Midweek Cycles Update – May 18th

May 18, 2016/in Premium /by Bob Loukas

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May 17, 2016/in Free /by Big League Finance

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Gold Cycle

Cycle Counts

Cycle	Count	Observation	Cycle Position	Cycle Clarity
Daily	Day 16	Range 24-28 Days – 1st or 2nd Daily Cycle	Rallying to next DC Top	Green
Investor	Week 3 or 7	Range 22-26 Weeks	New Cycle Rally	Green

Supporting Indicators

Sentiment Level	70% (Up 1%)	Significantly Elevated
Commitment of Traders (COT)	Blees Rating – 3 (0-100)	Extremely Bearish (Slight Improvement)
Primary Trend (Weekly Chart)	Down – (Possible Change)	Bearish to Neutral

Gold has reached an interesting crossroads, but it’s not alone in doing so. All of the assets that we track are at similar inflection points in their own Cycles. The inter-connectivity between Cycles is on full display, and is currently showing a high degree of both positive and negative correlations between assets.

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, as expected, and the coming week should reveal whether the short term bullish case for Gold 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.

The precious metals Miners have also held their huge gains. Normally, once the Miners top, the trip to the next 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.

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.

Looking at the weekly chart, I still believe that a $200 surprise 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 IC 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.

Investor Cycle Trading Strategy

I’m Long the Gold ETF rather than the Miners as a precaution. If Gold breaks down from here, I’ll be out of the position before Gold suffers a 5% decline. 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% Stop cushion.

Daily Cycle Trader Strategy

I have 2 Long positions in Gold to capitalize on my view that a strong rally is imminent.

Portfolio Positions Summary

Open Positions – Investor Portfolio –

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

Open Positions – Daily Cycle Trader Portfolio –

2 Positions long GLD (Gold ETF)- Bought at $123.19 STOP $114.50

Equities (S&P500)

Cycle Counts

Cycle	Count	Observation	Cycle Position	Cycle Clarity
Daily	Day 27	Range 36-42 Days – 2nd Daily Cycle	Likely topped – Many days before next DCL.	Green
Investor	Week 17	Range 22-26 Weeks	Possibly Topped	Green

Supporting Indicators

Sentiment Level	62% (Down 1%)	High Optimism
Commitment of Traders (COT)	NA
Primary Trend (Weekly Chart)	Flat- (Possible Change to Down)	Neutral to Bearish

In past weeks, we have discussed every conceivable equity bear market scenario. I continue to believe that equities have already peaked, and that they are in the process of printing a wide top that will eventually give way to a significant move lower. From the lens of a bear market, the “give way” point appears to be very near.

On the daily chart, the S&P rallied out of the Half Cycle Low before being rejected, essentially at the 20dma. As I mentioned at the time, the reaction out of the Half Cycle Low would tell the tale for equities. If the S&P had been able to push to a new high in the 2nd half of the DC, the bulls would have been cheering and the bearish case diminished. But that’s not what happened. As it stands today, the S&P is showing a clear, day 9 DC peak and a large, Left Translated Daily Cycle.

This is exactly what we expected, as mapped below. The resistance at the 20dma turned the S&P lower, so now it’s a question of downside follow-through. A DCL is at least 10 days away, and that’s plenty of time for the market to inflict serious damage.

I’m sure that Readers are tired of hearing about the macro case for an equities price decline, especially when it has not correlated well with stock prices for nearly 5 years. But I think it will be different this time.

Past equity rallies were induced by quantitative easing (QE), and the correlation between QE and equity prices is very clear. But now, the FED is backed into a corner. They are so fixated on moving off of a zero interest rate policy (ZIRP) that there simply is no will to pursue a new round of QE. And without QE, I don’t believe that stocks can sustain prices at 17 times earnings (PE ratio) in a declining revenue environment. The FED has lost its ability to, beyond rhetoric, intervene in equities, unless the economy rapidly deteriorates or the stock market loses a rapid 20%. But if that were to happen, the bear market thesis would have played out.

Like Gold, the S&P is at a critical point in its Daily Cycle. Although the DC hasn’t completely given way, cracks are clearly evident.

Take a look at retail stocks.

And the Dow Jones Transportation index has confirmed the negative action.

The IC topping pattern is gaining traction, and the action could get ugly. I am mindful that equities have not broken down yet, so am careful to remain patient and open to all possibilities. And remember, the bullish case I outlined 6 weeks ago called for a consolidation similar to what we’ve seen before a move higher can begin.

Even so, the bulls should be concerned since the market appears to have chosen a bearish path. If the current Investor Cycle is to recover, we should see an almost immediate rise in prices from here. But that’s not what I expect. I believe that the recent turn lower will soon give way to serious selling. The Cycle timing is perfect for a top, and the technical indicators (below) clearly show a Cycle that has topped and is turning over.