Midweek Cycle’s Update – June 22nd

June 22, 2016/in Premium /by Bob Loukas

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June 21, 2016/in Free /by Bob Loukas

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Gold Cycle

Cycle Counts

Cycle	Count	Observation	Cycle Position	Cycle Clarity
Daily	Day 14	Range 24-28 Days – 1st Daily Cycle	Possible 2nd Half Cycle Rally	Green
Investor	Week 3	Range 22-26 Weeks	New Cycle Rally	Green

Supporting Indicators

Sentiment Level	74% (Up 12%)	Elevated (Bearish)
Commitment of Traders (COT)	Blees Rating – 0 (0-100)	Bearish (Worsened by 18)
Primary Trend (Weekly Chart)	Down – (Possible Change)	Bull Trend

This week, Gold continued to rally impressively out of its June Low, confirming a new Investor Cycle is underway. And with the new IC at only week 3, Gold should see many weeks higher before the IC tops. If the Right Translated ICs during Gold’s 2001-2011 bull market are a guide, the new IC promises to deliver terrific performance.

Gold’s Daily Cycle was interesting this week. It had rallied for 9 of 10 sessions and was far extended to the upside when, on Thursday, it was hit with a significant reversal. Even though Gold was ripe for profit taking, I believe that the reversal was exacerbated by panicked investors with new or leveraged positions. But after Thursday’s drop, Gold again roared higher to end the week and, importantly, close above $1,300. While Gold’s intermediate term bullish position is undeniable, Thursday’s drop may not have been severe enough to relieve the asset’s overbought status. I believe that another drop into a Half Cycle Low is likely early next week.

Out of the HCL, we should see Gold continue to rally. The current DC is on day 14, and a normal 1st DC would suggest that Gold will move higher until day 20, or beyond, before it tops and heads into a DCL. But because Gold appears to be in the early stage of a new Cyclical bull market, the top of the current 1^st Daily Cycle may not come until day 25-30. So Gold could easily see another 3 weeks higher before a meaningful selloff occurs.

In recent weeks, I’ve mentioned Gold likely being in a new cyclical bull market, and it’s an important enough issue that it makes sense to review my rationale. First, Gold recently completed a powerful, Right Translated Investor Cycle. And with a higher IC High and a higher IC Low firmly in place, a change in trend has been confirmed. In addition, the precious metals Miners have doubled in price off the bottom, and holdings in the GLD ETF have skyrocketed, a sure sign that asset managers are desperate to obtain exposure. And if these data points were not enough, speculative interest in Gold has exploded, with trading volumes in various CME precious metals products up 50-100% from last year’s levels.

On the weekly chart, a powerful new trend has been established. The chart is both bullish and well-constructed, and speaks to the power of the cyclical advance that’s underway. Even though many investors waited on the sidelines for real evidence that the bear market was over, Gold rallied quickly to a new, 2-year high.

It’s possible that Gold has run a little too far too quickly – it surged this week outside of the top Bollinger Band. At this point, members should be careful in their leverage, and also mindful not to be suckered into adding exposure at the wrong time – like after a sustained rally. Excess leverage should be harvested after all mini-rallies, and slowly added back after good 2-3 day pullbacks.

Unbelievably, I’ve seen people lose money in bull markets. They have over-extended themselves at the tail-end of mini rallies, only to capitulate and sell for a loss during profit-taking retrenchments. To be successful, traders should stay strong, be content with their positions, and add on dips.

Investor Cycle Trading Strategy

I want to reiterate my belief that everyone should hold a solid, long-term position in both bullion and the Miners, positions that are being held for the long term and not traded with the Cycles.

In terms of trading, I still hold my Long position, and it is doing well. This is a new IC, so I do not plan to trade the position during any upcoming Daily Cycle fluctuations. This trade should be active for another 2-3 months.

Daily Cycle Trader Strategy

I am holding two GLD and one AGQ position, so have decent exposure here. I will look to close all 3 positions after any good rally near days 19-25.

Portfolio Positions Summary

Open Positions – Investor Portfolio –

30% Long position in GLD. Stops set to $114.50

20% Long Positon in SLV. Stops set at $15.55

Open Positions – Daily Cycle Trader Portfolio –

Long Two positions GLD – Stops set top $115.55

Long one position in AGQ @ $40.33 Stop $37.72

Equities (S&P500)

Cycle Counts

Cycle	Count	Observation	Cycle Position	Cycle Clarity
Daily	Day 22	Range 36-42 Days – 3rd Daily Cycle	Likely formed HCL	Green
Investor	Week 22	Range 22-26 Weeks	Possibly Topped	Green

Supporting Indicators

Sentiment Level	61% (Down 2%)	Extremely Elevated
Commitment of Traders (COT)	NA
Primary Trend (Weekly Chart)	Flat- (Possible Change to Down)	Neutral to Bearish

During the past few years, we’ve seen plenty of sharp sell-offs in equities that have reversed to make new highs, but this time the sell-off feels different. I sense that the market’s character has changed on multiple timeframes. That said, I’m keeping my eye on the recent S&P high at 2,120.55. It’s just shy of the all-time high, and if the S&P rises above it, a big new all-time high is likely to follow.

This week’s equity selloff was accompanied by an unusually big move in the VIX (fear) index. And in a clear sign of market distress, world sovereign debt markets rallied sharply, as capital moved from equities into the most defensive of asset classes. Such desperate bids to own debt at 0 or even negative interest rates, tells me where the smart money wants to be invested.

The decline this week was expected. It was deeper than I thought it would be, but the timing (day 19) for a move into a Half Cycle Low was perfect. The market tried to rally on Friday and failed, although I believe that during the coming week, the S&P will recover to retrace at least half of its recent decline.

Surprisingly, sentiment has remained significantly elevated. Bull market conditioning has left far too many people believing that equities will see another big rally in the near future. I don’t think that’s at all likely.

For the past 2-3 years, the market has not been driven by fundamentals. Earning grew until 2014 and kept the market at least somewhat satisfied. But now, with earnings and revenues both having peaked 2 years ago, and with the age of the expansion at 7 years, the economy has almost certainly peaked for this Business Cycle. Its next move should be toward the trough (recession).

Fundamentals were an afterthought while earnings were increasing. But now that earnings have turned lower, all eyes are on the FED. Only easy money from the FED’s printing press can sustain a market at historical overvaluation.

The FED’s recent policy focus has been on ZIRP (Zero Interest Rate Policy), yet it is clear from the chart below that ZIRP alone cannot lift the market higher. We’ve had a zero interest rate environment for 8 years, and to expect a new stock market breakout from a continuation of ZIRP is ludicrous.

The markets are running dry of liquidity again and only a new round of quantitative easing (QE4) can get equities going again. It’s my view that there are only a couple of events that could lead the FED to embark on QE4: a) the market takes a massive dive, or b) the economy turns decisively lower.

We are left with an Investor Cycle that stalled near the S&P’s all-time high. The market has spent nearly two years in the current topping range, and now that the current IC is at a typical topping point, I expect the coming Daily Cycle rally will quickly reverse lower.

In summary: perceived risk for equities should continue to rise, volatility should increase, and a summer selloff should begin shortly.