STOCK MARKET BREATHER & YEARLY CYCLE LOW IN GOLD

The stock market has known all along that the fiscal cliff issue was going to be pushed out to the last minute. This is just how Washington works. Nothing is ever settled until everybody gets all of the pork needed to buy their vote.

The correction today is nothing more than a short-term breather before the market makes a final push to test the all-time highs, probably by the first week in January. I'm guessing we will get some kind of stopgap measure, or extension of the deadline next week that will trigger another explosive move up to test those September highs. At that point the market will find some excuse to drift down into a daily cycle low around the middle of January.

Once a deal is struck the daily cycle correction will end and the market should explode to new highs, maybe big new highs by the state of the Union address on January 29.

The gold market however has been rather confusing of late. The selloff on the QE4 announcement, especially the huge sell orders that hit the market late Wednesday night, made no sense at all.

Now with the benefit of hindsight it's apparent that the yearly cycle low that I was expecting sometime in April or May has been moved up to correspond with last year's D-Wave bottom.

There is a possibility that that yearly cycle low bottomed yesterday. However it appears that we have a daily cycle low 10 days ago. If that's the case then after a short-term bounce gold may make one more move to marginal new lows as the stock market finishes its test of the highs in early January. The normal duration for a gold daily cycle is about 18-25 days. Unless this turns out to be an extremely stretched daily cycle then gold probably has one more curveball to throw us before a final yearly cycle bottom.

On the plus side the rally out of a yearly cycle low tends to be the most powerful rally of the year. In this case if we were to get one more marginal new low to say around $1630 in the next couple of weeks that should be the end of the selling and I think gold will easily test the $1900 level during its next intermediate cycle.

Those of you still holding positions in the precious metals market I would strongly advise you to not lose your position in the next couple of weeks if gold does make another marginal new low. 

If you are back in cash I think I would advise waiting to see how gold reacts as the stock market launches out of this short-term correction. Like I said that may be the trigger for gold to move down into the normal timing band for a daily cycle low and possibly a marginal break below yesterday's intraday bottom. If it does, that should mark a final yearly cycle bottom and trigger a big rally back up to test the September 2011 all-time highs.

INTERVIEW WITH TEKOA DA SILVA

INTERVIEW

NAT GAS IS THE TRIGGER

Last summer I told traders to watch the oil cycle as the CRB was working its way down into a final three year cycle low. At the time I was confident that the entire commodity complex was just waiting for the oil cycle to bottom. Once it did, the rest of the commodity complex launched out of that bottom like a rocket.

Remember at the time virtually every analyst was predicting the end of the commodity bull market. I knew that was baloney. All that was happening was a completely normal decline into a major three year cycle low.

I also correctly predicted that the bottom in the CRB would mark the three year cycle top in the dollar.

As expected the dollar made a halfhearted attempt to regain the 200 day moving average before rolling over in anticipation of QE4. At this point all we are waiting for is a move below the last daily cycle low at 79.56 to confirm the intermediate cycle has topped, and done so in a left translated manner (left translated cycles are an indication of a cycle that is in decline and making lower lows and lower highs). 

Once 79.56 is breached the dollar will be on its way down into its yearly cycle low sometime in mid to late February. My best guess is an intermediate bottom somewhere around 76-77 before another mild bounce like we witnessed out of the August low and then a continued collapse of the worlds reserve currency.

Since September when the dollar began it's pathetic countertrend rally, the CRB has been moving down into its first corrective phase. At this point I think the entire commodity complex is just waiting for the leader to turn. And by leader I mean natural gas. As you can see in the chart below Nat gas led the entire commodity complex out of that major three year cycle low. 

I think Nat gas began a new cyclical bull market in April. This was the point at which currency debasement overwhelmed the supply/demand fundamentals of a saturated Nat gas market. I don't believe for a minute that this bull market is being driven by supply and demand fundamentals. I think this market is being driven by the same thing that the entire commodity complex is responding to, and has been responding to since last summer, and that is massive global currency devaluation.

As you can see in the chart above the natural gas cycle is now deep in the timing band for a turn. I suspect when Nat gas forms a swing we will see oil, gold, silver, and the entire commodity complex begin another leg up in what I expect to be a severe inflationary spiral culminating in at least a mini currency crisis in mid-2014.

As predicted the stock market rallied violently out of its intermediate bottom logging a 7% gain on the initial thrust. We can now expect stocks to take a breather as a minor profit-taking event unfolds and the stock market moves down into its half cycle low. 

My best guess is we will see a bottom somewhere between 1400-1410 followed by a move up to test the all-time highs, probably by the end of the year (especially if we get a resolution to the fiscal Cliff in the next week or two). But if Congress manages to drag this into the new year, then I think we can expect fiscal cliff resolution and at least a marginal break of the September highs before the state of the union address on January 29.

So for commodity traders I think we are just waiting on the natural gas market to bottom before the next leg up begins.

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EUPHORIA STAGE

I think we are on the verge of entering the euphoria stage of this cyclical bull market.

 
The euphoria phase is where the rate of change starts to accelerate as traders become convinced that the economy is booming, and will continue to boom into the foreseeable future (the last bull market), or in this case that QE3 is a magic elixir with no unintended consequences.

During this final phase the character of the intermediate cycles should change and instead of a modest move above the prior intermediate top we will see a strong acceleration and a significant and sustained breakout above the September high of 1475. All of the traders that have convinced themselves that QE is having less and less effect are about to be caught off guard as we move into the euphoria phase of the bull market.

You can see in the chart below in 2006/07 the intermediate cycle accelerated rapidly past the prior intermediate top at 1326 in a classic runaway move. While this certainly felt good at the time, it was the beginning of the end as the housing and credit bubbles began to implode.

 
I think we are on the verge of something similar as I believe QE3 will drive the market high enough to test or marginally break the all-time highs. However, it’s also going to start an upward spiral in commodity inflation that will eventually poison this fragile economy and be the straw that breaks the camels back.

CHRISTMAS SPECIAL
For the next couple of days I'm going to run a Christmas special, one penny for the month of December. This is only valid for new subscribers. If you have already subscribed to the SMT premium in the past the system will charge you the regular $25 monthly rate. At the end of the month your subscription will convert to the normal monthly charge unless canceled before then.

OFFER HAS EXPIRED

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BIG MOVES COMING IN DECEMBER, JANUARY & FEBRUARY

Well how was that for the start of a new intermediate cycle? While many analysts were calling for continued losses or even a market crash I repeatedly warned traders that an intermediate degree bottom was coming and that markets routinely rally violently out of those bottoms often generating 5-8% gains in the first 12 to 15 days. This particular intermediate bottom has already gained 5% in the first five days.

Like I've been saying all along, I think the market will easily make new highs in the next two or three months, possibly even significant new highs, or a test of the 2007 top as QE3 starts to work it's magic.

That being said stocks and gold are now due for a short-term breather. Why is that you ask, if all markets have just formed major intermediate cycle lows? The reason has to do with the daily dollar cycle. Friday marked the 24th day in the current daily cycle. That cycle generally runs about 18-28 days trough to trough. At 24 days the cycle is well into the timing band for a bottom and bounce.

That bounce should force stocks into a short-term correction, or sideways consolidation, and gold into its next daily cycle low.

However don't be fooled by any short-term corrective move as stocks and gold have all clearly formed major intermediate bottoms. There are always corrective moves along the way, nothing goes straight up, but intermediate cycles don't usually form a final top until sometime around week 12-15. As last week was only week 1 of a new intermediate cycle, we probably don't need to look for a final top until sometime in February, or early March.

Coincidentally, that is when the dollar is due to form its yearly cycle low. A yearly cycle bottom is the most severe cyclical decline other than a three year cycle low (the next one of those isn't due until mid 2014). I think we can safely assume that QE3 is going to complete the head and shoulders topping pattern for this particular three year cycle, and just like I said months ago the dollar topped back in the summer when the CRB index formed its final three year cycle low.

The dollar should now head generally lower over the next year and a half with brief bear market rallies similar to what we just experienced. This will drive an inflationary phase that should drive all asset prices higher into mid-2013, and commodities into a super spike in mid-2014 (this is when I expect gold to reach its next C-wave top at roughly $4000).

By mid-2013 inflation will start to take its toll on the economy, and stocks will stagnate and begin an extended topping process as inflation continues to surge, similar to what happened in 2007/08.

I think we will experience the same phenomenon this time as QE3 eventually generates the same unexpected consequences and spikes commodity inflation.

Traders need to be prepared next week for some kind of corrective move. Understand this is not the beginning of  another leg down, but a second chance to get positioned for what should be a very profitable intermediate degree rally over the next 2-3 months.

 
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THE ODDS ARE HIGH THAT THE BOTTOM IS IN

In my last couple of articles I mentioned that I was waiting for the S&P to form a swing low as the first confirmation that an intermediate degree bottom had formed. That swing is going to form on the open Monday morning.

Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the first 15-20 days. At that point the market will dip down into a half cycle low that will establish the trend line for this particular daily cycle.

Since the dollar is now on the 21st day of its daily cycle it is now overdue for a move down into a short-term low. This should drive the first half of that 6%-8% move, followed by a very short corrective move as the dollar bounces and then rolls over quickly into a another leg down. 

That cycle would be due to bottom around the first of the year, and should drive the stock market generally higher until early January at which time we should get a more significant correction, probably as nervousness builds before the next earnings season. 

I've diagrammed the general directions and rough targets for what I think will unfold over the next month and a half in the chart below.

However, the dollar shouldn't put in the true yearly cycle low until sometime in mid February to early March so there should be another leg down after the one bottoming in January. 

The final leg down on the dollar index into its yearly cycle low should drive the stock market back to at least marginal new highs later this spring.

Back in June when the CRB made its final three year cycle low I said at the time that this should correspond with the three year cycle top in the dollar, which so far has been the case.

 
We should continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stock market generally moving higher at least until the point where commodity inflation, especially energy, gets to the point it collapses consumer spending. Once that occurs the stock market will start to stagnate and refuse to rise even if the dollar continues to fall. If Bernanke didn't learn his lesson in 2008 he will continue to print and spike inflation even higher creating the conditions for the next recession.

As has been the case in the 70s and also during the last cyclical bull market in 2007, I think we will probably see the stock market at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.

Today should be the opportunity to get on board what is likely to be a significant rally over the next 3 weeks and probably a move to new highs over the next 2-3 months. 

However I think the really big money will be made in mining stocks as gold should rally enough to make it's first test of the all time highs at $1900. It's not unreasonable to think miners will follow and test 640 during this time.

  

MAJOR BUYING OPPORTUNITY

I'm just going to do a quick post today. The relevant factors are that gold appears to have put in an intermediate degree bottom last week. Miners are being dragged down at the moment as the stock market makes its final move into an intermediate bottom. This happens pretty much like clockwork every 20-25 weeks (currently on week 23).

Invariably when stocks move down into one of these major cycle bottoms the selling pressure infects everything. It finally grabbed the miners today even though gold has barely budged. Not to worry though, we've seen this happen dozens of times in the past, and the miners always snap back violently once the selling pressure in the stock market exhausts.

More importantly than where things are going tomorrow or the next day is where they are headed over the next intermediate cycle. As I have diagrammed in the chart below the dollar is due for a move down into a yearly cycle low around mid February or early March. Roughly the same time as last year. This will drive the next intermediate rally in gold (and stocks) for about the next 12-15 weeks. 

I'll say it again. Buying anywhere around these levels will deliver big gains over the next 3-4 months. Probably largest in the miners, but certainly significant in virtually all sectors.

This is that period of time that comes only once or twice a year when the chartists get fleeced (the charts always say the market is going lower at intermediate bottoms. This is why chartists always miss these major bottoms. You need different tools to spot these kind of buying opportunities.) and the smart money positions for the next leg up. 

The choice is yours. Do you want to sell at the bottom again, or will you be a buyer this time and make some money? (I think big money.)

TIME TO BUY, BUY, BUY

If you aren't already in, Monday or Tuesday should represent an exceptional buying opportunity as gold moves into it's final intermediate cycle bottom. 

Now that the 38% retracement has been breached I would look for a final exhaustion move to test the 50% level early next week as we move into the elections.

At that point sentiment should be completely washed out and gold will be set up for an explosive move to test the all time highs by the end of the year or early January. 

Miners should deliver even bigger gains as I expect them to break out of the bull flag that's been forming over the last 4 weeks and generate a 25-30% rally to test the all time highs.

We are moving into one of those rare buying opportunities that only come around once or twice a year. This is that point that I warned about in my last post where you have to ignore the media and nonsense about QE3 not working. It is going to work, and it is going to work extremely well. I fully expect it to drive gold to $4000 by mid 2014. 

This is purely a profit taking event, nothing more. They happen like clock work about every 20-25 weeks, as you can see in the chart below. Gold is now very late in the timing band for that major cycle bottom. 

I'll have more in the weekend report. But I think the odds are very high we get a final bottom by mid week. 

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IN THE BELLY OF THE BEAST

Asset markets should now be in the final 3-5 days of this intermediate degree profit-taking event. We are moving into the belly of the beast, so to speak. This is that period of time during an intermediate decline where things start to look really bad. The media always confirms the decline with multiple stories of gloom and doom. Don't be fooled though, this is just a normal profit-taking event and it happens like clockwork about every 20-22 weeks (although sometimes QE can stretch the cycle to over 30 weeks).

The stock market is now 19 weeks into its intermediate cycle, which generally lasts 18-22 weeks. So we are well into the timing band for that major bottom.

The daily cycle is on day 35 which generally lasts about 35-40 days. So we are now in the timing band for that smaller cycle bottom also.

Gold is 22 weeks into its intermediate cycle, which generally runs 18-25 weeks, and 19 days into its daily cycle which averages 18-28 days.

Considering that the stock market is right in the timing band for its cycle bottom we could see a bottom any day now. However considering that this current daily cycle was left translated (topped in less than 20 days), the market should move below the prior daily cycle low before bottoming. Left translated cycles generally form a pattern of lower lows and lower highs.

My best guess is that risk assets will find a bottom at about the same time the dollar tests the 200 day moving average.

While I wouldn't rule out a marginal move above the 200, I think it's safe to assume that Bernanke has broken the dollar rally with QE3, and that any move above the 200 will be brief and roll over quickly. 

Once the dollar resumes the secular bear trend all asset markets should form intermediate bottoms and begin the next leg up in the cyclical bull market for stocks, and secular bull market in gold.

It's important that traders not get sucked into the rhetoric during this final bottoming process. Investors are about to get another one of those great buying opportunities, especially in mining stocks

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GOLD'S FINAL LEG DOWN IN PROGRESS

In my last article I warned traders that markets, especially gold, were at risk of a profit-taking event. This was due to the fact that the dollar had found an intermediate bottom and begun a counter trend rally.

I think the second stage of that rally is probably beginning today. I'm looking for the dollar index to test the downward sloping 200 day moving average before rolling over and continuing the secular trend.

This should drive gold down into a final intermediate degree bottom. My best guess is that we will see a rather mild intermediate decline, probably only testing be 38% Fibonacci retracement.

Since gold is already on day 15 of its daily cycle, and that cycle normally lasts 18-28 days, we should get a final bottom sometime in the middle to latter part of next week.

If one were trying to time the exact bottom you could either buy when gold tags $1694 (the 38% Fibonacci retracement level), or when the dollar index tags the 200 day moving average. Either one of those events should be close enough to the bottom where any further drawdown isn't going to be very significant or last more than two or three days.

I expected the next intermediate cycle to be every bit as violent as the last one, and gold should make its first test of the all-time highs at or slightly above $1900 sometime before the end of the year.

Because of the extreme undervaluation levels that were reached as the CRB put in its three year cycle low, mining stocks should be the big winners again during this next intermediate cycle. 

Just as I was expecting the HUI exploded out of that July bottom racking up a 38% gain in a little over two months. I think we will see something very similar during the next intermediate cycle and miners will test the all-time highs before the end of the year.

 The last C-wave that ran from the spring of 2009 till it topped in September 2011 was the C-wave of silver. Silver vastly outperformed all other areas in the precious metals group. This C-wave is going to be the C-wave of the miners. It's already started with an initial 38% rally, and I expect by the time this C-wave tops in mid to late 2014 we will have witnessed a 300% to 500% gain in the mining indexes.

Sometime next week traders will get their opportunity to jump on board what will almost certainly be an amazing ride over the next year and a half to two years. 

POSSIBLE PROFIT-TAKING EVENT IN PROGRESS

Since the breakdown out of the bear flag on the dollar index hasn't followed through, the odds now favor that the dollar has generated an intermediate degree bottom. First off this should be a countertrend move as I think the three year cycle has already topped. Based on the intermediate cycle count in the stock market the dollar probably doesn't have more than 3-4 weeks before this rally rolls over and begins another leg down.

Generally when an asset begins a bear market it will retest the 200 day moving average once or twice before the trend change is complete. With that in mind I think the dollar index will test and maybe marginally move above the 200 day moving average before resuming the secular trend.

If the dollar has generated an intermediate bottom then this should be the timing band for stocks and commodities to move down into intermediate degree corrections (considering the strength in oil, energy may decouple from this process).

Keep in mind this will just be a profit-taking event. I fully expect to hear many of the perma bears jumping on the bear market bandwagon at the bottom of this correction. We are going to hear many analysts claiming that QE3 didn't work, that deflation is setting in, etc. etc.

None of that will be true. This is just going to be a normal intermediate profit-taking event. They generally happen like clockwork every 20-22 weeks. Considering that the S&P is on the 18th week of its intermediate cycle, it is due for that corrective move, and now the dollar appears to be ready to cooperate by rallying out of its intermediate cycle bottom.

Once this corrective move has run its course I expect we will see stocks rally, probably back to new highs. As a matter of fact I think the most likely scenario is that stocks will rally just enough to break the all-time highs, either later this winter, or sometime next spring. A move to new highs is usually what it takes to pull in every last retail investor allowing smart money to unload their shares that they have been holding for the last three years. This is how the last bull market topped also.

 I think we can expect a final bottom (if an intermediate decline has begun) either on the next FOMC meeting, or if the cycle stretches a bit, a bottom on or around the elections, once it becomes clear who's going to win the presidency.

We took profits on our mining positions last week and put in place a strategy to allow us to weather an intermediate decline in the metals if it is now in progress, while still maintaining some exposure if the bull surprises to the upside and tests $1900 before dropping down into an intermediate correction.

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POSSIBLE OPPORTUNITY IN OIL

Generally speaking, I'm not one to put much faith in conspiracy theories. I don't think the price of gold and silver is being suppressed by the government or the Fed. Our money supply is no longer tied to gold so there is no logical reason for the Fed to care what the price of gold is. No matter how high or low it goes it's not going to affect the Fed's ability to counterfeit dollars at will.

Oil on the other hand I can see a very good reason to attempt manipulation. If the price of oil rises too high it stifles economic growth and will eventually trigger the next recession. During the last commodity bull market we have a clear history of politicians trying to impose price controls on energy, but no history of price control on precious metals.

Over the next month rising oil prices might not be too kind to incumbent politicians. So I could see a logical reason to attempt suppression of the oil markets over the next month.

It is late enough in the intermediate cycle that yesterday should have marked a bottom for oil. If oil were to continue down for the rest of the month moving well out of the timing band for an intermediate bottom I could make a case for something fishy going on, especially if the dollar continues to fall during this time.

However as most people already know artificially depressing price always has the opposite effect by creating too much demand. Eventually that demand overwhelms the attempts at manipulation and the asset or commodity will resume its secular trend at a much faster pace than would have occurred naturally.

The opportunity is that if we see oil held artificially low over the next month, and well past the intermediate cycle timing band, to create a favorable environment for incumbent politicians, then we can expect an exceptionally violent snap back rally once demand overwhelms the manipulation.

The trade would be to buy energy stocks or oil futures right after the elections if oil continues to remain in a downtrend into November.

WATCHING THE DOLLAR

It looks like it took till Thursday for the dollar to make up its mind. In my last post I was expecting a decisive move by Monday or Tuesday.

After two weeks of frustrating back-and-forth action it looks like the bear flag in the dollar is finally ready to break to the downside. This should deliver one more leg down to possibly test or marginally break below the February low before forming an intermediate bottom.

The next 2-3 weeks should be the best opportunity for gold to test $1900.   

Again I don't expect a breakout to new highs this year and once the test occurs it should fail and be followed by another intermediate degree decline as the dollar rallies out of its intermediate cycle bottom. The breakout to new highs should occur during the next intermediate cycle sometime in the spring.

IT MAY BE TIME TO BOOK SOME PROFITS IN THE MINING STOCKS

It's been a great run over the last two months but it may be time to tighten stops on mining stocks. You can see in the chart below that at least during this stage of the new C-wave gold is still inversely tethered to the dollar index, as are miners.

During the period from September 2011 to July 2012 the dollar was moving generally higher out of its three year cycle low and that forced a 10 month correction in the precious metals sector. 

It's been my opinion that the three year cycle in the dollar topped at that point, and should drift generally lower until the next three year cycle low sometime in mid-2014 (with occasional counter trend rallies from time to time).

I've been expecting one more leg down in the dollar to test the February intermediate low before the first counter trend rally. However, this bounce is now on the 10th day and in jeopardy of generating a right translated daily cycle (a cycle that rallies longer than half its duration and tends to form higher highs and higher lows). If that occurs it will probably signal that an intermediate degree counter trend rally has already begun. As you can see in the chart above just as soon as the dollar started to rally gold stagnated, mining stocks started to correct, as did the stock market.

If this bounce in the dollar turns into a full-fledged intermediate degree rally then we can probably expect a 3-4 week correction in asset markets. 

I find it hard to believe that Bernanke is going to allow the dollar to rise and asset markets correct right in front of an election but the possibility definitely exists if the dollar doesn't turn down early next week.

Those of you not willing to hold through a 10-15% correction in miners should probably consider tightening stops, possibly right below Thursday's intraday low. If that gets violated it would start a pattern of lower lows and lower highs which is generally the definition of a down trend.

If on the other hand, Monday morning the dollar is getting hit hard then I think we may see gold test $1900 before the next intermediate degree correction. In my opinion what happens Monday & Tuesday to the dollar index will probably set the stage for market direction over the next month and into the election.

DOLLAR MISBEHAVING

And as often happens right when you think you have a handle on what's going on the market throws you a curve ball. In order for assets to continue rising the dollar has to resume it's downward trajectory. It didn't do that today. That's a warning sign that we may be on the cusp of an intermediate degree rally in the dollar, which would probably trigger an intermediate degree correction in stocks and precious metals. 

More in the weekend report.

OIL HAS BOTTOMED

Oil has formed a swing and bounced off the 50% retracement I was looking at as a possible cycle low target. Gold, silver and stocks have clearly received the signal and are ready for the next leg up (which should mean the dollar cycle has topped and is ready for the next leg down).

Stocks may be locked in a runaway move which I discussed in last nights report in the premium newsletter.

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OIL STILL IN THE DRIVERS SEAT

We will continue to watch the oil cycle next week as it is driving all other asset markets. As I pointed out in my last article, the rally in stocks, commodities, and gold are on hold until the oil cycle bottoms.

Oil did form a swing low on Friday, but I think there is probably one more leg down before the cycle forms a final intermediate bottom. If oil does have another leg down next week, that has the potential to cause the stock market to break lower out of the volatility coil that it has formed.

As most of you probably remember the initial break out of a volatility coil ends up being a false move about 70% of the time. The initial break is soon followed by a more powerful and durable move in the opposite direction. In this case, a move down would form a stretched daily cycle low, which would be followed by, presumably, another move to new highs next month, and on into the election.

A further decline in oil would probably mean more upside for the bear flag forming on the dollar index, and presumably the dip down into a daily cycle low for gold that I noted in my prior post (although I wouldn't rule out one more attempt to tag the $1800 resistance level on Monday or Tuesday first).
 

Note that the above charts are only intended to illustrate trajectory not actual targets.

MARKETS ARE WAITING ON OIL

At this point I think even the most diehard perma troll has to admit that my cycles technique has navigated the markets almost perfectly. When everyone was calling for the end of the commodity bull market this summer I correctly predicted what we were seeing was just a move down into a three year cycle low that would soon bottom and generate a tremendous surge higher. 

In May and June I warned traders to watch the oil cycle as it would govern the rest of the commodity markets, and the three year cycle would bottom along with the intermediate oil cycle. 

I also warned at the time that the dollar's three year cycle would likely top at about the same time as the CRB bottomed. This also has come to pass and the dollar is now set up to drift generally lower into its next three year cycle low in 2014. As I have outlined previously, this should drive the extreme inflationary scenario as commodities build into a final parabolic spike, as Bernanke's monetary policy slowly destroys the purchasing power of our currency.

When everyone was calling for a bear market in mining stocks, I pointed out the 1-2-3 reversal that was setting the stage for a major bottom and once in a lifetime buying opportunity.

While many others were predicting $1400-$1200 gold I correctly spotted a B-Wave bottom in progress.

I've said it many times in the past, that while my system of cycles analysis, sentiment, COT reports, and money flows in combination with a secular bull market, isn't perfect, it's better than anything else I have ever found. And so far no one has demonstrated anything else that comes even remotely close to generating the long term gains of the SMT system.

Now that system is signaling that all markets are again waiting for the intermediate oil cycle to bottom. 

Once it does we should see another strong leg up in the CRB, another leg higher in stocks (possibly to test the $1500 level), and probably a final surge in gold to test the all-time highs at $1900 (expect a brief move down into a daily cycle low later this month before the final surge into an intermediate top).

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THE NEXT RECESSION WILL BE TRIGGERED BY OIL

I was confident that the Fed had already begun printing. That seemed pretty evident by the overall action in the commodity markets, the dollar, and the fact that stocks were unable to correct in the normal timing band for a daily cycle low. However, I didn’t really expect Ben would come out and publicly admit it. That one took me by surprise Thursday. I guess Bernanke wants to get full value for his attack on the dollar and make sure that markets are rising into the election.

At this point all the pieces are in place for the inflationary spike and currency crisis I’ve been predicting for 2014. We now have open ended QE that is tied to economic output and unemployment. But since debasing currencies has historically never been the cure for the bursting of a credit bubble, all the Fed is going to produce is spiraling inflation. So as this progresses we are going to see the Fed printing faster and faster as the result they are looking for never materializes. This is what will ultimately drive the currency crisis at the dollar’s next three year cycle low in 2014.

At this point watch the price of oil if you want to know when the next recession is going to begin. As I’ve pointed out many times in the past, recessions, well at least since World War II, have all been preceded by a sharp spike in the price of energy. Any move of 100% or more in a year or less, has historically been the straw that breaks the camels back. Modern economies can not survive that kind of shock. It invariably triggers the collapse of consumer discretionary spending and economic activity comes to a grinding halt.

In 2007 oil surged out of the 3 year cycle low into a parabolic advance as Bernanke trashed the dollar in the vain attempt to halt the sub prime collapse. That 200% spike in oil is what tipped the economy over into recession, which was then magnified in the fall of 08 as the financial bubble and debt markets imploded.

 

I think it’s safe to say the Bernanke doesn’t understand his role in causing the recession of 08/09 as he is now making the same mistake again. I think he believes the recession was solely triggered by the financial meltdown. That was the icing on the cake, but not the initial trigger that caused the recession.

Despite the complete inability of QE to heal the economy or job market, and since he really has no other tool, Bernanke just keeps doing the same thing over and over expecting a different result, but never getting it.

Commodities are the check that prevent Keynesian economic policies from healing the global economy. Keynesian academics either don’t understand this, or refuse to acknowledge it. Until they do, or we install Austrian economic advisers in the government, we are destined to continue making the same mistakes over and over.

So we will watch the price of oil as it rises out of it’s three year cycle low. If it hits $160 by next summer that will probably be enough to start the economy on the next downward spiral. If politicians get involved (and I’m sure they will) and try to impose price controls, they will multiply the damage, and probably guarantee that the next economic downturn escalates into a truly catastrophic depression.

Until we see the spike in oil and the corresponding damage to the economy, no one has any business try to short anything, well maybe bonds, but even that will be risky because the Fed is going to be actively trying to prop the bond market up and keep interest rates artificially low.

All in all there is going to be so much money to be made on the long side, especially in precious metals, that no one needs to fool around with puny little gains on the short side, especially in a market that is going to be hell to trade from the short side. The time to sell short will be in 2014 after the dollar’s next three year cycle low. The dollar’s rally out of that bottom will correspond with the next global economic collapse, ultimately caused by the decisions made by the ECB and the Fed this past week. I dare say if they could see the damage their decisions are going to inflict upon the world and the dire unintended consequences, maybe they would finally stop kicking the can down the road, and let the economy heal naturally. Of course that would entail several years of severe pain, and politicians as we all know, are extremely allergic to that.

2014-2015 is when we are going to see the stock market drop 60-75% and the next great leg down in this secular bear market. But until then there’s probably a pretty good chance we are going to see the S&P at new all time highs in the next 6 months – 12 months.

The rest of the weekend report is available to SMT subscribers. $10 one week trial.

Burrito bet

I do believe I'm going to earn a whole lot a burrito's :)

There will be a lot to go over in the weekend report, but basically everything is now in place for my inflationary shock in 2014 scenario, including the stock market at new highs, which has now already happened.

Portfolio Change

A portfolio change has been posted to the website.

Changing the blog

Unfortunately as so often happens with blogs that aren't purely a bear blog, the SMT has deteriorated to the point where it's mostly inhabited by trolls. The conversation has gotten to the point where it no longer serves any purpose, other than to offer a stage for the trolls to rant.

At this point I will be closing the comments section of the blog for the foreseeable future. If you want to join the discussion then you will have to be a member of the premium website from now on.

HAS QE3 ALREADY BEGUN? COMMODITIES AND GOLD MAY BE SAYING YES.

According to recent statements by Bernanke, the Fed stands ready to act with further easing of monetary policy (QE3) if economic conditions warrant it. But let's face it, because the Fed has never been audited we only receive the data they deem fit to publish. We know the government lies to us about inflation, unemployment, GDP, etc. Does anyone really believe the Fed is publishing true accounting numbers? I'm starting to suspect Bernanke has already begun the next round of quantitative easing. 

Politically QE is a hot potato, and impossible to publicly announce. But there have been enough hints (the last FOMC minutes maybe the loudest) that it is clear that Bernanke intends to print. Hey, we are in a currency war after all, and one can't win the war if you don't shoot your guns!

First case in point. The CRB exploded out of its three year cycle low in June just as I had predicted. Oil is already knocking on the door of $100 a barrel again. Grains in many cases have rallied 50% or more and show no signs of reversing. As a matter of fact, the CRB is showing no inclination to even retest the summer bottom. The complete failure up to this point of commodities to retest the three year cycle low is of itself a warning bell that something has changed. I think we can all agree that the global economy didn't all of a sudden ratchet into high gear, creating a surge in demand. Barring that, the only thing that would generate this kind of explosive move without even a hint of a correction would be another round of massive liquidity injections.

Another odd development is the action in bonds. A month and a half ago the bond market started to discount the inflationary surge as commodities launched out of their three year cycle low. Mysteriously, two weeks ago, interest rates started to tank. 

One has to ask themselves, who in their right mind would be buying bonds with a negative yield in a rapidly accelerating inflationary environment? 

This sudden reversal in interest rates is another warning bell, in my opinion, that QE3 may have already begun, and Bernanke is already buying bonds in the attempt to hold interest rates under 2%.

The next confirmation will come from the stock market. As we have seen in the past, the daily cycle in the stock market has tended to stretch far beyond its normal timing band (35-40 days) during periods of quantitative easing. The current cycle is due to bottom right around the next Fed meeting on September 13. If stocks are still rising with no clear decline into a cycle low by mid-September that would be a pretty clear sign in my opinion that Bernanke is lying to us and QE3 has already begun.

If I am correct then the penetration of the three year cycle trendline by the dollar index on Friday is going to be a harbinger of hard times ahead for the world's reserve currency.

As many of you may recall I've been expecting the three year cycle low in the CRB to correspond fairly closely to a top in the three year cycle on the dollar index. So far the rally out of the May 2011 three year cycle low has been very weak. The dollar still isn't close to moving above the 2008-2011 three year cycle high, and has now formed a monthly swing. 

The dollars three year cycle is now at risk of having topped in only 14 months in a left translated manner. If so, this greatly increases the odds that we will see the dollar index fall below 72 and probably below 70 by the time the next three year cycle bottoms in mid-2014.

If the dollar's current daily cycle continues to drop all the way into the FOMC meeting on September 13, then it will be unlikely we see any significant corrective action in commodities or stocks for the next two weeks, and at that point I am going to seriously entertain the idea that the Fed is lying to us and has already begun the next round of bond purchases.

The big question though, is how do we invest based on this possibility? 

First off one doesn't want to be short if there is even the slightest risk that the Fed has resumed bond purchases. Second, one has to ask themselves which sector stands to benefit the most from another massive increase in liquidity? 

The obvious answer is commodities. But most commodities have already rallied quite significantly as we've seen with the grains and energy. That doesn't mean there isn't more upside, I'm sure there is. But I think much larger percentage gains are going to be made in the precious metals as price and breadth are still quite depressed in this sector.

The metals are now set to "catch up" as traders take profits on some of their other commodity positions that have already generated large gains, and look to put that capital back to work in undervalued areas with more upside potential (precious metals, especially miners).

It's been my theory for several months now that we saw a B-Wave bottom for gold back in May.

With the recent breakout of the frustrating consolidation zone that always follows a B-Wave bottom, I think gold is now ready to begin the initial phase of the next C-wave advance.

Gold is now entering the high demand fall season. It has been my expectation that gold will generate its first test of the all time highs sometime this fall. If my intermediate cycle count is correct (explained in depth in the nightly premium newsletter) we should see a move above the A-wave top of $1800 and a rally close to $1900 by late October or early November. At that point the intermediate cycle will enter the timing band for the next corrective move, which should prevent gold breaking out to new highs

Following an intermediate degree decline in late November to mid December the breakout to new highs should occur during the next intermediate cycle this spring, followed by a retest of that breakout at the next intermediate bottom.

Yes I know these daily and intermediate cycle counts are some what complicated and beyond the scope of this short article. I do cover them extensively in my premium newsletter. Suffice it to say that cycle analysis lays a general guideline for when to expect major bottoms, and to a lesser extent tops. I like to think of it as a tool that signals when to step on the gas and when to start tapping on the brakes.  

While I don't think gold has much chance of moving above $1920 this year, conditions are definitely in place for a significant rally in the sector over the next couple of months. Miners, and silver in particular, have the potential to generate some pretty respectable gains over the next 2-3 months.

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