The recent market action has me wondering if the next leg down in the cyclical bear market has begun.
I always expected that we would see a very convincing rally out of the October yearly cycle low. I thought it even possible that we would test the 200 day moving average. Most bear markets do rally out of the initial leg down and test the 200 day moving average.
Recently the S&P made two attempts to close and hold above the 200 day moving average. They both failed. That was a loudly ringing warning bell.
As a matter fact every index, except the utilities, is now trading below its declining 200 day moving average, and that includes all the major European and Asian markets.
At the moment my concern is that the market is now moving into the timing band for a major daily cycle low (due in the next 5 to 10 days). The current daily cycle is left translated (topped in less than 20 days). That is relevant because most of the time left translated cycles move below their prior cycle bottom. The last cycle low occurred in October at 1075.
Now I'm not suggesting that the stock market is going to crash below 1075 in the next 5 to 7 days. However the S&P has broken below the 1220 support zone. When support was broken in July it led to a seven-day 17% crash.
I don't know if breaking of support this time will lead to another climax selling event or not. I do know that the market is now in the timing band for some serious selling. And, this is beginning to look like a counter trend rally in a bear market that is in the process of topping. If that's true then we are in the period of time when the next leg down should begin.
Confirming this is the fact that the dollar index has rallied back above its 200 day moving average and completed an intermediate cycle bottom. The dollar index is currently on only the third week of this new intermediate cycle. Those cycles tend to run about 20 weeks, so there is potentially many more weeks of upside left before the dollar moves down into another significant correction, which presumably would drive the next bear market rally in stocks.
The safest position at this time is to be in cash, and that's exactly what I did with the model portfolio yesterday morning.
We all better hope I'm wrong on this one, but I think the CRB just put in its three year cycle low in October. I'm also afraid that Bernanke has done irreparable damage to the dollar. If I'm right about both of those assumptions then we are on the brink of a historic inflationary period.
I've marked the major three year cycle bottoms in both the CRB index and the dollar index on the chart below with blue arrows. (Actually the CRB cycle tends to run about two and half years on average).
The dollar is now a great risk of forming a left translated three year cycle. A break below the October 27 intraday low would initiate a pattern of lower lows and lower highs of an intermediate degree. When the intermediate cycles start to roll over that is usually a sign that a major cycle has topped. If the dollar's three year cycle has topped after only five months we will be at great risk of a severe currency crisis in the fall of 2014 when the next three year cycle low is due. Even more concerning is if the CRB cycle has bottomed. If it has then commodities are poised for a huge surge higher during the next two years as the dollar deteriorates.
The next couple of weeks are going to be critical for the dollar. Sometime in the next two weeks the dollar is going to drop down into its next daily cycle bottom. On average that cycle lasts about 20 to 25 days. Monday will be the 12th day of the cycle.The reversal last Thursday has the potential to mark the daily cycle top. If that top holds then the dollar is at great risk of moving below the October 27 intraday bottom sometime in the next two weeks as it moves down into its next daily cycle low.
The dollar must hold above the October 27 low. Failure to do so would indicate that the cancer has now infected the currency markets, most specifically the US dollar. A penetration of the October 27 low would indicate that the current intermediate cycle topped in only two weeks. That should potentially lead to another 15-20 weeks of generally lower prices on the dollar index with the next intermediate degree bottom due sometime in early to mid March.
If that scenario plays out we are almost certainly going to see the CRB break its down trend line confirming a major three year cycle bottom has been formed.
The extremely mild nature of the decline so far is a serious warning sign that QE1 and QE2 are going to eventually trigger massive commodity inflation.
At this point all we can do is hope that the three year cycle in the CRB will stretch slightly long and bottom early next year. If it fails to do so and the major three year cycle low did occur in October, then we have some serious inflation heading our way in the next two years.
More importantly to precious metal investors, if the dollars three year cycle has already topped then there is a very strong possibility that the next two years, as the dollar collapses down into its 2014 bottom, will drive the bubble phase in the gold bull market.
Gold has now confirmed that an intermediate bottom was set on September 26. The double bottom at $1600 is a powerful basing pattern that should generate a test of the $2000 level by sometime in December.
For reasons covered in the nightly reports I don't really expect gold to push much above the $2000 level during this particular intermediate cycle.
Also for reasons discussed in the nightly reports I think the mining stocks, which have been unloved for the last year, are probably going to be the recipients of most of the hot money during this intermediate cycle. Both silver and gold have already generated parabolic, or semi parabolic moves. I think it's time for a big rally in the mining stocks over the next four or five months.
In my last post I hypothesized that the bear market in stocks had finally sunk its teeth into the precious metals sector. I was looking for a final move down into a true D-wave bottom, coupled with the HUI dropping down to test the 200 week moving average. I could not have been more wrong!
Instead gold formed a double bottom at $1600 and yesterday confirmed a trend change to a pattern of higher highs and higher lows.
As is usually the case the miners played follow the leader and reversed their downtrend also.
It is now clear that gold put in an intermediate degree bottom on September 26. The double bottom is a much stronger basing pattern then a V-shaped rebound and should launch a test of the $2000 level at some point during this intermediate cycle.
At this point I think it's pretty clear the general stock market is now in the initial phase of a new bear market. It's trying to generate a bear market rally over the last three weeks, but so far it's been pretty weak. That doesn't bode well once the cyclical and secular bear trend resumes.
The HUI mining index is now on the verge of breaking down out of the multi-month megaphone topping pattern. Once it does that will confirm that the bear now has his teeth in the last holdout sector. The sector that led the bull market over the last 2 1/2 years and now the last sector to succumb to the deflationary forces.
As I have noted in the chart I do expect the miners will find at least temporary support at the 200 week moving average. That should correspond with gold putting in an intermediate degree bottom sometime in the next two or maybe three weeks. Presumably it will come with gold below $1535. My best guess is that gold will make an attempt to test the 75 week moving average at that intermediate bottom.
At that point gold should be severely oversold enough to generate a very powerful, snap back, A-wave rally. That should be followed by a multi-month consolidation as gold works off the huge gains of the last 2 1/2 years. This while the stock market continues down into its final four year cycle low.
I expect the miners will produce a substantial rally off the 200 week moving average also but I'm afraid they will continue to get dragged down by the general bear market in stocks even if gold does form a high-level consolidation over the next year.
So while I expect to see a great buying opportunity on miners in the next few weeks I doubt it will be a long-term type trade. That probably won't occur until the stock market puts in its final four year cycle low sometime in the fall of next year.
As many of you know who have read my work in the past, the dollar put in a major three year cycle low back in May. It has been my expectation all along that the rally out of that major bottom would coincide with another deflationary period and the next leg down in the stock secular bear market. So far this has been the case as stocks topped in May at the same time the dollar bottomed.
After a 15 week consolidation the dollar has initiated its first powerful thrust up out of that major bottom. As you can see in the chart below the rally out of a three year cycle low generally lasts at least a year and turns the 200 day moving average back up.
I've also noted that once the rally out of a three year cycle low rises above the 200 day moving average, it shouldn't dip back below that level, at least not for the next year to year and a half.
Sometime in the next few days the dollar will put in a daily cycle low and bounce. My expectation is that it will either bounce off of the 200 day moving average or bottom slightly above that level. It's what comes next after that bounce that is absolutely critical.
Bernanke is now about to make the most important decision of his life. The correct decision is to allow the dollar to appreciate, which in turn would continue to drive the stock market down into its next four year cycle low in the fall of 2012, and would facilitate a much-needed recession to cleanse at least some of the massive debt that has been accumulated in the last two years. That is the correct decision. It is also a very hard decision because it will lead to severe short-term pain and undoubtedly another depression on the same scale as 1932.
However if Bernanke chooses to kick the can down the road again and continues his failed policy of monetary debasement then the dollar is at great risk of forming an extreme left translated three year cycle.
For those of you that are new to cycles analysis, a left translated cycle is generally associated with a bear market. Left translated means that the cycle tops in the front half of its cycle timing band. In this case any top that forms prior to 18 months would signal a left translated three year cycle. Furthermore the more extreme translated a cycle is the more severe the decline tends to be, simply because the cycle has a lot more time to move lower.
If Bernanke decides to avoid short-term pain and kicks the can down the road again with further currency debasement, then the dollar is at great risk of having already put in the top of this three year cycle.
The unintended consequences of a three year cycle that tops in only four months are, to put it mildly, horrendous. That would indicate that the dollar is going to head generally lower for the next three years culminating in a hyper-inflationary event at the next three year cycle low in 2014.
The next couple of weeks and months are going to be of grave importance. The dollar needs to find support at the 200 day moving average and resume moving strongly higher. That would of course put pressure on the stock market and probably terminate the current bear market rally somewhere around the 200 day moving average (roughly SPX 1270ish) before the next leg down begins.
If however the bounce out of the now due daily cycle low is weak and the dollar rolls over quickly and moves back below the 200 day moving average then all bets are off. Stocks could even rally back to marginal new highs. However that would also guarantee that the CRB has put in its three year cycle low and we are now at the very beginning of an inflationary Holocaust.
If Bernanke makes the wrong decision then gold is on the verge of moving into the bubble phase of the secular bull market. That being said gold should still experience one more move down in the next couple of weeks as the dollar rallies out of its impending daily cycle low. After that, everything hinges on Bernanke's decision whether or not to continue his failed monetary policies.
More often than not we as investors get caught up in the day-to-day action and never take the time to step back and look at the big picture. Today I'm just going to post some long term charts with appropriate annotations.
THE LIGHT AT THE END OF THE TUNNEL.
