THE 75 WEEK CEILING

The 75 week moving average has been a very clear dividing line between bull and bear markets for the last couple of decades.

The S&P is on the verge of running in to that roadblock soon.

It's possible that the S&P could penetrate this level briefly, and possibly even rally back to the 200 day moving average (about 1250) before the bear market resumes. That being said I doubt the market will be able to penetrate this major resistance level on the first try, and it may even end up capping this bear market rally.

We already have three warning signs that popped up today that should make bulls wary. More in tonight's report...

GOLD AT A MAJOR CROSSROADS

I think next week will mark a major turning point in the gold market. Depending on whether the dollar continues higher or turns back down we will either see a resumption of the D-Wave decline or this will just turn into a normal run-of-the-mill intermediate degree correction followed by another leg up in this 2 1/2 year C-wave advance.

First the pros:
The COT report has now reached a maximum bullish level on the commercial contracts. In the past this has always marked major bottom turning points.

Sentiment & breadth have reached extreme bearish levels (contrary indicator).

Chart courtesy of sentimentrader.com

It's possible that gold has formed a small T-1 continuation pattern (A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.)

 

 

There is a small problem with this interpretation as the second leg of a T-1 pattern is generally slightly smaller than the first leg.

The cons:

The current intermediate cycle is too short. Barring a shortened cycle, which does occur rarely, there should be one more leg down into the normal timing band for an intermediate degree cycle bottom (20-25 weeks).

 

 

Also the HUI mining index is potentially forming a megaphone topping pattern. If gold does have one more move down into a true D-Wave bottom then the bounce off the lower trend line should fail followed by one more aggressive move lower.

Also there is a much larger T-1 pattern in play that fits the normal parameters much better than the smaller version.

You can see from the chart above that unlike the smaller T-1 the larger version does feature a second leg slightly smaller than the first, and if this pattern is playing out then we need one more move lower to test the midpoint consolidation zone.

Right now the battle is being fought at the $1600 level. So far every time gold reaches that level buyers step in. 

If however gold closes below $1600 that would be a serious warning sign that the current daily cycle will be left translated and that gold is indeed caught in a true D-Wave decline. If that's the case it still needs to test the consolidation zone of the large T-1 pattern and the intermediate degree cycle will bottom in the normal timing band (November). If this scenario unfolds then we can look for an A-wave advance to begin once that final D-Wave bottom is in place.

As I have noted before A-waves usually test but fail to exceed the prior C wave top. They are almost always followed by a lengthy 1-1 1/2 year consolidation before the next leg up can begin.

 

 

In my opinion next week is going to be critical. Either the current daily cycle is going to break down below $1600 in a left translated manner, in which case we will probably see gold continue sharply lower to test the 75 week moving average and the consolidation zone of the large T-1 pattern. Or if gold can gain some traction and breakout of the recent trading range to the upside then the smaller T-1 pattern comes in to play and we should see gold make another run at $2000.

I've had quite a few requests for a trial subscription link, so I'm going to add a permanent trial subscription offer. $10 for 1 week of full access to the premium SMT report. If you decide you like the premium newsletter your subscription will automatically convert to the yearly rate after seven days. If not, just cancel your subscription prior to your week expiring by following the directions on the premium website homepage.

To access the trial subscription click here and then click on the subscribe link on the right-hand side of the homepage.

EUROPE TO THE RESCUE

It appears that the news out of Europe, right before the close, that the EU is looking at further measures to recapitalize the banks, was enough to halt what was likely going to turn into a very nasty drop into the employment report on Friday. Instead what started as potentially very ugly morphed into a key reversal day. Since the market was getting very late in its daily cycle this will likely mark not only a daily cycle low, but a greater degree intermediate cycle low.

I've noted in the past that these intermediate degree bottoms are often accompanied by a significant divergence in momentum. You can see on the chart below that this often plays out as a large divergence in the McClellan oscillator.

The market should now make another attempt at a respectable bear market rally. I would think a very minimum would be a return to the 75 week moving average.

And considering the amount of time the market has been consolidating a move back to the 200 day moving average is not completely out of the question.

I think we probably just saw a major turning point today. One that should mark a bottom for at least a couple of months.

I've had quite a few requests for a trial subscription link. The last $5.00 offer seemed to garner quite a bit of interest so I am going to add a permanent trial subscription offer. $10 for 1 week of full access to the premium SMT report. If you decide you like the premium newsletter your subscription will automatically convert to the yearly rate after seven days. If not, just cancel your subscription prior to your week expiring.

To access the trial subscription click here and then click on the subscribe link on the right-hand side of the homepage.

BACK TO THE BEGINNING

Bear markets are about cleansing the excesses of the prior bull market. Secular bear markets are about P/E compression, a move from extreme overvaluation to extreme undervaluation. The current secular bear market is now in its 11th year and in the initial phase of its third leg down.

As many of you know I expect next year to be one of the worst years in human history, at least economically speaking. Certainly on par with 1932 if not worse. This should drive one of the worst stock bear markets in history. Before this secular bear market expires we need to cleanse all of the excesses that were generated during the final bubble years leading up to the top in 2000.

I'm expecting at next year's four year cycle low, which should occur in the fall, that we will see a true secular bear market bottom. That means single-digit P/E ratios, along with a dividend yields on the S&P above 5%. I also expect this leg down will erase all of the gains during the bubble years from 1995-2000.

 However I don't think we will be quite out of the woods yet. We will probably have to endure one more nasty leg down in this secular bear market before we put in an inflation adjusted low, likely it will occur in 2016 with a final bottom slightly above the 2012 bottom. At that point we should begin a new secular bull market that I think will be driven by truly astounding discoveries made in the field of biotech and nanotechnology.

But first we have to get back to the beginning.

THE D-WAVE BEGINS

It's taken much longer than I originally expected, but we now have confirmation that gold's D-Wave decline has begun.

A D-Wave decline is a normal, regression to the mean, profit-taking event that occurs when gold gets too stretched above the mean. It is not a take down by an anti-gold cartel. Anyone with a modicum of common sense can look at the long-term chart of gold and tell that this is not a manipulated market. This is just a normal secular bull market, and it is acting exactly like a normal bull market acts.

Folks, these conspiracy theories are now bordering on the insane. I even heard the other day someone blame margin increases for the drop in gold. I guess they completely forgot that we've already had two margin increases in the last two months that had virtually no effect on gold.

Every bull market in history has its share of con men and scam artists. Think Bernie Madoff, Enron, WorldCom, etc. The gold manipulation nonsense is just one of the many scams that are going to hitch a ride on this bull. Actually it's one of the oldest scams in the book. You find a bull market, make a one-way bet on rising prices, tout these "to the moon" prices to suck in subscribers lured by the reward of gigantic financial gains, and then blame an invisible cartel every time a correction occurs that you don't foresee. It's a great way of not having to take responsibility when subscribers get caught in a normal corrective decline.

Needless to say I don't play those kind of games. I try to get subscribers out ahead of intermediate declines. Yes, I'm usually a little early. I have the same problem with tops that every other human being in the world has. They are virtually impossible to call in real time. Subscribers to the SMT/Gold Scents newsletter have sidestepped all of this D-Wave decline and instead have been 100% invested in the dollar index. The only asset initiating a strong trend higher.

Actually there is a fundamental reason for a D-Wave decline besides just a normal regression to the mean, profit-taking event. The dollar has now moved into the aggressive stage of the rally out of the three year cycle low. Deflation is starting to take hold in the world again. In a deflation defaulting debt collapses the money supply. There is a growing shortage of dollars in the world. That's the reason why the dollar index is rocketing higher. As the value of the dollar rises during this deflation it takes less and less of them to buy an ounce of gold. You can see this same process unfolded as the dollar rallied out of the 2008 three year cycle low.

On a much shorter timescale gold is now in the timing band for a daily cycle low. My best guess is that sometime over the next 1 to 2 weeks gold will move down to tag the 200 day moving average. That will trigger short covering and a very convincing snapback rally. However it's still too early for an intermediate degree bottom. There should be one more daily cycle down into November before the D-Wave puts in its final bottom.

I suspect the next daily cycle is going to be a volatile nightmare that will chew up bulls and bears alike before a final plunge down below the 200 day moving average somewhere between $1300-$1400. As all D-Wave declines have retraced at least 50 to 60% of the previous C-wave advance that would be a minimum target for the November bottom. At that point we should see a very powerful A-wave advance triggered by the extreme oversold conditions generated at the D-Wave bottom. More in the weekend report...

For the next week I am going to open a special $5 trial subscription. You will have complete access to the premium website, archives, model portfolio, etc. You can sample the premium newsletter for a week. If you decide you like the content your subscription will automatically renew on October 1 as a yearly subscription. If you decide you don't want to continue the subscription just follow the directions on the home page of the website to cancel your subscription before October 1.

Click here to go to the premium website then click on the subscribe link on the right-hand side of the page. You will see the special offer at the bottom of the subscription page. Offer has expired.

THE NEXT SELLING WAVE IS ABOUT TO BEGIN

As many of you already know I expected the dollar index to put in a major three year cycle low sometime this year. The normal timing band would have been for a bottom in the spring. The recent breakout and move to new highs has confirmed that the May bottom did in fact mark the three year cycle low. As expected that also marked the top of the cyclical bull market in stocks.

It's widely expected that the Fed will announce operation Twist at today's FOMC meeting. Obviously if printing several trillion dollars didn't save the economy, then rotating the Fed's balance sheet from short-term interest rates to long-term in the attempt to hold down the long end of the yield curve isn't going to have any effect at all as the approaching recession intensifies. Interest rates are already at historic lows.

Interest rates aren't the reason why people are not borrowing.With continued high unemployment There simply isn't enough demand for businesses to expand their operations.  The American consumer is so deeply in debt that he can't service  it. Unfortunately, we can't print money like the US government so it doesn't help us to go deeper into debt. The US consumer will not be borrowing money any time soon.

The bottom line is operation twist will be a miserable failure just like QE1 and QE2.  

The stock market, and gold are now moving into the timing band for the next daily cycle low (selling event). The only question now is whether the announcement of operation Twist this afternoon will initiate a short term knee-jerk reaction higher, or whether the market will immediately continue to sell off into that next cycle low that is due to bottom sometime in the next 11 days.

I expect gold to bottom a little sooner as its daily cycle tends to be slightly shorter.

But gold also is at a critical stage. It must hold above the prior daily cycle low of $1705. If it fails to do that it will signal that an intermediate degree decline has begun. It would also signal a left translated intermediate cycle which would have high odds of moving below the prior intermediate degree bottom of $1478.

As you can see in the chart below gold began to struggle just as soon as the aggressive stage of the dollar rally began.

As the stock market moves down into the next daily cycle low and the selling pressure intensifies, this should drive the dollar index much higher. It remains to be seen if gold can reverse this pattern of weakness in the face of dollar strength, especially since the dollar will almost certainly be rallying violently during the intense selling pressure that is coming in the stock market.

All we can do now is wait to see what the initial reaction to operation Twist will be this afternoon. Will there be a temporary knee-jerk rally that quickly fails, or will the market just continue down after yesterdays reversal?

CAUTION IS WARRANTED

I realize that most people that come to this blog are bullish on gold. I myself am definitely bullish long-term. That being said warning signs are starting to build.

Since gold is down this morning there's a good chance that the mining stocks are going to break the intermediate trend line today. The complete failure to follow through on the move above 600 is also concerning. Usually after an asset has tested an area three times the breakout  occurs with strong follow-through.

Gold is also in jeopardy of breaking the  intermediate trend line. 

A move below $1705 would confirm a failed daily cycle and a left translated intermediate cycle. That would almost certainly lead to a D-wave decline. 

Every D wave so far has retraced 50-62% of the preceding C-wave advance. If it turns out that $1923 was the top of the C-wave then we can expect a move back to the $1400 to $1500 level. 

Moreover as this would be a left translated intermediate cycle it should move below the prior intermediate low. Taking that into consideration it would be more likely that gold would decline to test the consolidation zone around $1400 before putting in a final D-wave bottom.

I've mentioned before that C-wave tops tend to occur slightly above a big round psychological number. We currently have a 2b reversal at $1925.

For those people holding gold or mining stocks your position size needs to be small enough that you don't do serious damage to your account if gold takes out $1705 as that would confirm that a D-wave decline has begun and probably still has another $300 to go before a final bottom.