Possible $200 Gold Rally - The Financial Tap

Possible $200 Gold Rally

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Gold Rally

In my opinion, gold’s Cycle is setup well for a surprise, $200 Gold rally.  Gold has reached an interesting crossroads and based on the Cycle position, some significant volatility lies ahead.  The Gold sector is doing well, and has held up after impressive gains.  It has seen a couple of weeks of price consolidation, but no serious selling.  This points to a strong underlying bid, and is reflective of a bull market.

After bouncing off the 20dma, Gold has been jammed between the 10dma and 20dma.  It has yet to resume the uptrend, and the remainder of this week, into early next week, should reveal whether the short term bullish case for a Gold rally will play out.  But whether it does or not, Gold is out of excuses.  If it cannot resume its move higher, the bears will likely take control and drive significant selling on the backside of the current Investor Cycle (IC).

 

gold rally daily cycle pennant pattern

The precious metals Miners have also held their huge gains. Normally, once the Miners top, the trip to the next Daily Cycle Low (DCL) is quick and severe.  But not so this time.  The lack of any real retracement in the Miners is indicative of a Gold Cycle ready to move higher.

The sky above the Miners is not completely clear, however; there are warning signs that should not be ignored.  The Gold Miners Bullish Percent Index is a reliable indicator of a Gold Cycle top, and as shown below, appears to have topped and turned lower.  The Miners are leveraged to Gold, so if Gold has topped, the over-stretched Miners will suffer far greater losses than will Gold.  So any current Longs should be in the metal itself this time around.

 

5-14 miners bullish percent index

Nevertheless, markets often fool traders, and commodity bull markets especially so.  History shows that once a Gold bull market has begun, standard technical indicators can be ignored for the first 6 to 12 months.  Gold can be so relentless and unpredictable in rising off of a long term bottom that technical indicators don’t work well for a period of time.  And if you’re still unsure whether Gold is in a bull market, take a look at the price action in the Miners.  Or look at the level of Gold bullion buying, shown below.

 

5-14 gold accumulation

Looking at the weekly chart, I still believe that a $200 surprise, Gold rally is in the cards.  Few others believe such a move is possible, but I still see the setup clearly, and have good skin in the game to capture such a move.

Despite my being positioned for upside, there are still reasons to be skeptical of Gold’s immediate prospects.  Chief among them is the lack of a clear ICL when one was due.  If Gold were to lose the 20-day moving average or the 10-week moving average, the near term bullish case would be negated and I would brace for a more traditional Investor Cycle price decline.

The lack of an IC price decline is a primary reason that I see the potential for a $200 rally.  And the presence of a (bullish) pennant consolidation, followed by a new high, provides fuel and a target for a move higher.  All of that said, seeing the upside scenario is exciting, and we can’t be so blinded that we forget that it is only one of several possible outcomes.

 

gold rally weekly cycle

 

Trading Strategy Ideas

I prefer the Gold ETF rather than the Miners as a precaution.  If Gold breaks down from here, the stops are set tight and offer a very nice risk/reward setup.  I also believe that in any second leg Gold rally, it’s gold that needs to play serious catch-up to the precious metals miners, Silver and Platinum.   On the other hand, to give the trade the room it would need, a position in the Miners at current levels would need a huge, 20-25% Stop cushion, far too wide (and risky) to justify a position.

Above all, remember to define your risk clearly before entering into a trade, understand your target/objective, and of course, always use stops.  I see the May 10th, $1,258 as an important level, closing below that has me cutting Long exposure.  Then below that, $1,228 is the ultimate stopping point.

 

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.

 

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The Next Crude Spill

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An important caveat to my Crude Oil outlook is that I continue to believe that Crude is in a bear market, and that its long term trend is down.  The past 12 months clearly support my position, but if that no longer applies, if Crude is no longer in a bear market, my subsequent analysis will be incorrect.  Some analysts attempt to predict major cyclical turns before they occur, but I believe it is more prudent to wait for evidence and confirmation before reacting.

If Crude is in a bear market, the current advance has gone about as far as it can; since the last major low in February, Crude has risen substantially.  And enough weeks have passed that another bear market decline that blindsides the bulls would not be a surprise here.

4-23 crude daily

As with equities, the Crude market’s fundamentals seem to be on vacation for now.  And this creates an ideal environment for trapping unsuspecting Long speculators.  Greed has taken over, and traders seem determined to drive Crude higher in a speculative rally.  In the short term, fundamentals are often swamped by emotion.  And in the case of Crude, the amount of excess Oil flooding the markets has become immaterial in the face of substantial, emotion-driven speculation.

With Crude at such an important week 13 crossroads, it’s important to note that speculative Longs are near a record high again.  The COT report shows that Longs are making leveraged bets on higher prices at exactly the point in the Cycle where we would expect a downturn.  Considering the normal ebb and flow of markets, excessive Long speculation near a potential top is not surprising.

 

4-22 crude COT

 

Of course, if a new bull market for Crude is underway, the above observations are pointless.  The Investor Cycle rally would likely extend higher by another 3-4 weeks to a likely week 16 to 18 top.

That said, we need to remember that bear markets, especially in the energy sector, are rarely just a 12-month event.  The fundamentals of supply and demand, the underlying reason for the original price collapse, are nowhere near the level needed to launch a new bull market.  This idea is supported by the fact that the most speculative corner of the energy market, US shale producers, has not seen a significant downturn yet.

We know that Venezuela, Russia, and Iran, all major Crude producers, are struggling to balance their budgets.  As such, none are in a position to reduce production to support manipulating price higher.  The only producer with the ability to potentially reduce production is Saudi Arabia, but the Saudis are bleeding economically, and simply can’t sustain further cuts in revenues.  They are churning through some $10-$20 billion per month in foreign reserves to balance their budget, so do not have the ability to cut production by the 2 million+ barrels per day needed to stabilize supply and demand.

 

4-23 saudi arabia blowing through cash

 

Crude’s advance in the face of poor market dynamics leaves it with an Investor Cycle in a precarious position.  As outlined earlier, a bear market Investor Cycle making a new high in week 13 is certainly in the topping zone, so Crude could turn over at any time.  The previous IC top was near $50, so, in theory, we could still see another surge higher in the coming week or two.  In any event, I fully expect Crude to turn down and to begin to sell-off with relentless ferocity.

 

4-23 crude weekly

 

 

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Crude Oil Trap

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Crude Oil Trap

The price correlation between the Crude and equity Cycles was on full display last week.  The only real difference is the relentless nature of Crude’s surge higher.  Crude was so oversold and bearish sentiment so elevated, that its march higher from the Investor Cycle Low has been unyielding.  On the surface, this appears to be bullish, but I feel the setup is ripe for a Crude Oil trap.

The action appears to be a classic bear market squeeze, as traders who bet big on a continued decline have been forced to cover their Shorts.  And in the process, Crude’s mood has quickly turned.  The mood was bleak and extremely bearish just a month ago, but we’ve now begun to hear opinions that the bear market has ended and that Crude has seen the bottom.

Don’t believe it.  In my opinion, the current bear market is still in its early stages, and the current move higher is just a sentiment-clearing event.  I will concede, however, that the move higher is strong enough that it is likely to continue for some weeks.  I am targeting early April for a top.  In the shorter term, however, there is the potential for a Daily Cycle Low (DCL), one that will shake the confidence of the bulls.

 

Crude Oil Trap

Daily Chart

The size and speed of the rally in energy producers – over 30% in a few weeks – confirms that a new Investor Cycle (IC) is underway.   As a result of the move, the percentage of energy sector stocks showing a bullish P&F (BPENER) chart has hit a record 95%, matching levels not seen in many years, if ever.  The BPENER level is a testament to the extreme nature of the recent rally, and provides a reason to be cautious now.

In the past, every Crude IC top has corresponded with a BPENER level of over 80%.  It’s well over that now, but since it appears that the current rally has serious speculative power behind it, I believe that the current elevated reading is likely to persist for some weeks.  Still, the level of the indicator suggests that Crude Oil has entered the topping area of the IC, and it is unlikely that the current IC can continue more that 3-4 weeks higher.

 

3-12 energy p-f chart

The weekly and monthly charts always allow us to better understand short-term action.  They also provide needed perspective to day and swing traders, who can form powerful and unfounded biases from their observations of short-term moves.

This recent Crude rally has been both powerful and convincing, but we must appreciate that it is only a short-term rally.  On the weekly timeframe, it is an inconsequential blip in a much larger and more enduring bear market decline.  Just 4 weeks removed from a 17-year low, Crude has given us only a mean-reversion rally so far and is now setup to provide a crude oil trap for unsuspecting bull.s

 

Crude Oil Trap

Crude Weekly Chart

 

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.

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Finishing Touches (Market Top)

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Finishing Touches (Market Top)

 

In a classic example of the power of Short-covering, the S&P 500 has risen 190 points in just 16 sessions. Market valuations remain at historically extreme levels, so it’s not like the markets are cheap and investors are rushing in to buy value. The economic news remains uninspiring, and announcements continue to re-enforce a recessionary or low growth environment. So once the Short covering has run its course, the only catalyst for a continued rise in equities (back to 2,000 and above) would be the idea that the central bank will become more accommodative again.  To some this is bullish behavior, for me, the market is putting in some Finishing Touches (Market Top).

In a case of bad-news-is-good-news for the markets, it’s clear that equity over-valuation exists because of FED policies. For several years, the FED has responded to bad economic news by increasing liquidity, and this has pushed asset prices higher. But the FED’s ability to safely provide liquidity is not unlimited, and it appears that the FED’s powerful accommodative policies have been exhausted for now, leaving asset prices vulnerable at current levels. Unless economic announcements become much more negative, forcing the FED steps back in with some sort of stimulus, the bear market in equities will almost certainly continue.

Since 2015’s broad topping pattern, equities have frequently moved sharply in both directions. The extreme nature of the moves makes predicting the day-to-day markets extremely difficult, which is why traders find it so difficult to profit in an environment like that we have today. In the short term, however, Daily Cycle timing and the market’s overbought status greatly favor a reversal and decline toward the next DCL.

 

Finishing Touches (Market Top)

The Financial Tap – S&P Daily Chart

There is clarity again in the S&P’s Investor Cycles, especially with a Three White Soldiers pattern in place. Three straight weeks of solid gains have lifted the S&P sharply to close back above the 26-week moving average. The current rally will draw the bulls back in and swing sentiment back to the bullish side, setting up another decline.

Since I believe that equities are well into a bear market, the recent strength should be seen as only counter-trend. We’ve had 2 significant Investor Cycle declines since August, and it appears that we still have some upside “filling” to do before the longer term bear market decline continues. The next step is a Daily Cycle Low decline, which should get bears excited before price launches in a new DC. I expect the new DC rally will push the S&P back above 2,000 and form the top for the current Investor Cycle.

If this scenario unfolds, I’d expect sentiment to once again become too bullish, at a time when the equities Cycle has the time and room to sell-off in a confined fashion. But this scenario is not a given – if the bear market is underway, greater-than-expected downside risk is always present and the bottom could fall out of the market at any time.

 

Finishing Touches (Market Top)

The Financial Tap – Weekly Chart

 

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.

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Crowded Gold

Crowded Gold

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Crowded Gold

Even though Gold did not continue higher this week, sentiment still seems to be dangerously elevated. Talk of $2,000 Gold and a new bull market has become common, and Gold seems ripe for a fall, at least in the short term. Don’t misinterpret my point – I see the evidence that a new bull market trend is developing, but that’s in the intermediate term. Shorter term, the current rally is approaching its limits and has resulted in a Crowded Gold situation.

The average daily trading volume of call options for GLD, the SPDR Gold ETF, hit its highest level since 2011. But unlike today, 2011 Gold prices were at a record high. Turning to the Comex, Gold volume for February is about to surpass the levels of all past Februarys. And lastly, the volume in many precious metals Miners is through the roof, and the broader Gold mining indices have added more than 50% off their January lows.

 

2-27 gold volume

The Gold bull market topped in 2011, and since then, the precious metals complex has been locked in a long, punishing decline as funds have flowed to greater opportunities. Long bear market declines are essentially an extended flow of capital out of an asset, which eventually bottoms when there are literally no more sellers at a greatly reduced price.

Of course there is no way to know with certainty whether Gold has bottomed yet. After 4 consecutive years without a significant counter-trend rally, we have to consider that the recent spike higher could be just a large bull trap. But regardless of whether Gold has seen a final bottom or not, I am encouraged by the large flow of capital back into the precious metals. Since all bear markets eventually end with a rushed inflow of new capital, the chart below is a good step toward confirming that the bear market is over.

 

2-27_flows_into_Gold

In the short-term, however, Gold is offering conflicting and difficult-to-read data. The Daily Cycle can be interpreted in multiple ways, and is likely to lead traders to construe the evidence to support whatever bias they hold.

I do not hold a position in Gold at present, and this allows me to be neutral in my analysis. As such, I see reasons that support being Long, and others that support the Short side. The bulls hope that the pennant – a continuation pattern – presages an imminent 3rd Daily Cycle surge that will take price to a new IC high. The bears, however, point to Wednesday’s reversal lower after a $30 surge higher from the pennant. Gold has again suckered the bulls, they believe, and is on the verge of breaking rapidly lower.

We know only one thing for certain – that Gold has rallied $150 in just a few short weeks. Any traders who rode all or most of the rise should be protecting profits now that the primary move higher is over. On the other hand, traders who only recently added Long positions in the hope of not missing another $100 rally are probably sitting in weak-handed positions. And these traders will likely bail at the first sign of downside. Netting it out, although another rally can always be coming, the potential reward is not high enough today to justify a Long position. The risk of a breakdown is simply too great. If you’re bullish, you need to be aware that Gold just formed its first bearish MACD crossed since October.

 

Crowded Gold

The Financial Tap – Daily Gold chart

The primary reason for my concern about Gold, however, are the readings from various indicators that I use to spot tops. None of them are perfect, and none are exact timing tools, but all have proven their worth over time.

We’ve talked about these indicators before. The Silver COT has reached an 8-year high, an extreme level that underscores how Long speculators are in their positions. The Gold COT, however, is nowhere near as extreme as Silver, but is still at a level that is normally associated with an IC top. Turning to history, when compared with Gold’s nine previous Investor Cycles, the current IC is overdue for a top. Daily Cycle timing, too, is now in the latter part of the timing band for a DCL. So even though I am neutral, there is reason to believe that Gold could fall from here.

 

Crowded Gold

The Financial Tap – Gold COT Report

On the weekly chart, not much has changed since last week. And I suspect that it will continue to change little between now and next weekend, primarily because I see Gold’s IC topping in the very near future. In the short-term, however, speculative interest could push Gold as high as $1,350 in a final 2-week surge. Even though I’m not currently Long Gold, I would love to see such a move higher for several reasons.

The most obvious is that it would provide a very clear, valid reason to go Short. At that point – a week 15 high after a 25% gain – a selloff would be very likely. For decades, that sort of performance has preceded a sell-off.

In the longer term, and beyond the opportunity for a Short trade, such a move higher would have “bull market” written all over it. The precious metals Miners would likely be up 75% or more from their lows, just the sort of lockout move we’d expect from the first IC out of a bear market low.

Talk of a bull market is cheap, however, so we need to see Cycle evidence develop before we buy the bullish case completely. For now, traders should focus on the highest probability event, an Investor Cycle Low in May. This should provide Short opportunities in the near term, and Long opportunities after the bottom. In fact, the buying of the ICL should be enormous!

 

Crowded Gold

The Financial Tap – Gold Weekly Chart

 

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.

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On a String

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On a String

An excerpt from this past weekend report within the Equities section.  Consider membership here:  Financial Tap

 

In equities this week, it makes sense to focus purely on technical analysis. During the past few months, I’ve outlined the likelihood that equities are well into a bear market decline that should last for 3-5 Investor Cycles (12-18 months). At this point, I don’t believe it makes sense to rehash it again.

Last week’s report was titled “All On the Same Side” to illustrate just how one-sided the markets had become. Not surprising then, equities bounced after forming a failed Daily Cycle and becoming very oversold.  Since the January 20th Daily Cycle Low (DCL) had already confirmed a failed Investor Cycle, the failure of a following Cycle (on Feb 11th) was not a surprise. The Cycle failure was simply an extension of an already-apparent larger degree correction. However, as with every asset class, equities are subject to ebbs and flows on shorter time-frames, so a Daily Half Cycle Low rally was expected (past 8 sessions).

I noted previously that a 2nd half rally might be sharp, but would fall just short of the high from day 8. It is too early to know if the half cycle rally is finished, but a final Daily Cycle should always form a lower high before it begins a final decent into a deep Cycle Low. Since the current DC has failed and is only on day 22, without a new high, we can only assume that the coming weeks will bring a sizable sell-off into DC and IC Lows.

 

2-21 equities daily

We expected a sizable rally, but need to avoid allowing it to flip our thinking to the bullish side – the bear is still very much alive. More than anything, the current rally has allowed oversold technicals and bearish sentiment to reset themselves from extreme levels. In a downtrend, counter-trend moves like we’re seeing at present act as profit taking events before the decline continues.

In this case, the rally has allowed the market to reset to a position where a sell-off into a deeper, final ICL can begin. There is always the chance that a market will go against a well-defined Cycle picture by rallying prematurely without a clean final Daily Cycle low, but that’s the exception and not the rule. At present, it does not look good for the bulls, and the Cycle count does not support any type of bullish outcome. I expect that equities will decline into a mid-March ICL before being treated to a large, counter-trend rally.

 

2-21 equities weekly

 

 

 

Bear Market Confidence

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It’s been 7 years since the start of the bull market, and signs of a market breakdown are now everywhere. A look at past bull market tops (1998-2000, 2005-2007) shows warning signs and divergences as much as two to three years before the top, all while the general equity indices are making new highs.

These signs are evident in today’s market. The commodity sector represents raw materials, and it has been in a deflationary spiral for a couple of years. Emerging markets, even those not heavily dependent on commodities, have been in a bear market for at least two years as well. In particular, China, the bellwether of the world economy and poster child for the current expansion, has been sounding a bearish alarm for well over a year.

Additional warning signs have appeared. High yield (junk bond) debt has been under enormous pressure recently. As investors begin to rein in speculative risk exposure, the high yield market is one of the first to turn down before of a market top. In addition, cyclical sectors like banking and transportation have already broken down. Moreover, the US treasury yield curve is flattening again, as demand for longer dated treasuries, the ultimate safe-haven asset, is once more rising.

The bottom line is that equities have stopped advancing, and have moved sideways for well over a year. Repeated attempts to breakout on the high side have failed, and the current top has turned into solid resistance. With valuations still at historical extremes and corporate sales growth flat, the ability for the market to sustain its current level is being seriously challenged. In short, I believe that the equity markets have topped and that a bear market is well underway.

That said, it’s crucial to remember that nobody knows in the short-term where the market is headed. That is both the beauty and the difficulty of trading – the markets are far too complex to predict with certainty over short time periods. And that’s especially true in the current environment, where whipsaws and volatility are so extreme that trading either side – Long or Short – is a challenge. Overall, a near term a rally would not surprise me, but I expect it to be short-lived. With Daily and Weekly Cycle failures in place, the market is showing unmistakable bear market characteristics. That being the case, my primary expectation is for a break below the January 20 low. I see this scenario as more likely than a large, counter-trend rally.

 

sp daily

 

From an Investor Cycle standpoint, the bearish action should be clear. I’m now fully in the bear market camp, so I expect most of the significant moves to be to the downside. The last three attempts at a reversal higher have all failed, so the “buy the dip” ethic is clearly over.

Nevertheless, it would be foolhardy to rush in on the Short side and expect immediate downward pressure. That could happen, since we expect generally lower prices, but we need to be mindful that tops take time to form, and bear market declines are riddled with sharp rallies. My primary concern with trading Short is that equities have not had a particularly sharp rally yet. Sentiment is particularly low, so the door is open for a surprise rally. The trend is down, and I expect massive declines in the near future. But in the short-term, I’m open to all possibilities.

 

sp weekly2

 

 

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.

 

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Gold Weekly Cycle

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With gold moving to $1,140 this morning, we’re finally starting to see bullish sentiment move up noticeably.  Last week’s COT report also showed there were still a number of leveraged speculators holding on to short positions.   Rising sentiment and speculator short covering are fairly typical at this point within the weekly gold Cycle and indicative of the final rising portion of any Weekly Cycle.

Gold is still in an uptrend for this Investor Cycle, this is neither necessarily bullish or surprising, because the move is well within the normal parameters of a Cycle’s early rise.  Gold traders need to be aware though that gold is scheduled to begin running into some upside resistance in the near future. The technical indicators show gold has another 2-3 weeks before topping. However, as this is Week 9, we are aware that the prior bear market Cycles mostly topped between week’s 9 and 12.  And since 2012, no weekly Cycle has gone beyond that week 12 mark.  That should cap the upside move in the coming week to around the $1,160, with a possible bullish stretch to $1,207.

 

2-3 gold weekly

 

A Bear Party Perhaps

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This blog post is a continuation of the bearish theme I highlighted and posted for you back in December, titled: Game Changing Action

Maybe 2016 will be the year when equity bears finally get to celebrate. Although I wouldn’t call an end to the “buy the dip” era quite yet, the current market has a different type of feel and vibe to it. Many people believe – and there is supporting historical evidence – that as January goes for equities, so goes the year. Bulls should hope this axiom doesn’t hold in 2016. The month is still young, but the first week of January ushered in the worst 5-day start to a year in the S&P 500’s history. The last time the market started a year this poorly was 2008, and we know how that turned out.

I am not projecting that 2016 will end up like 2008, but it could. As the bull market enters its seventh year, it’s clear that the cyclical advance is on borrowed time. With valuations at historical highs and the economy moving well below optimal levels, unless equities serve up a blow-off top, it’s difficult to see how the current bull advance can continue. I’ve been relatively bullish on the market for two years, but with the current Investor Cycle looking as if it’s topped, I’m thinking that it might be the bulls’ turn to be fooled by equities.

On a daily timeframe, a very well defined downtrend is in motion with clear Cycle evidence supporting it. If we look back over the past few Daily Cycles, we see an impulse rally into an early November top that failed to make a new high, followed in December by a new Daily Cycle that failed to exceed the November peak, resulting in a day 10 DC high. Since then, the current Daily Cycle has failed, and stocks are plummeting.

In the world of Cycles, equities are showing a classic topping pattern. With Daily Cycles in a declining pattern, we have very clear evidence that the Investor Cycle (IC) has topped. Although the equity markets are now oversold and a new DC is due, the damage is already done! The next Daily Cycle  (DC)should top within 10 trading days, and then turn lower to break below the August 2015 Investor Cycle Low (ICL).

 

1-9 Equities Daily

Even though the broader NYSE and S&P indices show failed Daily Cycles and are in clear decline, they remain comfortably above their August lows. These markets, however, are typically led by the Transports and small caps, and these indices – the Dow Transportation index and the Russell 2000 – have broken below the August lows and now rest at multi-year lows. This type of divergence is shouting that the broader markets will also soon break below their August lows.

The Russell 2000 small cap index, in particular, has been suggesting for some time that the current IC is fundamentally weak. In December, the Russell was rejected at the 200-day moving average, and has since moved well below the October 2015 low. After leading the broader indices higher during much of the bull market, the Russell 2000 is again leading, only this time to the downside.

 

1-9 NYSE - Transports and Russell

Bulls will suggest that the market is oversold, with technical levels that now favor a Cycle low. That has been the hallmark of the bull market and is why so many traders are confident that the current drop will eventually go down as yet another buy-the-dip opportunity. But for the first time since 2013, I suspect the bulls are going to be wrong. Until we have stronger confirmation, however, it doesn’t make sense to call the end of the bull market.

Equities just finished week 19 of the Investor Cycle, and that’s too early in the timing band for an ICL. And with a 5 year history of 24+ week Cycles behind us, an ICL in the coming days has only an outside chance of occurring . In addition, the current IC has an early, week 10 top that failed to make a new IC high, so I expect the IC to become Left Translated and to fail by falling below the August low. That implies that we should have an IC of at least 22 weeks, supporting the need for at least one more Daily Cycle lower before an ICL.

The setup is in place for a further decline, but I expect we’ll have a counter trend move higher first. I suspect that traders will step in after an initial drop on Monday, and could bid the market higher over the following two weeks. Look for the counter-trend move to approach 1,980 before turning lower into a rather fast, steep collapse below the Oct 2014 low at 1,820. That will set the stage for a potential 2016 bear market.

 

1-9 Equities Weekly

 

Trading Strategy Ideas

As always, you must understand the time-frame within which you wish to trade and structure your positions and risk levels accordingly.

In the very short-term, going Long equities now with a stop under Friday’s lows offers a good risk/reward opportunity on a counter-trend rally.  I can see a move back to 1,980, where partial profits should be taken, followed by a test of the 2,000 level over the next two weeks.  At that point, profits should be taken or at least a rising trailing stop strategy used.

I will be personally looking to renter short positions again around the 1,980- 2,000 level, to once more be in a position to capture significant gains from a Failed Daily Cycle.

 

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Game Changing Action

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It appears as if the worm has finally turned for the equity markets. The S&P 500 recorded its largest weekly decline since August, and the broader risk markets took a beating. The price of Crude fell under $35 a barrel and high yield bonds took an absolute drubbing. Friday’s big decline in equities was on extremely high volume – the highest in 6 weeks – and the volatility index (VIX) jumped 26% in its biggest one-day percentage increase of the year.

This past week’s performance notwithstanding, we have been through enough face-ripping reversals in equities to know that, in the end, one move may prove meaningless to the broader trend. Volatility and reversals have been a characteristic of the 2015 market, so we need to consider the current action in that context. But if I can be so bold, I’d like to depart from my normal reliance on evidence to suggest that I have a “sense” that this time might be different for equities.

Commodities and the emerging markets are scaring the heck out of traders, and there is rampant fear that deflation will sweep through the markets. Compounding the problem at a time when the market seems vulnerable, the FED is universally expected to raise interest rates for the first time in almost a decade. This is why the FED’s looming FOMC rate decision has really become the variable in the short term. The market is clearly saying that it cannot support a FED rate hike.

In the short term, the S&P is well within the timing band for a Half Cycle Low so we should expect a bounce next week regardless of longer term direction. But in my opinion, the bounce won’t come to much – the damage is already done. The market has revealed its intentions.

Beyond my anecdotal narrative that the market is suddenly in trouble, there is bearish evidence in the Cycles. The S&P failed to make a higher high last week, which was the first clue that it might be topping. And on Friday, when it dropped below the last Daily Cycle Low (DCL), the S&P confirmed a failed, Left Translated Daily Cycle (DC) with a day 10 Cycle high. In addition, the 10dma has crossed below the 20dma. It’s clear that equities have almost certainly topped for this Investor Cycle (IC), and future breaks are likely to come to the downside.

 

12-12 equities daily

 

A fair question would be how it’s possible for me to be relatively bullish one week, and then outright bearish the next. The answer is simple – I call the markets as they appear, and I am not married to my calls. My analysis offers a working framework that incorporates all that I know about the markets at the time. My goal is not to pick a market turn well in advance, nor am I interested in being able to declare that I was right about one call or another. I’m focused on making money, and that means using all available information and controlling risk. Being stubborn is how traders end up taking 10%, 20% or even 30% losses on a position, and that is not how I trade. I might miss a good trade, but I will never be caught over-extended in a losing position because I have clung to a public call about market direction.

I form my opinions by relying on what the Cycles are telling me at any given time, and then combine it with a view of the price action. I’ve said many times that price action is what matters most, and we always need to make sure our framework aligns with the most recent price action, be it bullish or bearish. Whenever price changes character or breaks below a key Cycle pivot, the market is signaling that an important development has occurred, and we ignore it at our risk.

In addition to the clear breach of key Cycle points this week, other alarming developments surfaced, highlighted by the strong reversal in equities and the new short-term declining trend. The high yield corporate debt market appears to be in serious trouble, and now rests at a multi-year low. The junk bond market is typically one of the first places capital flees once signs of trouble emerge, so the decline in the market is a real tell for equities.

Junk bonds have been flashing a warning signal about capital market conditions for some time. But a divergence the size of what we are seeing today becomes especially significant once the market begins to break in the direction of the divergence.

When markets fueled on liquidity and speculative leverage are rising rapidly, traders seem unconcerned with valuation, because booming markets are all about confidence and greed. But once the confidence is broken, liquidity suddenly dries up and ridiculous asset valuations quickly seem to make no sense to anyone. That has not occurred – yet – in the current equity markets, but junk bonds do illustrate how quickly an overheated market can lose its support.

 

12-12 junk bonds

At any given time, there are various under-performing sectors that can be compared to the broader market. But no sector other than the Dow Transportation Index holds any real weight when identifying divergences between a sector and the general market. And in terms of the Transports, because Crude and energy prices are at seven-year lows, we would expect the Transports to be enjoying extremely favorable margins and higher equity prices. But that’s not what’s happening.

Before July’s big S&P decline into an ICL, the DOW Transportation index diverged rapidly lower from the broader market.   We see the same divergence today, this time between the Dow Transportation Index and the DOW Industrial Index. This is only secondary evidence, but is clearly supportive of a market that is in a downtrend.

 

12-12 Transports versus Industrials

 

When the market speaks, we need to listen. Markets often turn on a dime and this one is certainly no exception – what has changed from a few weeks back are the trend and the evidence from Cycles. The failure of the S&P to form a higher high on the Daily chart, and a very clear, powerful decline that left a failed DC tell us that a trend change has occurred and an intermediate decline is underway.

The market has traveled quickly from a potentially bullish setup to a possible Investor Cycle Top. Although it can always change, the trend is now distinctly downward, and there are still many weeks before we should expect an ICL. The big variable on every time frame is the FOMC meeting next week. But regardless of what the FED does, my bias is now firmly in the bearish camp. I believe the market could be in for a very sharp decline in the coming weeks/months, especially if the FED decides to raise rates at next week’s meeting.

 

12-12 Equities weekly

 

Possible Trading Strategy

Longer term holders:

Once we see an oversold relief rally occur, back towards the 10 day moving average, you could look for a short trade that could be good to a weekly Cycle Low around the February time-frame.

Position Traders:

A scalp trade (long) is on offer here now, being the market is oversold and due a bounce in the 2nd half of this Daily Cycle.  But the right play now is to allow the market to rebound, and then look for a Short position at around days 27-30 of the current Daily Cycle, probably in the 2,060-2,070 range on the S&P.

 

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