding him.

Invariably, what happens though is that most people simply can’t buy into the correction. They have to wait till it “feels” good before they can buy. Unfortunately by that time a big part of the rally is over.

Warren Buffett said it perfectly. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Folks we are now at that point where it’s time to be greedy.

I’ve mentioned many times in the past that I’m not a big believer in patterns. Too often they end up morphing into something else or just outright fail like the head and shoulders top did recently on the S & P. There are however a few patterns that I do pay attention to and they include triangles, which are often consolidation/continuation patterns, crawling patterns (also continuation patterns) and T1 patterns, again a continuation pattern.

We saw a great example of a triangle pattern last year right before gold broke out above the `08 highs.

We saw a text book crawl pattern recently in the dollar.

And we’ve seen multiple T1 patterns form as gold has progressed through its bull market.

I think we are probably seeing one form right now, although not in gold. This T1 pattern is forming as the miners are consolidating that huge move out of the `08 bottom.

The first leg up tacked on 350 points. Second legs in T1 patterns usually gain almost as much as the first leg. That puts the HUI at roughly 850 by the time this T1 pattern reaches its top. That is a huge move up from where the HUI was on Friday (425) and another reason why I think this C-wave is going to run into the spring with another corrective sideways move late this fall (gold’s next intermediate cycle low). 425 points is way too big of a move to unfold in only 3-4 months. The law of regression to the mean would pull it back down before it ever had a chance to raise that far. No, I think it’s probably almost a given that this next phase of the C-wave is going to unfold in two stages and correspond to the dollar moving down into its 3 year cycle low.

Then as gold moves into its D-wave decline, which will mirror the dollar’s bounce out of the 3 year cycle low, we should see the HUI complete the T1 pattern with a test of the consolidation zone, which incidentally will tell us when to get long again for the next A-wave advance.

Oh and before I forget, how’s this for a really big consolidation pattern?

 

THE BEGINNING OF THE END?

Something significant happened today. The dollar broke through the 82 support zone. This is the first condition of three that will tell us if the almighty dollar is now caught in the clutches of the 3 year cycle decline.

The other two are a break below 80 and the next intermediate cycle must turn out to be a left translated and failed cycle.

But let's start with the current daily action. First off a little cycle information. "Most" daily cycles (for the dollar) tend to run about 20 days but can stretch up to 30 and not be abnormally long. Also note that most left translated cycles tend to drop below the previous cycle bottom. A left translated daily cycle is one that tops in 10 days or less.

Here is a 7 month chart of daily cycles. I've marked the troughs with a blue arrow and noted the length. If the cycle was left translated I marked it with an L.

As you can see the last three cycles have all been left translated and they all bottomed below the prior cycle bottom.

The last cycle, and it now appears the current cycle, were and are extremely left translated. Those tend to produce the worst declines. The break of 82 today not only meets my first warning sign that the dollar is now in the grip of the 3rd year cycle low, it also puts the odds heavily in favor of July 16th marking the last daily cycle bottom.

The reason that is important is because the cycle is only on day 9. There should still be 2 to 3 weeks left before the next major bottom.

One of the conditions necessary for the stock market to continue rallying is for the dollar to continue falling. Today's action is a big check mark in the continuation theory.

As you can see each one of the major impulsive moves down in the dollar sparked powerful rallies in stocks.

As we still have at least a couple for weeks before the next major bottom we should see the stock market rally at least another 2 to 3 weeks. That is going to force the current daily cycle for stocks into a right translated cycle. As I said before those tend to hold above the prior cycle bottom.

Keep in mind I'm just guessing on levels. I'm just illustrating general trajectories and time frames not actual targets.

At that point the dollar will be ready to put in a major intermediate cycle low and we should see a more substantial rally. If that rally fails and moves below the August bottom then we can close the book on the dollar. At that point there will be virtually no question that the 3 year cycle low has its hooks in the dollar and off we will go.

This should spark extreme inflationary pressures and as I've pointed out before every C-wave in gold has been driven by a major leg down in the dollar. I have no doubt the current C-wave will be driven by the dollar falling (maybe crashing) into the major 3 year cycle low.

I've said many times that Bernanke is going to pay a price for his insane monetary policy. In the world we live in one just doesn't get away scott free after printing trillions of dollars.

Heck Greenspan didn't get away with printing billions after the tech bubble burst. The end result was a housing & credit bubble that ultimately burst and sent the world into the second worst recession since the Great Depression. Does anyone seriously think Bernanke can one up Greenspan by many, many multiples and not have anything bad happen?

I can assure you that you are dreaming if you think the market is just going to "let this one slide".

There are going to be extreme unintended consequences and I'm about 99% sure they are going to come at the dollar's 3 year cycle bottom next year.

HOPING FOR A BREAK

I want to discuss something that came up on the blog Friday. An anonymous poster hinted that we were going to see more gold weakness in the days ahead because big money was having to sell  positions. Folks, big smart money traders don’t sell into weakness. These kind of investors don’t think like the typical retail investor who is forever trying to avoid draw downs. Big money investors take positions based on fundamentals and then they continually buy dips until the fundamentals reverse. The fundamentals haven’t reversed for gold so I’m confident in saying that smart money isn’t selling gold, it is using this dip to accumulate.

With that being said there are times when big money will sell into the market and it is why so often technical analysis as it’s used by retail traders doesn’t work. They do so in order to accumulate positions. Let me explain.

When a large fund wants to buy, it can’t just simply start buying stock like you or I would. Doing so would run the market up causing them to fill at higher and higher prices. Unlike the average retail trader, smart money attempts to buy into weakness and sell into strength. (Buy low, sell high). In order to buy in the kind of size they need without moving the market against themselves, a large trader needs very liquid conditions. Ask yourself, when do those kind of conditions exist? They happen when markets break technical levels.

If big money is selling it is because they are trying to push the market below a significant technical level so all the technicians will puke up their shares. By running an important technical level big funds can trigger a ton of sell stops to activate, allowing them to accumulate a large position without moving the market against themselfs in the process. We saw this very thing happen in the oil market recently and also in February as gold bottomed.

Technical traders wrongly assume these breaks are continuation patterns but the reality is that very often they are just smart money “playing” the technical crowd so they can enter large positions. The key to watch for is an immediate reversal of a technical break. When that happens you know there was someone in the market buying when everyone else was selling. 9 times out of 10 it was smart money.

At the moment everyone is jumping on the bear side for gold. Remember we saw this exact same sentiment in the stock market 3 weeks ago. I knew the bears were going to be wrong simply because the market was way too late in the intermediate cycle for there to be enough time left for a significant decline.

The gold bears are going to be wrong also and for the exact same reason. It is just too late in the intermediate cycle for there to be enough time left for anything other than a minor decline.

I'm now waiting, and hoping for a break of the May pivot. I want to play that break if it comes like a smart money trader. That means I want to buy into the break instead of panic sell like most dumb money retail traders will invariably do.

The reason of course is that gold is still in a secular bull market. In bull markets you buy dips.

Also the dollar with the break below 82 this morning is starting to show signs that it is now in the clutches of the 3 year cycle decline. Every C-wave so far in this 10 year bull market has corresponded to a major leg down in the dollar. I'm confident this C-wave will inversely track the dollars move into that major cycle low due early next year.

Sentiment wise gold has now reached levels more bearish than at the February bottom. That means gold is at risk of running out of sellers.

And finally, and most importantly it's just simply too late in the intermediate cycle for gold to have enough time for a significant drop. This is the 25th week of the cycle and the intermediate cycle rarely lasts more than 25 weeks. That puts the odds heavily in favor of a major bottom either sometime this week or next. And don't forget gold is about to move into the strong demand season. Like clockwork gold invariably puts in a major bottom in July or August before the run up into the strong fall season.

The bears are going to be wrong again.

HEAD AND SHOULDERS TOP OR BOTTOM II

A couple of weeks ago I posted the possibility that the market might be forming a head and shoulders bottom instead of the top everyone was so focused on. I knew at the time that the intermediate cycle was in the timing band for a major low and sentiment had moved to bearish levels even more extreme than what we saw at the March `09 bottom.

Calls for a market crash were flying left and right. I'll let you in on a secret, we always hear that the market is going to crash at intermediate cycle bottoms. The reality is we've had three real market crashes in the last 100 years. The odds of a fourth following right on the heels of the third are pretty darn slim.

The first and the third crash were caused by credit bubble implosions and the second was caused by severe overvaluation in the fifth year of a secular bull market. These fifth year corrections are fairly common in long term bull markets as it seems like it takes about five years for sentiment to swing to the extreme bullish side. Then the fifth year correction serves to wipe out that bullish sentiment so the secular fundamentals can continue to drive the bull higher.

Not withstanding the very low odds of a market crash, I knew that we were way too late in the intermediate cycle, and sentiment was way too bearish for there to be much chance of the head and shoulders top succeeding (actually head and shoulders patterns only succeed and reach their target about 27% of the time). Not to mention everyone saw it which gave it even less odds of actually playing out like everyone was expecting.

At that point it became much more likely that the market wasn't forming a head and shoulders top, it was in fact probably going to form a head and shoulders bottom with the half cycle low forming the right shoulder.

No one else at the time was calling for any such outcome, as a matter of fact I took an amazing amount of abuse for my temerity to even consider such a ridiculous idea.

As of yesterday the Dow has now completed the inverse head and shoulders pattern by breaking the neckline just like I thought it would. Now will it reach it's target (11,200)? The odds say no. But it's anybodies guess at this point.

What we do know is that virtually all indexes have rallied out of the half cycle low to new highs thus breaking the pattern of lower lows and lower highs. Higher highs and higher lows is the definition of an uptrend.

This was why I'm not ready to call a bear market yet. I was confident this rally was coming and we need to see were it goes before we can say with any confidence that we are back in the secular bear trend.

We now have two clear lines in the sand. If the market breaks out to new highs then the perma-bear/deflationists were too early and the cyclical bull still has some kick left.

If the market (both Dow and transports) break below the July 1st low then yes the bear is back.

As long as the market holds between those two lines we will remain in no-mans land.

Right now the market is in rally mode just like I warned would happen. We just have to wait and see whether it turns out to be a bear market rally or another leg up in the cyclical bull market.

I for one, have no intentions of trying to guess which it is until one of those lines gets broken.

DO'IN THE CRAWL

One of the few patterns that I actually pay attention to besides triangles and the T1 pattern is the "crawling pattern".

Most of the time this plays out in bearish fashion as a stock or index crawls or bumps along a rising 50 day moving average. Once the support breaks it's usually followed by an aggressive move down to test the 200 day moving average.

Recently we saw this pattern play out in the dollar index.

As you can see when support broke the dollar moved aggressively lower and may still have further to go as it still didn't move all the way back to the 200 DMA yet. I've also noted that the break down powered the rally in the stock market. As a matter of fact both legs down in the dollar powered strong rallies in stocks.

I'm pretty confident that if the rally is to continue Bernanke is going to have to keep pressure on the dollar.

Now we have this same pattern starting to develop on the S&P although in reverse form. If the market breaks above the 50 it should power a very aggressive move higher.

 
 

 

CARPE AURUM

Just like the stock market, gold runs in cycles (all markets do because the humans that trade these markets go through periods of optimism and periods of pessimism).

For the purposes of this discussion we will concentrate on the intermediate and daily cycle, after a quick explanation of the two larger degree cycles.

At this point all one needs to know is that gold's 8 year cycle bottomed in `08 and isn't due to bottom again until 2016.

The yearly cycle bottomed in February, and no yearly cycle except the one at the 8 year cycle low has ever moved below a prior yearly cycle low since the secular bull started in 2001.

That means in order for gold to move below $1044 we would have to entertain the fact that the current 8 year cycle has already topped in only two years. That would also mean the secular bull has likely topped.

I just don't buy that, as no secular bull in history has ever topped before reaching the bubble stage and gold is clearly a long way from that. So all this nonsense about gold falling back below $1000 is just that - nonsense. The odds of a move back to $1000 anytime during the remainder of this bull market are probably less than 1%. I don't know about you, but I make it a rule to never bet on something with odds of success at only 1%.

Now let's move in and take a look at the next larger cycle, the intermediate cycle. This cycle has averaged 18 weeks since the secular bull began in 2001, but has lengthened to 23 weeks after the global debt problems began in `07.

My guess is that the Fed's extreme monetary policy is acting to stretch golds intermediate cycle slightly. As you can see from the chart, gold is now about to enter the 24th week of the current intermediate cycle. This of course means it's becoming extremely dangerous to sell gold. On the contrary, this is the time where savvy investors want to be looking to add to positions. Remember, this is a secular bull market after all, and you only get this kind of opportunity about every 5 to 6 months.

You certainly don't want to blow it now as you will have to wait another half year before it comes again, and since this is a bull market the next opportunity is going to come at higher prices. For all you traders who claim that you are going to back up the truck when gold experiences a pullback, well you are getting your pullback right now. The question is, will you follow your own advice?

Now let's look at the smaller daily cycle and see if we can pinpoint a closer time frame for when we should be looking for the final bottom of this intermediate cycle.

On average the daily cycle tends to run about 20 days. However, it's not completely out of the question to see a cycle run as long as 30 days occasionally.

I will also note that we usually see a failed daily cycle as gold moves into a final intermediate cycle low. With that in mind here is where I think we are in the current daily cycle which, by the way, does appear to be a failed and left translated cycle as it was unable to break to new highs.

It appears we are now on day 16 of this cycle. Since we know that the average duration trough to trough for a daily cycle is 20-30 days, we can extrapolate a reasonable timing band for a final bottom somewhere in the next one to two weeks.

Here's what to look for. First off, I think gold will need to retrace at least 50% of the intermediate rally. That would come in around $1155.

Next, I would like to see sentiment turn extremely bearish. We are already well on our way to that happening as public sentiment is now nearing the same levels we saw at the February intermediate cycle bottom.

About this time we will see the conspiracy theorists start blaming a mysterious gold cartel for what in reality is just a normal correction within an ongoing bull market, and one that happens like clockwork about every 20 weeks.

So the bottom line is we are on the verge of getting one of the best buying opportunities we ever get in a bull market sometime in the next week or two. The question you have to ask yourself is, will you take it or will you let the "technicals" talk you into missing another fleeting chance to accumulate at bargain prices in the only secular bull market left? Let's face it, at intermediate cycle bottoms the technicals are not going to look like a bottom. Instead, they are going to look like the bull is broken.

Only those people who can think like a value investor and keep the big picture firmly in mind are able to buy into an intermediate cycle bottom. You have to make a decision. Are you going to seize the opportunity or are you going to let the bull trick you into losing your position?

Carpe Aurum

(Seize the gold)

BOREDOM PARADOX

Now that gold is holding consistently above $1000 it's going to become tougher and tougher for gold to shed riders, which is mandatory if the bull is to continue higher. That means the bull is going to have to pull out every trick in the book in order to get investors to jump ship. The greatest trick the gold bull pulls isn’t the D-wave decline (although that is a doozie). No, the greatest trick the bull pulls on investors is the boredom paradox. Basically this rule says that before any big leg up gold will wander around long enough that everyone becomes so bored they finally give up and jump ship. The paradox is that usually during this period gold is trending higher.

Let me show you some examples of the boredom paradox in action.

You can see these things often occur during the summer months. Ultimately they are consolidation patterns after large legs up. We have been in a tedious BP since last December. And even though gold has shown enough strength to actually break out to new highs (the paradox) it is still shedding riders at a vicious clip. I know I’ve seen it in progress. During the run up in November last year riders hopped on the bull in droves. My guess is that probably less than 10% of them have had the stamina to hang on, even though gold has made new highs.

Once gold has shaken off virtually every impatient rider then the next leg up will begin. Trust me none of those lost riders will be able to pull the trigger when it happens and the bull, when he starts charging, will instantly leave them behind. Invariably traders buy when the pain of missing the move just becomes too great to endure any longer and that of course ends up as either a short term top or an intermediate term top like we saw last November. Then of course the correction comes and all those Johnny come latelies end up getting knocked out for a loss. Like I said the bull is going to pull out every trick in the book.

Now I know many of you are just chomping at the bit, hardly able to wait for the big parabolic move that will top this monster C-wave. You want it and you want it now. Well I think I can tell you without a doubt you aren’t going to get it any time soon. Even if this is the bottom of the intermediate cycle I can virtually guarantee that gold is going to make you suffer through the rest of the summer. C-waves just don’t top out in the middle of summer. They top either in late fall or early spring. (They also top at the end of intermediate cycles and this one is just beginning.) What we can probably expect is a frustrating grind higher. Each marginal new high followed by another move into a daily cycle bottom. In the mean time some other sector will get hot, maybe it will be tech or energy or whatever. But there will be extreme temptation to jump ship, of that I’m positive.

I’ve seen this for 9 years now. Investors get frustrated and lose their position and about that time gold and miners will start to rally. It won’t be noticeable at first. As a matter of fact by the time you notice it gold will be overbought. And you know you won’t be able to make yourself buy into overbought levels, so you will sit on the sidelines waiting for a correction. Some of you will manage to hang on until the correction comes, most won’t. They will panic in at a short term top. It never fails. Like I said, I’ve seen it for 9 years now.

Of those that managed to wait for the correction probably less than 50% will be able to buy because as we all know by now, this is a volatile sector. Corrections are scaring looking. It’s tough to buy into them. I have to laugh when I see these comments about how a trader is going to back up the truck if we get a correction. Did any of us see any backing up of the truck at the February low or during the recent correction? No of course not, because bottoms never look like bottoms. They always look like the trend will continue. So the vast majority of truck backers never load the truck.

The only way to avoid getting taken out by the Boredom Paradox is to just hang on. As long as you make up your mind that nothing the damn bull does is going to buck you off no matter what tricks he pulls then you will be there when the charge starts. Trust me on this one, all the pain and frustration will be worth it if you can last long enough to make it to that final parabolic move. I don’t doubt for a second that we will eventually see miners break out above that 519 resistance and when they finally do they are going to go a long long ways. I will be totally flabbergasted if we don’t see the HUI above 750, maybe even above 1000 during this final C-wave. But you are never going to get there if you let the BP knock you off the bull.