Back to Defense
Considering how extensively the dollar has been sold recently, gold was given every opportunity to put in an impressive Right Translated Cycle. The Dollar peaked 17 trading days ago just as gold was coming out of a successful retest of the April lows. The setup was perfect for gold, having resisted a deeper drawdown and sentiment sat at 10+ year lows.
I generally place less importance to correlations, but it’s important to note that the dollar virtually free-fell these past 17 sessions, dropping a full 4 index points. So when a dollar denominated asset that was setup perfectly fails to rally on a dollar drop of this magnitude, it indicates that there must have been some significant underlying selling.
So what were very “favorable winds” for gold should now quickly reverse course and become a headwind. The Dollar is well overdue for a bounce and if the demand for gold remains at the same level, then gold will certainly be drawn down into a DCL. If gold couldn’t rally with a collapsing dollar, then it’s just too late in the Daily Cycle now to expect any positive upside action. What members should be focused on for the next 10 days is not will gold drop, but where will the DCL occur.
When the last Daily Cycle Low occurred in May, it looked as if most of the components for a significant rally were firmly in place again. An Investor Cycle that appeared to have made a trough while staying above the prior Cycle Low. Extremely low sentiment and a COT report that would fuel a rally. And a dollar Cycle that was clearly peaking which showed the promise of 5-8 weeks of declines ahead.
But that was last month, since then it just hasn't materialized as the setup indicted was likely. Now we’re left with an Investor Cycle chart that hardly inspires much confidence. Two deep lows (April & May) have barely produced a bounced, while the tracking oscillators remain pegged to the bottom. Of course a big bear market low is coming, likely sooner than later. But now the Cycle is turning, and as the most opportunistic portion of the Cycle has passed, we must respect the threat posed by a Daily Cycle that should be ready to decline.
Notice: Update Report
Notice: Update Report Continue reading
An Endless Feeling
So lets end the gold Cycle analysis on a positive note. Although Friday’s drop by the miners was the largest of this Daily Cycle, it still remains a constructive setup. It was the only real drop of the 13 day Cycle, and that’s saying a lot when describing the precious metals miners.
In hindsight the drop was really more to expectations; the midweek report illustrated a very plausible drop into a Half Cycle Low and a gap fill ($28.50) before it moved higher again. In context of a HCL, this was what we expected and an intra-day drop and reversal on Monday would satisfy this scenario. The decline has barely broken the 10dma and GDX remains firmly above the rising Cycle trend-line. When viewed in isolation, this Daily Cycle looks perfectly fine, so lets hope it’s the miners that are leading gold in this Cycle.
To give you an idea of just how far the miners having fallen relative to the S&P, take a look at the ratio chart below. The S&P 500 relative to the HUI has spiked and gone parabolic. The ratio is up 3 fold since the miners peaked in 2011 and is now at the highest level since the gold bull started. The miners have been consistently negatively correlated to the S&P and we find this is especially true when either index is experiencing extreme moves. Because they are negatively correlated and the Equity index is arguably seeking a massive 4 Year Cycle top, the coming equity market drop bodes extremely well for the miners.
The opportunity is huge, but it requires patience and execution. All of the top quality names are down 50% or more, the broader index down 70%, and some juniors off 80-90%. Just getting back to the 2011 highs is easily a double. But an eventual secular bull market blow-off top is just an unfathomable gain from these levels.
Midweek Market Update Report
The dollar continues to produce nicely formed (the waves) Cycles; the problem has been more the varying length (oscillation) of each Cycles. The current Daily Cycle is beginning to get deep into the Cycle count and technically down towards traditional DCL levels. Due to the age and decline of the Cycle, one should not expect to see more than 5 more sessions lower from this point forward.
The bounce out of the coming DCL might be weak though, because the expectation is that the dollar Investor Cycle has topped and is in decline. That would make the coming Daily Cycle the final one and therefore the Cycle could potentially top within just 3-6 sessions.
It’s an interesting departure from recent form though, having the equity and dollar Cycles so closely aligned and correlated. It’s by no means new from historical context, but as far as this cyclical bull is concerned they have not been married to this extent before. I don’t know what to make of it or what specifically it might be indicating for equities. As for the gold Cycle, we’re going to need a nice extreme Left Translated Dollar Cycle in June\July if we’re too see gold put in something resembling an Investor Cycle rally.
Falling in Line
Crude is off almost 10% from some recent peaks, but the speculators have continued to go long. Their position is again near record levels and this has never boded well from Crude. The “smarter” commercials are reigning in their positions in what they are likely anticipating is a coming move towards an ICL.
The last 4 times speculators were this long Crude it resulted in significant tops and a decline over at least 3 weeks. But as this Cycle is tracking the Investor Cycle so closely, my expectation is that Crude is going to fall sharply from here and in the process take out some key intermediate level support areas.
Crude has already showed the signs of breaking down well before the Equity Cycle started turning over. For the short term outlook I expect crude to drop to the lower Bollinger Band and find some support at the $89.20 area. It’s also where we find a developing triangle pattern that I’ve been monitoring on this site. Eventually though, I expect that crude will breakdown from the next Daily Cycle and this pattern and send Crude sharply lower. Just like my Equity Cycle expectation, Crude could see an ICL in August.
Midweek Market Update Report
The equity Daily Cycle is topping, I have no doubt. The equity markets have ripped every bear apart for 6 straight months and now they’re all scared to speak out against this market. But I see evidence that the Equity markets are in trouble, the mood is shifting, and the infallibility of the market is silently being questioned.
The oscillators are turning over and the daily session swings are getting much more volatile. We have a clear MACD cross over, the RSI is dropping fast, and the rising trend-line has broken. These sell signals are coming on Day 28 of a long and extended move, so the best probabilistic expectation is that this is a Cycle Top, and the reversion down is in process.
I get the sense that the news stream is becoming much more negative lately, and this is a sentiment turning indicator and a sign that the Cycle is turning. It’s a natural human process that dictates the movement of an asset through the various Cycle stages. Once it approaches a top, we become concerned and defensive (as the gains stretched to the extremes), which gradually feeds itself into fear, ending in a full blown panic and capitulation event. We’re at that turning point now. Once the buyers fail to buy the dips, then the market will drop suddenly and fear will be realized.
A Rude Awakening
Which brings us to the important Investor Cycle chart. Notice that the week of April 16th was the biggest volume bar in the history of the Comex! Gold dropped nearly 20% on massive capitulation volume in what can only be considered a crash. Since then the Daily Cycle managed to recover some of the losses, only to drop for 8 straight sessions and almost 10%.
I really believe this Monday marked a successful retest of the April 16th crash. The more volatile Silver and precious metals miners moved right through the April 15th lows, but the heavier traded gold market showed classic bottoming strength. Gold had all the momentum and reason to drop below $1,324, and it didn’t. This past week was a trench battle in the pits, don’t let the relatively tame price fluctuations fool you, gold put in the 5th largest volume week ever. This was the drop to test the crash and gold showed us that buyers were willing to support the asset at these levels.
Midweek Market Update Report
It was good to see crude drop today. The declining resistance line that has marked the past few Cycle tops and pivots again proved to be a barrier. Before and after the chairman testified we saw an across the board rally in equities, metals, and industrial commodities like copper. However Crude was down, it was down the entire session and by the close ended significantly lower.
This was bearish action because any asset that lags so badly during a surge of that magnitude is normally the asset that will lead a decline. The laggard going up always becomes the worst performing asset when the market is weak. As I’ve noted in past reports, crude remains much more correlated to the equity market and if this is the top for that Cycle, then crude should fall quickly.
Last Call – Weekend Report
As the rally matures, the rate of change (ROC) of this Cycle is beginning to accelerate. Normally a Cycle will form a more pronounced topping pattern, so the rate of change declines towards zero near the market top. This move is very different because it has blow-off like qualities about it. The longer this Cycle advances, the more vertical it becomes. The extension of this rally compared to past Cycles is clearly pronounced (see blue arrows below) on the below chart and we know the sharper the rise the faster and further it will eventually fall. To me this market resembles a lot like the 2007 melt-up move where the market just kept on going despite what was clearly a worsening macroeconomic landscape.
This might also explain why the market internals is conflicting, despite an obvious divergence half way through this Cycle, much of the internals now look bullish and easily support this markets move to all-time highs. What it’s most likely showing is that once the next ICL occurs, we could well be looking at yet another move higher.
The internal technical data may support this move, but the underlying macroeconomic fundamentals couldn’t be further away. The divergence between the sputtering economy and the liquidity fed markets is already at bubble proportions. This FED created spread is by design, and for as long as the economy manages to avoid tipping into the abyss there remains a chance that this spread could be maintained.
I often here on “the wire” that this move has such little exuberance and that because “Joe public” isn’t buying it that this couldn’t be a bubble. This is often cited as justification for the market at these levels (and for higher prices) and I believe it’s a dangerous argument. Don’t believe for a second that traders, economists, investment banks, and hedge funds believe this is a true secular bull market. In 2000 and 2007, this element actually believed in the market, they really did think it was going so much higher.
But this time around it’s just one big game and we’re not invited. It’s a "backdoor" payback for the 2007-08 losses, a way to make them all whole again, and it’s at your expense. None of them believes this market because they know it’s an artificial rally, a FED induced and supported “wealth creation” exercise. This mentioned group is in on the deal in what is a massive transfer of wealth from the public to the connected “banksters” and their vast network of friends. Cash is sloshing around the economy and they’re buying everything and anything. Equities, junk bonds, Rwandan and Greek debt, Condo’s, Art, you name and they’re buying it.
So as they all party and cash in, “Joe public” is struggling to find employment. They're very aware that eventually all drunken parties come to an end. The smart ones already have one foot out the door while the others have quietly made their way over towards the exists. Like in any party, there are always the young and naïve who are just having too good a time, and we know what will happen to them. Can you see them moving towards the exit, look below.
Making new highs 26 weeks into a Cycle matches the longest winning streak of this 4 Year Cycle. We also have a close above the weekly and monthly Bollinger Bands, historically this has signaled a significant top.
When the party ends there will be a massive stampede for the exits. After an astounding 400 point Yearly Cycle move there is a lot of paper profit outstanding along with some massive and over leveraged positions. Once the first couple of dips are not bought, the participants will get a whiff of the party’s end and the mood will quickly turn from ecstasy to panic. This realization will set the “bots” into motion as their speed will accelerate the change in trend. This will set of a process of leverage reduction, forced liquidation, and the natural instinct to protect oneself. This self-fulfilling process is at the very heart of Cycle mechanics and it will ensure that the markets reversion back to the rising mean is fulfilled. Never under-estimate the natural laws of human nature, the FED maybe powerful, but they are far from supreme.
Midweek Market Update Report
This is a bear market, the sooner member’s divorce their precious metals expectations from those held during the massive 2008-2011 bull market, the better off they will be. We all need to stop trying to find a silver lining in every chart or event that hits the news-wire. Of course I’m still a believer and long term gold bull, but until the charts (price) tell me otherwise, I will not try to force my position on the markets.
Whether this is a Bear market or Bull about to roar back, the gold sector is due for a rebound, and a substantial one at that. Even if “hypothetically” the bull was dead, we should expect some significant counter-trend rallies. The pent up energy and short interest against the sector is just too great and soon it’s going to ignite and lead to a “face ripping” rally.
I’ve been warning members for weeks to watch out for the bearish case. With the decline now firmly in motion, it will now likely come down to this Daily Cycle. With the culmination of this waterfall decline the Cycle should reach an important low. Once the butchery ends, we could have a DCL, ICL, and YCL all print together. With sentiment and COT where they are a new Investor and Yearly Cycle should be extremely explosive and a move higher over many months should be expected.
But the problem is with the now, so how far will this waterfall drop. Obviously I can’t tell you where that bottom is, I can only advise you to continue shorting it or stay away until we see confirmation of a new Cycle. For now we must watch, knowing that any reversal from here is already nicely in the timing band and most likely evidence of a DCL.