Bear Market Confidence


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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Just a Little Bit More

Back in May, I sent followers of this public blog a Gold Cycle Update, outlining how gold had a 75% chance of failing to rally, resulting in an unexpected downturn.  And then 3 weeks later, I sent a follow up article (Approach An Endpoint), where I outlined how gold was heading for a major Investor Cycle failure below $1,136.  As was predicted, the Gold sector was hammered this past week, with new lows being achieved in every nook and cranny of the precious metals complex. Silver and platinum crossed that threshold weeks ago, but for the Miners and for Gold itself, Friday’s high volume decline pushed them to new, multi-year lows. The Miners are especially concerning. Gold’s decline has been tame by normal standards, but the Miners are back at the depths of the 2008 plunge, having completely erased the gains of the last Cyclical bull market.

When looking at Gold’s decline in a Cycle framework, the action to this point has been fairly typical. The entire sector has moved exactly as we would expect when propelled by a failed Cycle in a bear market. To this point, Gold’s moves have followed the expectations I outlined many weeks ago.  Of particular importance is that, after a 2nd straight Daily Cycle failure, Gold is showing a clear breach of the prior Investor Cycle Low as well! This is (obviously) bear market confirmation, and opens the possibility of massive capitulation in the coming days and weeks. The relatively predictable portion of the Cycle is over, and we’re moving into the area where there are more possibilities.

We’ve seen just 3 Daily Cycles in the current IC, and ICs generally have 4 DCs. Although the length of the current IC (week 17) supports an ICL at this point, it is early enough to easily accommodate another Daily Cycle (5 weeks) before the ICL. Both scenarios are possible, so we’ll need to let secondary evidence unfold. The best hope for bulls is to see a massive capitulation event this week. If that happens it should mark an ICL.  (Note: A Daily Cycle (DC) is measured in trading Days. Investor Cycle (IC) measured in weeks.  (See Glossary of Cycle terms)

7-17 Gold Daily

The Miners are showing complete confirmation of Gold’s decline. They’re down 8 of the last 9 weeks, are showing a massive weekly Bollinger Band crash, and are at an RSI level not seen in years. This is end-of-Cycle action, the type of behavior seen only in a big Gold ICL event. Of course, the Miners are known to free-fall during ICL declines, so it can always get worse. But with the decline already at 27%, an ICL could be imminent.

7-17 GDX Weekly

Another indicator I’ve found useful in identifying ICL’s is the Miners bullish percent chart ($BPGDM). The number of Mining stocks showing bullish P&F charts have hit bottom again, a clear sign that selling pressure is at a crescendo and that a Gold ICL is coming. This indicator is never a perfect timing tool, but history shows that whenever the Gold mining stocks have hit the current BPGDM level, a Gold ICL typically arrived within 1-2 weeks.

7-17 Gold miners PF charts

Long time followers know how much I value the COT reports. They show how speculators are positioned in an asset, and extreme positions are typically associated with Cycle tops and troughs. A Cycle represents the collective ebb and flow of an asset, and mapping cycles versus speculator positioning creates a very useful predictive tool.

The current COT report shows that Gold is ready to form an Investor Cycle Low. Even considering that the below chart doesn’t include the declines of the past 3 days, it shows that speculators are positioned more aggressively against Gold than at the 3 most recent ICL’s. This is a telling contrarian indicator. Although the COT report is not the best timing tool, there is likely not enough room in these numbers to support another Daily Cycle.

7-18 Gold COT

Another favorite indicator is the sentiment chart. The ebb and flows of sentiment have a very high correlation with the tops and troughs of the Cycles. With little fanfare, and in true apathetic bear market style, Gold sentiment dropped this week to the 2nd lowest level ever recorded. Again, the below chart doesn’t include the drop into the weekend, but it clearly shows that the next Daily Cycle Low could mark a major turn for Gold.

7-17 Gold Sentiment

This brings us to Gold’s most important chart – the weekly chart. For months, I’ve been watching for an IC containing 4 DCs to play out, primarily because most IC’s are structured with 4 DCs. The below chart how closely Gold has mirrored past Cycle moves.

With all of the secondary evidence supporting an ICL in the very near future, I’m no longer convinced that we have another DC ahead. But I’m also hesitant to call the current decline an ICL because of the weekly timing. We have to keep in mind that during bear markets, it can always get worse – much worse. It’s the falling knife trap, where an extreme drop encourages traders to call a bottom prematurely. And that can be dangerous.

But I cannot ignore the evidence presented earlier. A Cycle on Week 17 may be a little early, but it’s well within an acceptable time-frame for an ICL. And if Gold continues to capitulate to start the week – possibly falling another $100 in very fast action – I believe that Gold would likely see a week 18 ICL at the end of the week.  If I were pressed to say which outlook I favor…I’d declare that I believe that Gold is just days from an ICL.


7-17 Gold weekly

But whether or not an ICL is imminent does not help us in determining Gold’s longer term possibilities. Longtime premium members will know that I generally refrain from longer term predictions (most analysts make them exclusively for marketing/promotional purposes). Longer term predictions generally carry only a 50/50 probability, and can have the nasty side-effect of clouding shorter term trading with expectations of long term price movements.

The only long term factual statement I can make about Gold is that the Investor Cycles are showing a failed series in decline. That’s the definition of a bear market, and shows that Gold wants to continue moving lower. It would feel great to pick the upcoming ICL as the bear market low, but the reality is that our primary expectation must be that the next Investor Cycle is another failed, declining Cycle.

At some point that pattern will reverse, but it will be when the bear market is ready to end, and not before. We can’t (and shouldn’t) attempt to make that call in advance – evidence of a new bull market must emerge prior to any call that the bear market is over. If your ego can allow you to do that, you will be better prepared to accept the highest probability event – another declining Investor Cycle.


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.

You’re just 1 minute away from profitable trades! please visit: