Gold - More Cycles, Fractals, and Updated Targets

As we wrote about last week, gold appears to have put in place a short-to-intermediate term top.  For some detailed references in this post, please make sure you understand how to read the cycle charts. 

Though last Friday wasn't THE top in the gold market, it did occur over the late session between Monday and Tuesday.  As we mentioned before, the chances of a top were good, as noted by bearish divergences and the beginning of the down cycle period.  There was a risk of a breakout when the gold price broke over the old highs, but it was negated as the price quickly came down.  We are, once again, at an interesting point.

The chart below is the updated GLD ETF cycle chart, used so we can analyze market volume quickly.  Note the circled "H" that occurred last Thursday, which was a warning of an impending top.  We noted that the top would likely be within 1-2 days of this marker, and the top did occur between Monday and Tuesday in overnight trading.  Today the price bounced off of the instantaneous trendline.  We will need to see a solid day or two below today's lows to confirm that the trending state is over, and a reasonable pullback in the gold price is underway.  That is, we must see the price fall below the instantaneous trendline until we get an "end of trend" sell signal.  Presently, we do not have this, but another day like today will satisfy this condition.

Note that the down cycle, if this is to be a short term cycle, is already roughly 1/4 of the way through.

While the head and shoulders pattern we discussed is technically out of the picture, the chance of a double top (which is essentially the same issue at hand) is present.  We're still watching the 1360ish range as a neckline that would indicate a much strong downward move in the mix.  Most of the technicals discussed last week still apply.  We encourage you to review those two posts.

This week, we add a new element into the mix--the fractal turn signal.  Below is the GLD ETF chart with a fractal indicator at the bottom instead of the cycle indicator.  We keep the cyclical supportive and resistive lines on the chart as references (remember, they act as "magnets" for the price)

The bottom section of the chart shows color-coded volume data.  Whenever a red bar shows up, the implication is that within the next 5 bars, there's a change in price direction.  So, if the trend is up and the cycle turns negative, we look for a fractal indicator (and/or a Japanese candle "end pattern") to attempt to locate tops and bottoms.  You can see a fairly recent rash of turn indicators showing up that helped forecast the recent top.

By using a combination of cycles data, fractals, and traditional technical analysis--which all use very different techniques--a higher probability of a correct diagnosis of a turn is possible.

One of the more difficult challenges with cycles work is correctly interpreting which cycle is dominant at a given time.  Here is a 3 year GLD weekly cycle chart.

Note that the only time that the price has fallen below the instantaneous trendline ("IT") was in 2008.  In fact, with the exception of that period which was the strongest pullback in gold price in percentage terms during the entire bull market, the price has simple bounced off of the IT during a correction.

The IT is currently around 1285.  The 150 dma is at 1270. The 150 wma is at 1032.  Key fibonacci retracements are at 1327, 1295, and 1263, respectively.  There is obvious support between 1250 and 1265.  The dollar is still in a weekly uptrend and daily downtrend, but not likely to rise much higher.  Thus, we believe that the best case for a gold price pullback is in the 1270 - 1285 range.  This is a change from our previous forecast of 1250, largely because the price has stayed higher than expected which have forced the trendlines to stay higher.

For the time being, silver is outperforming gold, but as the ratio is now down from 70ish to 50ish, the intermediate term outperformance is likely ending.  Our target is the 47ish level.  Note that the gold/silver ratio has not dropped below 46.74 since this bull market has begun.  Unless we're near the end of the market, gold is likely to begin to outperform.  We're taking profits on SLW, which has more than doubled in the last year.

The gold miners have broken out and are outperforming.  We expect this trend to continue as long as oil stays below $100--likely for another quarter or two.

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On Gold - Tuesday Will Tell the Tale

Silver smashed through resistance today, and if that's any indication, we may not get that gold pullback.  Gold is right at the critical level, and unless it just stands still in the next 24 hours, either the pullback begins or the head and shoulders thesis is out.  Again, we're largely overbought again with momentum now in the territory where pullbacks have occurred with consistency.  At the same time, the divergences have begun to fade a bit.  Let's put it this way, a strong daily close above 1424.40 will attract more momentum buying and carry the price higher.  Since we're less than $2USD away, we'll likely see how this is going to play out within 24 hours.

While we are big gold bulls, the current trend makes us a bit nervous.  Either we're going to get a strong down move soon, or people are going to be bartering for food in light of the destruction of fiat currencies within the very, very near future.  Which direction it's going, we can't say yet.  One way or the other, hold on because it's about to get bumpy.

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Daily GLD Chart Update - How To Read This Chart

This post was originally penned yesterday, but given a few conflicting client meetings, we were unable to post it.  The markets are acting a bit out of turn today with stocks lower, dollar lower, and gold up.  See our post (keep in mind most of it was written yesterday) below to get a better sense of where we believe things are going.  We'll update briefly this evening with the latest to see if we're on track.

The original post:

Though the USDX was down today, gold was unable to break above 1400. As we mentioned previously, we believed that the dollar would run out of steam and turn lower, but gold would not react and would move down. To understand that position a bit better, take a look at this chart.

Again, here we use the GLD ETF chart because it's quick to analyze on a day-to-day basis.  There's a lot going on in this chart, and we hope to step you though it in a way that makes sense.  We recommend opening the chart larger in another tab in your browser for easier viewing.

Note that prices are on the left and dates are along the bottom.  The blue candlesticks are up days (traditionally clear or "white" candles) and red candles are down days for GLD, and by proxy, the spot gold price.  The upper right hand corner shows some important stats: the day's open, high, low, and close (in parentheses), the low and high values for the time period being measured (108.8208 and 139.15, respectively), the mechanical model for what market phase we're in (in this case, a bullish uptrend with an averaged trendline at 8.5 degrees above the horizontal), and finally the period of time being measured, including the number of candles (bars) on the chart.

The upper left hand corner shows what moving averages are on the chart.  First, the very important 150 day simple moving average in red, the 4 day weighted moving average in orange, and the instantaneous trendline in dark green (more about that below)

The bottom section is the Hilbert Transform sine wave. There are two lines, one red (the sine wave) and one black (the lead sine wave).  At any give time, the values of these waves oscillates between 1 (at the high end of the indicator) and -1 (at the lower end of the indicator), with the 0 line being shown as the horizontal dotted line in between.  Under the title at the top center are the values of the sine and lead sine for the day.

Before we discuss the other indicators on the chart, it's time for a little theory.  Mathematically speaking, we can define the price movement over time of any security as a combination of a cycle and a trend.  That is, the price moves up and down in a cycle that is reasonably predictable and statistically measurable.  However, sometimes prices just take off up or down for long periods in a trend.  Traders tend to look for trending movements and indicators that point to a trend likely developing.  This is because the big money is made by getting into a trend and riding it out.  Markets that "move sideways" are often very choppy.  Traders tend to lose money in these markets because it is difficult to call the tops and bottoms of moves.  The general momentum trading strategy is to get into a trend early and ride it until it fades, then find another trend and jump on board.

The Hilbert Transform is a way of determining when something is trending or cycling.  When cycling, we have found the Hilbert Transform to be very, very good at picking tops and bottoms.  When trending, it is best to use other indicators and use the Hilbert Transform as a secondary indicator.

With that said, this chart shows you how to determine what's occurring with the price of a security in terms of cycles or trends (it's something we've developed internally to show this specific format).  When trending, ride the trend.  When cycling, sell when the cycle turns.

Looking at the sine and lead sine waves at the bottom, the key is to follow the red line (sine wave).  When the sine wave peaks, a turn to the downside is likely as long as the security is in a cycling mode.  If the security is in a trending mode, then any pullback is likely to be minor and not worth selling.  The black line (lead sine) is mathematically computed as a predictor for what's about to occur with the sine wave.  As the name implies, the lead sine wave leads the sine wave just slightly, so when it turns back down and crosses the sine wave, you know that a cycle turn is imminent.  When this cross occurs, two visual indicators are placed on the chart.  The first is a red (resistive) or green (supportive) circled "H" with a white interior and a gray vertical dotted line.  This means that a cyclical turn is ABOUT to occur (in 1/16 of a cycle, or typically 1-2 days).  Note that we have such a red circled "H" with white interior today.  Once the sine has topped (or bottomed), a red (resistive) or green (supportive) horizontal dotted line is drawn at the approximate resistive or supportive level as a reference.

We should take the cycle tops and bottoms as warnings of a possible turn.  If the underlying security is behaving cyclically, many times the turn will be exact or off by 1-2 days at most (we look at fractals and other signs for confirmation).  Often, however, we will see some "overshoot" of the high (or low) point that lasts for a few days.  As long as the security is not trending, the price tends to "hang around" the red or green line.  These lines should be viewed as "price magnets."  It is common that if the price overshoots, it will not overshoot longer than 1/4 of the cycle.  If the price overshoots resistance, at 1/4 of the cycle we will get a green triangle indicator.  If the price overshoots support, at 1/4 of the cycle we will get a red diamond indicator.  These will also often mark points when we get turns during an overshoot whenever the security is cycling.

For securities like gold, which is in a very strong bull market, the security tends to trend more than cycle.  Cycling tends to occur after a major trending move when you get a strong pullback in price--then you get a period of base building, characterized by a range-bound trade of ups and downs.  That period is a cycling period.  When the price breaks up or down outside of that range, it is more-often-than-not the beginning of a trending move.  The instantaneous trendline (dark green) is a mathematically computed line that attempts to remove the cycling component from the trend.  Said another way, the instantaneous trendline shows the price trend at any given instant without the cycle tendency being included.  When a trend begins, price will often ignore the cycle tops and bottoms and start moving consistently above or below the instantaneous trendline.  The beginning of a mathematically computable trend is marked with a red (downward) or green (upward) circled "H" (note that it is a solid color, not "hollow" like the cycle indicator)and a vertical, solid blue line.  At the end of a trend, a cycle period is likely to take over.

While that's a lot of data, it is easier to see on the chart. From the 4/1/2010 date, we can see the gold price staying above the instantaneous trendline in a trending pattern (bouncing off of the instantaneous trendline frequently).  On 7/1/2010, the price fell and ended the upward trend (shown with a solid red circled "H" and a blue vertical line). On 7/9/2010, the cycle indicator showed a potential turn to the upside (which we held out for waiting for a bottom at the 150 dma).  On 8/4/2010 the gold price began to trend upward again after having bottomed for one cycle (frankly, we expected it to cycle longer than that, but...).  The price has continued to trend upward to today, with a possible warning that states tomorrow may be a short term gold top.

If you had been following this chart, you would have bought on 2/17/2010 (not shown on the above chart) at the beginning of the trend at roughly $1100 per ounce, sold on 7/1/2010 at $1200 per ounce (9% profit), bought back at $1155 per ounce and you'd still be holding today with a potential signal to sell around $1400 (21% profit or 30% profit total since February).  It's not clear whether or not the top will be reached on December 3, but the current situation presents itself as a possible top.  If so, selling near Friday's highs (at least lightening up) may be advisable.  A price drop below 1360 for a day or two implies the trending move will be over and a period of consolidation will be in order.

You can see that, in bull markets, the trend is to have short positive cycles and long trends during negative cycles.  The reverse is true for bear markets.

Note that cycles occur in all timeframes--daily, weekly, monthly, etc.  At any given time, one cycle may be the dominant cycle that must be paid attention to.  Currently, the weekly and monthly cycles are negative, but trending.  The weekly cycle has only stopped trending once in the last 10 years and that was during the credit crisis of 2008.

Note also that we also use fractals to determine the likely day (week and month as well) of the top or bottom.  When combined with other indicators, especially the Hilbert Transform, turns become much more predictable than with traditional indicators alone.  Gold currently has some signs of a possible downturn on both the daily and weekly charts.  Only a sustained move above the former highs will negate that possibility.

At this stage, we believe we're overdue for a gold pullback.  Let's see we see a top on Friday.

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Gold: From the "It Ain't A Pattern 'Til It's a Pattern, But" File

The dollar rally is extending a bit further than anticipated in the last report, though we're on target in the original forecast area for an 81-ish handle on the USDX, though there's a case to see it extend to 82-ish. We doubt that this rally has much longer, but time will tell.

The USDX chart below shows the probable targets.  It appears that we're in an A-B-C correction (a bull flag) from a larger downtrend with a target in the 150-dma-to-200-dma range at the 81.74 - 82.00 range.  This corresponds also to a 50% retracement from the June highs of 88.71 and the target of the A-B-C retracement.  RSI is approaching overbought and the stochastics are overbought.  Cyclically, the dollar should be in a down daily cycle, but more EU fears continue to make it trend higher.  We do not anticipate a break through the 200 dma to be sustained more than intraday.  If we're wrong, that means the dollar is going to enter an intermediate term uptrend.

 

The implications for gold are interesting.  Since last year, gold has been moving up whether or not the dollar has moved up.  This is because gold is now a safe haven regardless of currency it is being measured against.   Since the bull market began in 2001, gold has had only 1 major correction--the 2008 deleveraging episode.  Since then, central banks have kept liquidity high (forget austerity--that's for the peasants, not for the banks) which has allowed only modest gold corrections.  It is unclear what fundamental event could force the price of gold down in any significant way at this stage.  Perhaps another liquidity crunch that forces deleveraging (unlikely as long as any monetary regime has fiat currency and a central bank), or perhaps a sustained period where the illusion that "the major problems are solved" reigns supreme.  Regardless of the fundamental event that justifies such a dramatic sell-off, the gold picture may be presenting such a scenario.  Below, we use the GLD as a proxy so the volume information can be easily analyzed as a useful indicator:

As the title of this article states, "it ain't a pattern 'til it's a pattern, but" we're setting up for the first opportunity in some time for a meaningful reversal in gold price.  Note that we have developed a left shoulder, a head, and what appears to be a right shoulder in development.  The shoulder heights are symmetrical, but if they are to remain so, today will likely be the short term peak in price. The neck is modestly upslanted, meaning that the degree of sell-off may not be as strong as the pattern should count downward.  The volume pattern supports a developing head-and-shoulders pattern.  The initial left should peak climaxes on peak volume, sells off on lower volume, and has a minor rally at the low point.  The head is formed at higher highs on higher volume.  The right shoulder rises on lower volume.  This is a classic sign of a trend running out of steam.

In support of this position are the MACD, ADX, and MFI, which have all been in a downtrend (bearish divergence) since the top of the left shoulder formed in late October:

 

 

Short term momentum disagrees and is still rising, but this is a shorter term indicator and will turn over only after the first day sell-off begins.  RSI and stochastics are not overbought, however. 

It seems gold is at a crossroads.  If it continues to move upward with momentum, the h&s pattern will likely not form.  If, however, short term momentum weakens, then any reasonable retracement will likely activate the h&s and lead to an intermediate term sell-off.  The answer may lie in timing:

The above chart can be complex to explain.  It attempts to mathematically measure the cyclical behavior of the underlying security and provide indications on when the security will "obey" the cycles or ignore them and trend in some direction.  With gold in a bull market, clearly the bias is to trend up.  The above chart shows gold trending up against any cyclical "magnets" that should cause it to sell off.  It is currently in a short term up cycle, but that that cycle is halfway through (approximately 5 more days of "up" time) and behaving very cyclically (as opposed to trending).  Unlike most indicators, the Hilbert indicator above is predictive and not based on moving averages or other time-delayed data.  In short, we believe that there is a good chance of a turn in the next 5 days that may activate the head and shoulders and produce a significant sell-off in gold (and corresponding buying opportunity when the weak hands are shaken out).

Head-and-shoulders patterns are reversal patterns--meaning that if it becomes active (as in, the price breaks below the neckline)--we should see a downtrend occur that has some moxie.  The pattern target would take it below the short-term Fibonacci retracements toward the 1225 level as a minimum downside target.  If we see a true intermediate term sell-off ala 2008, the target price will be closer to $1000.  We know, we know--no one believes that can happen (even us).  However, that's exactly why it might.  Note that you don't hear anyone out there talking about this pattern, which usually is a sign that it may just happen.

In summary, the preponderance of the evidence suggests a correction is coming.  It may be significant.

Here's what you need to watch:

• Gold price cannot move much higher than today's high without putting the h&s pattern at risk.  If we see a higher price movement, especially higher than the previous high, the trending will continue higher and a major sell-off will have to wait
• It is possible that a sell-off will only go to the neckline and not activate the pattern (somewhere near the 1320 level). We need to see a break through this level on volume to get a bigger sell-off.  This is the first stop now for a bounce.
• If the price breaks through that level on strength, the next level to watch is between the 150 and 200 dma in the 1250 range.  A sell off that doesn't stop there will see 1225.  It is in this region that we believe is most likely to hold.
• A sell-off that breaks through 1225 may well see something around 1000 - 1050.  This is an outlier, but a possibility.  At some point during this bull market, we expect to see a sell-off that will shake the confidence of the most die-hard bulls before moving to truly unbelievable highs.

We'll know a lot more about the possible outlook within a week.

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Wednesday Dollar Rally Update and Entertainment

Based on our best internal measurements, the dollar rally probably has a day or two left in it at most.  Though it didn't feel like a rally today, the dollar rose during US market trading hours after pulling back overnight.

From a daily cycle point of view, the euro has completed a 50% retracement from its August 24 lows and the dominant daily cycle has turned positive.  The USDX chart shows a similar cyclical downturn.  Unless the cycles invert, we're near the end of the up move for the dollar--at this stage, we're simply waiting on a confirmation.

Gold appears to have broken out of its trending move and appears due for further downside and a few weeks of consolidation.  We believe that the dollar/gold correlation will break down for 5-7 trading days as gold continues to move down toward 1280 and begins a consolidation process.  We may have a day or two of bounce as gold moves off of its 50 dma, but we're still under the belief that the downside move is not yet over.

Tonight's entertainment is not "family friendly," but is entertaining nonetheless.  It is a sarcastic, crude parody of Vince (of "SlapChop" and "Sham-WOW" infomercial fame) pimping a scanner for TSA to make people fill better about their naked scans.  Very entertaining.



P.S. The newsletter is still coming!  We're behind on getting everything done, but it will be out soon!  If you haven't signed up for it, you won't want to miss it!

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Intermediate Term Dollar Rally / Gold Pullback Possible

In reviewing charts this weekend,there exists a good possibility that the dollar rally could end up stronger than originally anticipated. On the weekly GLD and UUP ETF charts, used because they show relevant volume information, there are both cyclical and fractal signs of a top in gold and a bottom in the USD. The upcoming week should confirm the move. Assuming it does, we're looking for a multi-week pullback and multi-month consolidation period.

We are particularly interested in the 1280-1300 range for gold at this time and will be looking for signs of a reversal at that stage.  If this is an intermediate term correction, it will be marked by a move below 1240 with a possible, worst case low in the 1050-1100 range.  We don't anticipate it being that much of a pullback at this stage,  but the possibility exists.  It is more likely that a move to 1240 would be a best case pullback for bulls looking to add to positions.  We probably won't be that lucky...

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Looks Like We're Getting That Dollar Rally

I can almost guarantee that when my stops get hit, that means that my decision was on the money. An updated view of the GLD ETF shows that today's volume spike was large and was a clear reversal day.  It is likely that gold's move down has begun. 

Note that our cycle timing model does not support the notion that this move down will likely last very long.  We're looking at the 1280-1300 range as a possible floor for this move.  Larger downside moves are possible and will definitely come at some stage.  We will keep an eye out for signs of an upward turn.

The HUI (GDX) and silver both confirm the turn.

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November 7: Week in Preview....

We'll be launching the newsletter later this next week. The first edition will be be more abbreviated than will future editions as it will only be a couple of weeks before the next edition is released.

To summarize, it appears that the US dollar will be rallying starting this week--either that or a crash is brewing. While the latter is possible, we're not convinced we're there yet. We anticipate a short term pullback in asset prices associated with a dollar rally, a continued run up in asset prices shortly thereafter, then an intermediate term rally near the end of this year or early 2011.

First, a look at the USDX.

From the monthly chart we can see that the trend was and is clearly down from the 2000 - 2002 triple top, with the 80 level serving as the critical pivot point.  The 2008/2009 and 2010 tops near the 88/89 level appear to support a double top, implying that the lows at 70.70 will be tested at some point in the next year.  However, there is an upward trend from the 70.70 level lows of 2008.  The larger configuration is a symmetrical triangle.  Currently the dollar is right at the lows with any further significant breakdown signifying a run toward 52 on the USDX as the minimum objective of the dollar.  There is plenty of room on the RSI and slow stochastic to allow further downward room longer term.

The weekly chart shows a closer look at the upward dollar trend.  The upline has been violated, though the weekly close is above the line.  We take this as a sign of a possible intermediate term rally (though we don't favor those odds) beginning soon, but the uptrend is not strong enough to support a major bottom.  IF we assume that a rally is already in the cards and has started as of Friday, November 5, it's unlikely that the rally would exceed the 80/81 level.  The RSI and slow stochastic are oversold.  We will look to the daily charts to determine when a countertrend rally may begin.

The dollar has completed a bear flag.  A significant move down from here that stays below the 76 level for a day or two implies a large downside move is coming.  If a rally is going to start and be sustained, it will have to start soon.  Our short term dominant cycle model provides some incite.  We use the UUP dollar ETF to provide short term timing using a modified version of a Hilbert transform and a fractal formation.  These models show a possible short term low took place on November 4.

Note the cycle model shows that we should see a turn when the black line at the bottom of the graph crosses the red line.  That appears to be within a few days if the dollar rallies, so we anticipate the dollar rally will be short term, not intermediate term.

The red volume bars in the lower portion of the chart signify points where a turn is likely to have occurred.  The last occurred on November 4.  Based on the additional evidence, we believe that a short term turn has begun.

Do asset values concur?  The evidence there is not clear yet, though it is not uncommon for a turn to occur in one financial security before a highly correlated security makes a turn.

On the weekly charts, you can see gold's inverse head and shoulders breakout.  The intermediate term target of roughly 1400 has been reached.  It would take several days of sustained rally above 1400 to play the momentum to the upside.  At this stage, short to intermediate term pullback appears to be in the cards.  We suspect that the pullback will be short term with an intermediate term pullback coming in spring of 2011.

 

Note that gold is overbought on the RSI for the daily, weekly, and monthly charts.  As we reported last year, whenever  gold has shown up as overbought in all three timeframes, whenever the pullback does occur, it is typically very strong.  We don't expect this strong pullback to come immediately, though we would not be chasing gold here except as a trade.  If the dollar were to continue to fall and gold sustained a run above 1400, it may imply that the dollar move down is becoming disorderly--fundamentals are taking over and hyperinflationary risk is high.

Using GLD as a proxy for the timing model, we see similar timing as we see in the dollar for a turn--implying a short term pullback for gold, not an intermediate term move.

Short term, the S&P is largely overbought.

 

Much like gold, we anticipate a short term pullback followed by a continued by a continued liquidity-driven run up in asset prices.  The S&P has a target of at least 1250 as it executes an inverse head and shoulders pattern.

It is likely that by Wednesday the 10th, we'll either be in a consolidation/pullback mode.  More updates mid-week and more detailed information will be in the newsletter.

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Out of Popcorn: FOMC Announcement

From the horse's mouth.  In short, the move was roughly in line with expectations.  Initial "vindication" rally in the euro and stocks.  Now we expect a reversal for a few weeks with a dollar rally and stock market pullback (starting to get that now) before the market moves higher and the dollar moves lower.

Dramatic moves in currencies.  Amazing.  More on this later.

Get your funds ready for precious metals purchases.

Press Release

Release Date: November 3, 2010

For immediate release

Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. 
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.
Statement from Federal Reserve Bank of New York

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Dollar's Short Term Rally May Be Shorter Than Anticipated

The dollar is really struggling on election day in the US.  Perhaps it realizes that it can't win, regardless of which party wins?

The very short term upward trendline has been decisively broken, but the lows are holding--at least at this moment.  A breakdown below 76.15 spells trouble, and perhaps the beginning of things becoming disorderly in the decline, as suggested by John Hathaway on Bloomberg.

We still remain of the opinion that the Fed will actually disappoint.  As long as the lows hold, we'll hold that conviction.  As we suggested last week, the markets may expect upwards of $1T for QE2.  The Fed has been ratcheting down expectations and used the term "a few hundred billion," which set the low for the dollar.  According to today's economist survey results, the consensus is $500B for QE2.  Keep those numbers in mind for tomorrow's FOMC announcement.  We anticipate that the Fed will announce $500B +/- $50B for QE2 while leaving the door open for future QE rounds.  This will likely disappoint the market, leading to a dollar upward move and an asset/precious metals pullback.  That will create a buying opportunity.

The longer term trend remains the same.  Fiat currencies are going to be devastated, and the USD will likely lose its reserve currency status.  But this game is played in short timeframes with volatility being the norm, not the exception.


We will have to see tomorrow how it all goes down.

If you haven't already done so, contact us to be placed on the list for the first newsletter.  We do not and will not ever sell entrusted information to any party.  The newsletter will contain more in-depth analysis of commodities, precious metals, equities, and currency markets, segments on personal and asset protection for the coming times, protecting your privacy, and a host of other information which may prove invaluable within a much shorter period of time than you may expect.

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USD Uptrend Still Intact

But for how long?  This is three weeks of movement on the 30 minute chart.  Note that the dollar is trying to bottom and has held the uptrend since the lows, but the devil will tell the tale next week.

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Dollar Uptrend Chances Being Challenged

Though the USD uptrend is still in place, it is clearly being challenged. Below is the UUP, the USD ETF, used so that volume data is available.

Two items of note. First, the blue lines show a typical correction period (a bear flag). In theory, we should be at the bottom of that trend with a correction (rise in the dollar) coming. Second, note the red upward trendline coming from the bottom on October 15. A violation of that red trendline will start dollar selling.

On a separate machine, which is currently showing the 5 minute UUP chart, we have currently bounced off of the lower trendline but face a number of moving averages as resistance. Today is an important day for the USD...

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Excellent Bloomberg Video with John Taylor on Currencies

A definite can't miss.  We don't disagree with much, except perhaps timing.

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Mid-Week Report: Dollar Rally Beginning

We're easing back into the complete analysis of the markets simply because of how much time it takes to validate and prove every case AND publish the data and commentary.  That will largely be reserved for the monthly newsletter.  The blog will contain shorter term summary information.

In summary, overextended markets, cyclical work, and sentiment point to a correction with a minor dollar rally and minor stock pullback.  Only if Helicopter Ben disappoints will we have a dramatic correction.  Ben has created a real mess.  The fundamental story is simple enough: if the Fed doesn't continue to pump money, the economy craters and every politician will be hanging from lamp posts within a couple of years.  Expect MASSIVE civil unrest.  (Note: Europe is in the same situation, and due to "austerity" measures, the path to massive unrest is virtually baked in the cake.)  However, if the Fed pumps enough money to support asset prices and give "Keynesian hope" to the masses, then the dollar will crash and the likelihood of MASSIVE civil unrest comes about again.  There is no escaping this trap--only the means by which things break is up in the air, and that, my friends, is what we're trying to keep an eye on.

Short term, we expect a rally in the dollar and a corresponding correction in stocks/commodities/gold.  This trend has just started as we speak.  However, mid and longer term, the song remains the same.  We believe it highly unlikely that the currency of any country will be preserved over its economy.  No politician will have that.  The fault is in government, as it always is.

November 3 is the big day to determine just how much money will be printed in QE2.  The Fed is already realizing that leaking information about QE2 can only set the market up for disappointment.  $500B+ is already baked into asset prices--anything less is a disappointment.  At the same time, the dollar has taken a beating and some economic indicators are better than expected.  Typically, this should be a signal for the Fed to do nothing--but they've set the expectation of QE2 already and cannot afford to do nothing.  What a tangled web we weave...

It is our opinion that we are now witnessing the Fed, by way of the Wall Street Journal, attempting to talk the markets down and reset expectations before next week so the disappointment is not so high.  The Fed has used the term "few hundred billion" in regards to the amount of QE2.  We expect weak markets going into Nov 3 and then an announcement of $500B or more to try and goose the markets on "higher expectations relative to the lower expectations we set a week ago following the massively high expectations we set the month before that."   Phew.  Confused yet?  Imagine how confused the Fed must be...

Today's analysis will focus largely on the dollar and gold...

The dollar/asset correlation conundrum (DACC) is high, which we've been commenting on since before commenting on it was cool...

The implication is dollar up/assets down and vice versa.  Considering that any move in the dollar here is not out of fear (like the credit crisis or the European debt crisis) but is out of short term expectations, we anticipate that any rally will be minor with correspondingly minor moves in gold to the downside.  Longer term charts provide a clearer picture.

Of note is the symmetrical pattern denoted by the orange lines.  Longer term, that must be watched for clues as to what's next.  Any rally in the dollar should not exceed the 84 region--if it does, then panic will set in.  A break above that triangle will take the dollar to roughly 102--likely a long term bull market.  We expect the Fed to fight this trend.  As such, eventually we may see the dollar break below the triangle with a target of roughly 58 over the next year or two.  Note that the MACD is pointing toward a rally.  This is worth watching as momentum is rising, not falling.

Weekly view:

Weekly is clearly showing oversold stochastic, a near-oversold RSI, and a strong trendline.  Watch for a MACD buy signal as momentum has clearly started rising.  A rally here would be several weeks to a couple of months long--supporting the thesis of a move toward the 84 level.

The daily shows momentum has shifted to be dollar positive, and supports a rally up to 84.  What's not shown is that the trend is weakening as the dollar is rising--that's a divergence that shows a change could be fast and sudden.

Our own cyclical look at the UUP, the ETF that tracks the USD, shows a positive turn.

If this move is going to be substantial, we should see a rally that trends for some time.  Here are the scenarios we're watching:

1. Dollar rallies into Fed meeting.  Fed outperforms.  Dollar turns negative on cyclical top.
2. Dollar rallies into Fed meeting.  Fed underperforms.  Dollar rises in trending fashion toward 84 over next couple of months.

We'll see what happens.

The implication is that, on the gold side of things, there's a likely buying opportunity coming up.  How low will gold go?  That's for next time...

If you haven't purchased any physical gold yet, you may want to take advantage of this pullback.  We expect a minor pullback here and an intermediate term pullback next year.  As part of our first newsletter, we will outline our expectations and why.  In addition, if you're concerned with gold confiscation, we have become very familiar with a rock-solid plan for allocated gold investment in a Swiss vault--one that will actually take American customers--and one that will allow for easy pick-up or delivery.  Contact us for details--we will not publish that information on the blog.

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Anatomy of a Market Crash - What's Next for Equities Part I

We recently discussed staying on the right side of the trade by watching the 150 day moving average.  Given the chaos of the last week or so in equity markets, the question is whether or not we've resumed the bear market or whether this is just a pullback in the bull market with more room to run.  Today, we'll try and answer that question and provide some checkpoints to guide along the way.  At this stage, it's not clear.  For the intermediate term, there is a lot of technical damage.  In the short term, after today's market action, we're probably poised for some degree of rally.  Monday will confirm or deny this position.  If the markets move back down and are particularly weak intraday, then we're set up for a crash.  If the markets move flat to up with positive intraday signals, then we're likely to get at least a short term rally toward 1125 on the S&P.  That level is absolutely critical, though not obvious on the charts.  We're going to show why we believe that 1125 is the key to determining whether the intermediate term future holds a bull or bear market.  In the long term, it's a mess....

Today's post will be CHART HEAVY.  It is strongly encouraged that you click on each chart, blow it up, print it out, and study it relative to where we are today.  Typically, we show charts with standard price based technical analysis showing the likely direction things will evolve.  In this blog, we're going to "open the kimono" so to speak, and show some proprietary indicators that we use to help gauge the market action.  You won't be disappointed.

Let's examine some evidence to see where we are.

This bull market began in March of 2009.  The average bull market rally within a secular bear market lasts 22 months.  That's an average.  We doubt this rally will last that long in the best case.  But, assuming we did get to the average timeframe, that implies that the bull market would end in January 2011.

Although the bullish sentiment at the top was ridiculously high, sentiment turned negative immediately as the "mini crash" began.  This implies that the "bulls" out there don't have much conviction and are willing to sell at the drop of a hat.  That, in and of itself, is bullish to some extent.


As we noted a couple weeks ago, we have our first indicator that a top is likely within 4-7 months.  At this stage, we've only received a single signal.  Past bear markets have posted a combination of signals from the same indicator:  first a top, then a divergence vs. the general direction of the market, then a lower high just as the market turns under a flat to negative 150 day moving average.

Market breadth on up moves has been good since the rally began.  So has on-balance volume (a technical measure of volume that tracks volume moves relative to up and down days).  Absolute volume has been bearish--poor on up days, strong on down days.

From an investor standpoint, retail investors (that is, individual investors) are usually the patsies that get left holding the bag in major market moves.  They tend to buy when things are moving up and sell when things start moving down--that is, they buy high and sell low.  The major market makers know this and use their considerably larger pools of capital to "paint the tape" and pull retail investors to go long (and sometimes short, but retail investors tend not to short...).  The big players sell overpriced shares to the retail investor, who is always late to the dance, and then there's no one left to buy--that's when prices drop and the retail investors sells his discounted shares back to the market makers.

Since this rally began, retail investors have largely bought bonds.  They have generally avoided the market.  This is generally a bullish sign as the last sucker is not yet in.

Very short term, that is in the last week and half, we had been waiting on a sharp move down followed by a day where the market gapped down lower and reversed to close positive.  Once the euro went positive, we anticipated such a move.  Instead, the market moved down even as the euro rallied.  Given that the argument for a negative market was problems in the eurozone, this divergent movement was (and is) troubling.  At this stage, we tend to believe that Thursday's downward movement was an overreaction to the euro situation (since it has since stabilized and moved up).  The break in correlation in troubling and worth watching.

Speaking of the euro, frankly we've completely missed on most of our euro forecasts as many readers will likely duly note (they always remember the misses, but rarely the hits *sigh*).  We anticipated a short to intermediate term fall in the euro back in November, but this has carried on further than we anticipated.  As a result, the US dollar has rallied longer and stronger than anticipated.  However, we think we've seen the technical indicator that matters, which unfortunately, was in front of our noses the entire time:

Above is a monthly view of the euro from its 2000 lows to present, along with a Fibonacci retracement overlay.  When a market retraces from major lows to major highs ,it tends to stop at one of the key Fibonacci retracement levels, notably the 50% level (as Elliott Wave aficionados can attest to).  Note on this monthly chart, which is just about the longest term chart one can analyze, the euro has pulled back from its lows of 121.10.  IF the euro falls below that level, the bearish trend continues (and global markets will likely lock up again).  IF the euro drops below 111.87, that would be extremely negative, and essentially spell the end of the euro currency.  Critical support lies at the 117-118 level where the 150 and 200 month moving averages, respectively reside.  In essence, assuming the euro holds at the 121.10 level (or worst case, 111.87), it would be putting in a major low.

Conversely, the US dollar is near it's 2008 highs.  A break above the 89.68 level on a weekly basis would be very bullish.  As is, the dollar appears dramatically overbought at this level.

We anticipate a rise in the euro to the 1.33-1.37 range, followed by a strong pullback to support.  We will reevaluate it at that stage to determine how the dollar/euro currency game is running along.  As long as the euro strengthens, global equity markets are likely to maintain some stability.

So, we have a mixed bag of evidence that we are inclined to interpret as follows: the big market crash is yet to come, and depending on how much liquidity the central banks of the world pump in to prevent a crash, may never come.  Here are the most optimistic to most bearish cases for global equities:

The most optimistic case is that central banks ramp up liquidity again and equity markets move to new, sustained highs.  This is the number one item to watch at this stage.  Given that central banks are often behind the curve, we doubt that central banks will respond until a new crisis is underway.  We're not really expecting this case to come to fruition.

The most bearish case is a crash that begins next week and moves to new lows.  That is possible, and we are watching the S&P at the 1125 level for clues as to what's next.  More on this in a bit.

We believe the most likely case is that equity markets will be held together for a few more months (3-6) as they generally start trading in a sideways range.  Depending on the quantitative easing during that period, they will either move to new highs or begin a major correction of approximately 50% while central banks, who will likely be behind the curve, again turn on the printing presses.

What's most important is having signposts over the next few months that provide clues as to where we're headed in the intermediate term.  For this, we will show some proprietary indicators and how they've performed in past market top situations.

 First, you need to be able to understand the indicators.  In addition to the well known indicators we often reference, like RSI, MACD, and stochastics, we rely on some cyclical, fractal, and volume-based indicators so that our analysis does not focus on momentum activities alone.  By using several different, unrelated indicators over different timeframes, the likelihood of making right decisions increases dramatically.

First, let's look at a few wider period pictures of the key tops we're going to cover--just for reference.  We begin with the 1930s.

Below is a daily chart of the DJIA from 1928-1931, the most feared crash period of them all, along with the 150 day moving average and volume.

The 1929 crash was a classic head and shoulders top.  What was unexpected was that the crash occurred very quickly.  As soon as the 150 day moving average flattened out, the market fell right through it.  This is the crash scenario we're most concerned with, but it's not as common as most crashes.  Note the behavior--until the crash occurred, the 150 day moving average served as support.  After the crash, it served as resistance.  Stay on the right side of the market.  We cannot overemphasize this.

After the rally, the 1930 crash was less dramatic, but was the beginning of the long slide down.  Note that during that rally and top, the 150 dma was already negative.  That is not what we currently have in the S&P.

There was a rally in the middle of 1932 that fizzled over 9 months or so, then a bounce from a flat to rising 150 dma, ultimately culminating in a massive rally into July of 1933.  The market moved sideways (setting up an inverse head and shoulders that was never activated) into the end of 1934.

The market recovered beginning in the spring of 1935.  After a massive whipsaw from March to August of 1937, the market again crashed in September of 1937 in dramatic fashion.  Again, the 150 dma was flat when the prices began to close under it--signaling a crash was on the horizon.

From 1938-1941, the market whipsawed frequently, with obvious technical patterns before major drops (a head and shoulders and a descending right triangle above).

While the 1930s were characterized by deflation, brought about by the discipline of the gold standard, the 1960s and 1970s were characterized by inflation resulting from the lack of discipline of being on the gold standard.

The inflationary 1970s secular bear market began in 1966.  Again, note the similarity in market activity around the 150 dma.

For sake of brevity, we'll post the rest of the secular bear market in 3 year increments.

For reference, here is the latest 3 years from the top in 2007 to present.

In Part II we will look specifically at the years that contain the tops and compare them to today's situation. 

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Don't Freak Out--Quite Yet, Anyway. How to Spot a Market Top.

Given today's fun filled market action, currency chaos, and roasting PIIGs, it's probably important to put some things into perspective.  Let's start by taking a look at major stock markets around the world.  You should see a trend here...

First, the S&P, which over the last few weeks has fared better than most of the other global equity indices.

As we discussed last time, the S&P has not had more than a 9% correction this decade, with the exception of the 2007-2008 crash.  Can it crash again?  Of course, but there will be signs again.  More on that top spotting a bit later on.

Let's zoom out a bit.

Note a few things on this chart.  First, from the bottom in March of 2009, the market has retraced 61.8% of it's crash from October of 2007.  That's a key Fibonacci retracement level.  At the same time, the market is overbought and overextended.  We can expect the technicians to sell the market here.  The real question is whether or not this is a correction, or the beginning of something much more damaging.

This brings us to the second point on this chart.  Note the red line.  A very important characteristic of markets is their behavior around this average.  Bull markets tend to correct to the line, with some possible overshoot, but do not stay below it for long (look at the July 2009 and February 2010 corrections as examples).  Here's the important premise: as long as the 150 day moving average is pointing upward, the bull market is intact.  Once the 150 day moving average slopes downward AND the closing price of the security falls below it, a full blown bear market begins. For the most part, market tops don't just happen immediately.  Topping is a process, not an event (some rarities, including the 1987 top, are exceptions).

So, at this stage the bull market is intact.  The burden of proof is on the bears to take control.  They have failed to do so in the last year.  It appears they will have their chance again now.  What transpires over the next week will be particularly important.  Why?  The US markets have been lagging, not leading, the global "recovery" for some time now.  When the US markets bottomed in March 2009, most global markets had bottomed in October, 2008.  The US had underperformed most global markets until the last few months.  Again, we do not believe this is a US leadership issue--US markets are just last on deck, so to say.  Let's look at several major global market indices as signs of what's to come.

Note the same behavior in the Shanghai Composite regarding the 150 day moving average.  Once it flattens and prices fall below it, you're in a bear market.  Since the bottom in October 2008, the SSEC topped out in August, 2009.  Below is a shorter term view from the August 2009 highs.

The SSEC is in an intermediate term corrective cycle, noted by the blue rectangle.  Prices have fallen below the 150 day moving average, but the 150 day moving average has not rolled over.  It will be critical for the SSEC to hold the 2639 level and then rise to break to the upside, above the 150 day moving average before it rolls over.  It probably has at least 3 months to do this.  If, in that period, it does not rise above the 150 dma and begin an upward trending pattern, ultimately breaking out of the consolidation zone to the upside, then this will probably forecast another round of market sell-offs, commodity price crashes, and the like.

Using this similar criteria and mode of thinking, take a look at these key markets and note the trend...

Australia has begun its consolidation as the pace of the rise of the AORD has failed to keep the 150 day moving average rising faster.  Australia is not going to help itself out by taxing miners more, but then again, when has government ever done much good for anything or anyone?

At first glance, you might think it's the AORD again, but it's not--it's Brazil's Bovespa.  It exhibits the same pattern as the AORD.

Canada is looking like the best of the resource-based economies out there.  If the rest of the global markets move into consolidation regions, along with oil and gold, the TSE will likely have a strong sell off.  Longer term, this market should remain in a bullish trend, but we may have a few months of weakness and a shocking sell-off ahead.

Interestingly, the DAX (Germany), CAC (France) and FTSE (UK) are generally showing the same patterns as the S&P.

Japan tends to move to the beat of its own drum, and we'll cover it separately another time.

In digesting all of this information, here's what's important.  We are likely entering a period, globally, where we trend sideways in global equity markets.  As the situation evolves, we'll be looking at changing our trading strategy to be less position-oriented and more frequent.  Expect choppy, sideways markets for some time to come.

Expect gold to do well here after this initial sell-off.  Again, note the consolidation pattern in gold, the breakout, and what we believe will be the subsequent pullback/retest of the consolidation rectangle:

We should see gold hold today's lows.  A closing price back within the rectangle signifies a false breakout.  Honestly, it's textbook at this point.  It may not move much in the next few days, but we anticipate it will challenge the highs soon.

A final note of possible interest.  One of the indicators we use takes the market date, mathematically derives a signal from it from which short term cyclical turns can be forecast.  It has an uncanny way of calling countertrend moves.  For example, if the markets are above the 150 day moving average (bullish), this indicator tends to call any sell-offs to within 1-2 days.  Each market moves somewhat to its own rhythm.  Interestingly enough, there are a series of upward turns forecast to begin (with Japan--actually it will turn down) on Friday through Tuesday of next week.  If we are still expected to maintain bull market territory in these averages, we should see markets flat to down most of this week with upward turns starting  with a downward turn on Friday in Japan and other markets reacting opposite it next week.

The TED spread is up, but not in any zone to be concerned with.  Markets are anticipating problems, but no REAL liquidity crisis yet exists.

One final comment.  Most of the extremely negative news currently revolves around how much each European country owes the next European country.  That is, as they say, a paper problem with a paper solution.  If for some reason debts are allowed to be defaulted upon, then you can expect another return to the 2008 global meltdown world of counterparty risk.  If the PIIGS are removed from the eurozone first, the euro will benefit.  If Germany steps away from the euro, the euro is toast.  We still expect a bailout of some form as soon as politicians realize that a default creates a chain reaction that will plunge the global economy into depression.  That's not good for their reelection chances.  Thus, if Europe comes up with a paper solution to a paper problem, you can expect the markets to go on an upward tear.  If they do not, they risk plunging their own countries, and the globe, into another crisis.  The markets are now telling them to print money to bail out the PIIGS or otherwise contain the contagion.  They will likely be pushed into doing something soon.

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