BEAR'S BEWARE

I'm going to go through some signs that rabid bears might do well to pay attention to because I think the market is very close to a major bottom. (That doesn't mean we are guaranteed to make new highs, although we might. Just that we can probably expect an explosive rally soon, even if it ultimately turns out to be a counter trend rally in an ongoing bear market.)

First off way too many people are counting on the head and shoulders pattern taking the market directly down to 850. Folks historically these head and shoulder patterns have a success rate of about 50%. A coin toss. Didn't we learn that lesson last July?

Anyway on to the charts.

My friend Doc noticed that the market dropped down to the 75 week moving average yesterday and bounced strongly. You can see that during the prior bull the 75 week moving average acted as final support during the entire bull market. That level also happens to be the 38.2% Fibonacci retracement of the entire cyclical bull move. Not an unusual correction in an ongoing bull on both counts.

Next we are now right in the timing band for a major intermediate cycle low.

At 21 weeks it's just way too late to press the short side. You risk getting caught as the intermediate cycle bottoms initiating a violent short covering rally.

Next, breadth is diverging massively during this final move down. As you can see the NYMO often diverges at these intermediate cycle bottoms. The divergence at this point is the largest in years.

And least of all we now have a momentum divergence forming on the daily charts.

Finally I'll point out that the February cycle bottomed on a reversal off the jobs report. I think it's safe to say the market has already discounted a bad number so we could see shorts begin covering in a buy the news type trade, even if the number is bad. And if it's good we will see the market gap higher huge, trapping shorts and throwing gasoline on the fire of a short covering rally.

It's just too dangerous to continue pressing the short side at this point. Better to just step aside and not risk getting caught in the intermediate bottom that WILL happen sometime soon, maybe even on today's employment report.

WATCHING THE WRONG MARKETS

Everyone is fixated on the stock market or the gold market. Meanwhile the real story is unfolding right under every one's nose in the currency markets.

Today the dollar broke down violently from the recent crawling pattern that has been forming along the 50 DMA. When these patterns break down they tend to move aggressively, usually down to at least the 200 DMA .

I'm not at all sure the dollar will stop at the 200 DMA though and here's why.

We've already seen a mini-crisis in the Euro. We know the Fed printed trillions of dollars during the period of QE. You simply can't debase a currency that way and not have repercussions.

I suspect we are about to see the crisis that started in the Euro spill into the dollar. (This is how currency problems unfold they tend to spread like a cancer into other currencies.)

Don't forget we have a major three year cycle low coming due next year in the dollar. Just on a cyclical basis the dollar is due to start moving down into that low. But we definitely have a fundamental driver for the move in the Fed's insane monetary policy. Trust me Bernanke isn't going to get off scott free from his printing spree. The market is going to make him pay a terrible price for his foolishness.

That price may be about to come due.

Needless to say once the cancer spreads into the dollar it is going to power the next leg of the ongoing C-wave in gold.

Now isn't the time to let emotions control you, the correction in gold could end at any time. If you aren't on board you will quickly find yourself chasing an overbought market.

Now more than ever investors need to heed Old Turkey's wisdom.

MARKET TOO OVERSOLD TO PRESS THE SHORT SIDE

I noted in yesterday's daily update that we should be nearing not only a daily cycle low but an intermediate cycle low any day now. (the February intermediate bottom came on a reversal off the jobs report. Guess what's coming on Friday?).

Not only that but sentiment is again back to bearish extremes. We are even starting to see the haters & trolls appear again on the blog (generally a pretty good sign of an impending bottom), although not as much because gold and miners have for the most part completely decoupled from the stock market.

Not withstanding all of that the market is now just about as oversold as it was in March of `09. There are only 27 stocks in the S&P trading above their 50 DMA.

You can see from the chart these kind of oversold levels always  spawn some kind of bounce and often bear market rallies begin out of these kind of oversold levels.

Considering how late we are in the intermediate cycle the market is due to put in an intermediate level bottom at any time.

Now just isn't the time to get brave and press the short side. Much safer to just let that trade slide on by than risk getting caught in an explosive bear market rally or a continuation of the cyclical bull which ever the case may be.

1-2-3 REVERSAL, LOW RISK ENTRY

The S&P may be in the process of forming a 1-2-3 reversal. It broke the down trend line during the recent rally and is now in the process of testing support. For you trader types this is the lowest risk entry on the long side. You could place stops slightly below the previous lows at 1040 and risk less than 2% on the trade.

If the market does hold support and rally from here your risk reward ratio would be very large. There are large momentum divergences forming in RSI and and MACD.

Hint: The least risky trade is to buy below support. If you end up being wrong your risk is even less than 2% and you may catch the bottom of a 2b reversal.

PATIENCE

If you are one of those people who absolutely loath ever taking a draw down then you might want to wait a bit before jumping in with both feet.

Gold is due for a daily cycle low any time now. It is possible that the low formed last Wednesday.

I would like to see a more decisive decline to mark a cycle low though. If you are a long term "OldTurkey"  type investor just ignore the daily cycles. But if you are still trying to enter positions with as minimal draw down as possible you might wait a bit and see if gold experiences a larger drop this week into a more normal daily cycle low.

HOW WILL WE KNOW?

Question: How will we know when the bear has returned?

Well, for one, the market will break back below a yearly cycle low initiating a series of lower lows and lower highs. This year that cycle low was set in February.

But didn’t the market break that low during the recent correction?

Well yes and no! The S&P and Dow did both marginally break below the February lows. However a big part of the weakness that dragged these two indexes down was due to crumbling energy stocks as the mess in the gulf unfolded.

The rest of the market held above the February lows. Some like the transports comfortably above those levels. I tend to think if the economy was ready to fall back into recession again we would be seeing a lot more weakness in the trannies.

The banking industry has also held up quite well during the recent crisis. Surprising since it was the failing European financial sector that has been blamed for the current market swoon. If the financial sector is collapsing again how come the banks are holding above the February lows?

 

 
So we are kind of up in the air right now on whether we are indeed making lower lows.
 
The next thing I would need to see before I would be willing to call another leg down in the secular bear would be a Dow Theory sell signal. In order for that to happen both the industrials and the transports would need to break below a secondary low point. I think we just put in that low a few weeks ago. So if the Dow were to close back below the June 8th low of 9939 and it was confirmed by the transports closing below 4089 then I would have to say it’s time to hunker down bad times are a comin’. (They are surely coming eventually - we are just trying to get the timing right.)
 
Then the final straw would be for the 50 day exponential moving average to cross back below the 200 and for the 200 to turn back down.
 
Obviously none of these things have happened yet. Until they do it’s just too early to get beared up.

GOLD BUBBLE? WHAT BUBBLE?

We continue to hear pundits describe gold as a bubble. Certainly it will turn into a bubble before this is all over but we are hardly in the bubble stage yet. In order for a bubble to form you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they "catch on". It took 18 before they noticed the tech bubble.

Once they do start to "get it" we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. See the Nasdaq chart below from late 98 to March of 2000.

At gold's top, half of your neighbors will be buying gold (not selling like they are doing now).

At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in.

At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals.

At the top the guy standing next to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins.

At the top everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless.

At the top the population will believe that we have to go back on a gold standard.  By the way, a gold standard never stopped any country from debasing its currency. In ancient Rome they clipped some of the gold out of the coins. Roosevelt confiscated and arbitrarily revalued gold in the 30's. A gold standard will not prevent a government from trying to get something for nothing by debasing the currency.

At the top stocks will be universally hated and gold universally loved. In reality, stocks will at that time, represent true value. Much more so than a shiny metal with virtually no industrial uses. 


At the top smart money will eventually come to their senses and realize that true value (profitable companies making the necessities for life on Earth) are being given away for pennies on the dollar to purchase a shiny metal that really has no intrinsic value.

Here is a chart of the Nasdaq followed by a chart of gold. You tell me, does gold look like a bubble yet?

Of course not!

I think we might be getting close to the Nasdaq 1998 level, but gold is hardly in the runaway parabolic stage where it rallies over 100% in a year. Not to mention that none of the other signs I noted above are even remotely present yet.

But no one needs to worry about a bubble just yet.  We need to have at least one more serious correction similar to what happened in `08 or in tech stocks in 1998 to wash out bullish sentiment before we can start the final parabolic run into a true bubble top.

If I had to guess I would say that will occur during the next liquidation event which should be due in mid to late 2012 as the stock market collapses down into the third leg of the secular bear market.

That should mark the next four year cycle low and possibly the nominal bottom for the secular bear market in stocks that began in March of 2000. I expect the selling pressure at that climactic event will also drag gold down into the correction that should separate the second phase (what gold has been in since early '06) from the third and final bubble stage. Gold will quickly recover, like it did from the last selling climax, and when it does this is when we will see the public begin to panic into gold.

Then and only then can we start talking about a bubble.

At the moment I think we are about to enter the second leg of an ongoing C-wave advance that began in September of last year. I'm expecting this leg to take gold to the $1400-$1500 level before experiencing a major D-wave correction.

I'll be monitoring the advance on a daily basis to keep subscribers appraised of where gold is in its intermediate cycle. When I think we are getting close to the top of the C-wave I'll warn subscribers to take profits and exit the precious metals market so as not to get caught in a D-wave correction.