The Oil Will Flow

April 19, 2015/in Premium /by Bob Loukas

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April 16, 2015/0 Comments/in Free /by Big League Finance

Sample Premium Member Report published on July 26, 2015.

Gold Cycle

Cycle Counts

Cycle	Count	Observation	Probable Outlook	Cycle Clarity	Trend
Daily	Day 36	Range 24-28 Days – 3rd Daily Cycle	Bearish	Green	Failed
Investor	Week 19	Range 22-26 Weeks	Bearish	Green	Failed
4Yr	Month 38	Range 48-52 Months	Bearish	Green	Failed

The premise of last week’s report was that Gold was seeking a bottom. The evidence strongly suggested that Gold was on the verge of printing a major Cycle Low from which a counter-trend rally could begin. Whether the counter-trend rally would be temporary or something more was uncertain, but all of the signs of an impending bottom were there. As I write this week’s report, Gold’s late week action gives me confidence that we may well have found the bottom and begun the expected bounce.

Before I dive into specifics, I’d like to stress that we lack real confirmation of a reversal. The bottom call is based solely on the capitulation nature of Gold’s recent decline, coupled with its reversal during Friday’s session. I am speculating that a turn higher began because Gold’s technical readings are at extreme levels and cannot be sustained.

In last week’s review of the Daily Cycle, I had hoped that Gold would continue to drop into Thursday’s session before rallying into the weekend. And that’s what happened. At this point, the reversal is unconfirmed, but Gold’s drop did hit a significant low at $1,072, a deeper low than last Sunday night’s plunge. Gold’s requirement to form a Swing Low is close ($1,100.80), and a move above that level will confirm it.

The Miners were especially encouraging, as they reversed sharply higher into Friday’s close. The idea that they may have bottomed on Friday is supported by secondary evidence: Timing, COT and sentiment all show an asset that’s ripe for a DCL and ICL.

When reviewing the COT report last week, I detailed how traders were positioned at extreme levels against Gold. This week, the picture has become even more extreme, with readings at record levels. This is very strong evidence that an ICL is imminent.

What is especially interesting is that commercial traders now have the smallest level of Gold hedges ever. And speculators are short Gold by the 2nd most on record. This massive short position shows that speculators are stacked entirely on one side of the trade. Since all new Investor Cycles begin as short-covering rallies, once Gold turns even slightly higher, the unwind of these leveraged, speculative positions will fuel the next IC rally.

The COT reports are among the most reliable and consistent of the technical indicators I follow, and I believe the current numbers are screaming “ICL”. Since they line up perfectly with an 18 week Cycle, it’s difficult to see much more downside without a counter-trend rally to correct the imbalance.

The Miners are interesting too, although we need to remember that they can become so stretched in their moves that caution is needed to avoid developing premature conclusions. That said, the Miners are telling us that an ICL is occurring at present.

GDX is a proxy for the mining sector as a whole, and last week it fell sharply to hit a record price low, one that is lower than any price since its inception. With Gold many hundreds of dollars above its 2008 crash level, GDX plunged more than 10% below its 2008 crash low. It also saw its highest volume ever this week, with half a billion shares trading hands (3x to 4x normal) in what can only be describe as massive capitulation. And GDX also saw its 9th big declining week out of the past 10.

Looking at the weekly chart (below), this past week’s candle was a full 10% below the lower Bollinger Band, and with the RSI(5) falling below 5. These are record levels that are simply unsustainable, and they are occurring in the timing band for a DCL and an ICL. Lumped together with the other evidence presented here, these are perfect contrarian indicators. And because we witnessed a solid reversal into the close on Friday, I suspect it might be the very early sign of a new IC rally.

We were searching for a bottom last week, but this week’s action has turned the question to whether Friday marked a bottom. The right answer for those trading Gold should be, of course, that we don’t know yet. We do know that the evidence in support of a bottom is so great that we expect any turn higher to be the start of a new IC move. At this point, if Friday does not turn out to be the ICL, I expect that the next price low will absolutely mark the ICL.

Given an impending ICL, is it fair to expect it to be the end of the bear market? Unfortunately, it’s impossible to know, and I’m not prepared to make a prediction at this point. I do think that the bear market low is finally on the horizon, that the length of Gold’s decline and extent of its losses suggest that we’re almost certainly beyond the bear’s seventh inning stretch. But, as always, we must expect a continuation of the trend until Gold proves otherwise.

The first order of business is to extract some gains from the expected ICL. A new IC rally could be very sharp, but a top might occur in as few as 3 weeks. It’s important to understand that any trades need to be early to avoid being whipsawed by an extremely Left Translated Cycle. And that’s a real possibility – there is fear that the sector will turn lower again, so the conviction to hold a Long trade through sharp declines is not very strong.

Investor Cycle Trading Strategy

Since Cycles tell us that Gold is likely to form another Left Translated Cycle, this is a difficult Long trade setup. Going Long here is against the trend, so requires careful and light-footed positioning. It’s not ideally suited for the slower, buy-and-hold nature of this portfolio. Depending on how the IC rally unfolds, I will not push to capture a big position, but will instead target gaining exposure to the market that will allow me to be conservative and take profits fairly early.

Daily Cycle Trader Strategy

I entered 2 Long GDX positions on Friday, both because the Miners were extremely oversold and due a bounce, and because the entire sector was turning in real-time. I don’t know if this trade will capture the “ICL turn”, but there is decent evidence to support it. And if Friday was the turn, it would not be surprising to see these position return 20% in very short order. I will look to exit these positions by Day 12 of the Daily Cycle.

Portfolio Positions Summary

Open Positions – Investor Portfolio –

None.

Open Positions – Daily Cycle Trader Portfolio –

2 Positions Long GDX.

Equities (S&P500)

Cycle Counts

Cycle	Count	Observation	Probable Outlook	Cycle Clarity	Trend
Daily	Day 14	Range 36-42 Days – 1st or 6th Daily Cycle (depends on IC)	Bullish	Green	Up
Investor	Week 3 or 41	Range 20-24 Weeks		AMBER	Up
4Yr	Month 73	Range 50-56 Months- 8th Investor Cycle.	Bearish	Green	Up

We need to avoid reading too much into the current action, so the equity market outlook will be short and sweet this week. The overarching theme at present is that price is moving in a narrow, tight trading range. Equities have seen a period containing the 3rd most crosses above and below its 50 day moving average in the market’s history, an indication of the struggle to find a new shorter term trend.

By now, my stance regarding equities should be clear: the markets remain in a dominant Investor Cycle up-trend, so the path of the least resistance should be to the upside, into open territory with little overhead resistance. Recent Investor Cycle timing suggested that equities were due for a decline similar to that in October, but instead, the market held up relatively well, and the bullish portion of the Cycle is now underway.

We’re on Day 12 of a new Investor Cycle and this week’s sharp drop should end up becoming a significant “buy the dip” opportunity. I expect an almost immediate reversal from this point, and for the market to finally begin climbing into new, all-time high territory.

The 4 day decline was scary, and many saw it as an ominous sign of an impending plunge. But I believed (and wrote last week) that we would see a steep shakeout before the market turned higher. Well, this is certainly that. We will have confirmation of direction once the market declares its intentions around 2,044, the last DCL. A move below that level would cast a bearish pall on the market.

This week’s sharp decline left behind a rather ugly bearish engulfing candle. But that’s just one secondary indicator in an ocean of technical data points. Cycle timing rules my analysis, so it’s important to consider that my preferred framework has equities in only week 3 of a new IC. For that reason, and because we’ve seen such massive Right Translated Cycles for consecutive years, I expect equities to rise to a new all-time high over the next few weeks. Even if the current IC forms as a Left Translated Cycle (my primary expectation), we should see considerably higher prices from the S&P before the threat of a failed Cycle comes into play. Considering the market consolidated for the past 2 months without a significant price drop, I’d place very high odds on the market setting new record highs, even if they are only temporary.