BULLS STILL IN CONTROL, BUT TIME IS RUNNING OUT

In last week's article "Three Weeks Left" I outlined a brief synopsis of what I was expecting based on how the daily cycles were unfolding. So far markets are playing out pretty much as anticipated.

This week I'm going to go a bit more in depth and tie cycles analysis with the upcoming fundamental calendar, namely the next two FOMC, and Jackson Hole meetings.

As you may recall from the last article, the dollar index is in the process of moving down into an intermediate degree bottom, which in turn is triggering a rally in virtually all risk assets, most noticeable in the energy and grain sectors as the CRB exploded out of its three year cycle low.

I think we will probably see the dollar continue to drift generally lower for most of the remainder of this month, possibly even into the Jackson Hole meeting as traders continue to hope for the next round of QE.

When the Fed fails to deliver, which they almost certainly will, we should see the market start to move down into its daily cycle low, which coincidentally is due almost exactly on the September FOMC meeting.
 

The September FOMC meeting will be the opportunity for the Fed to shorten the stock market intermediate cycle and possibly abort most of the move down into the yearly cycle low due in October. However I think the Fed is probably going to balk at the September meeting also, and when they do it will initiate the real move down into the normal timing band for an intermediate, and yearly cycle low in late October, or early November.

I suspect that the Fed will finally cave at the October meeting and begin an open ended QE with the misguided goal of achieving a nominal GDP target and lowering the unemployment rate. The one caveat would be that the Fed meeting in October would call for a slightly short stock market daily cycle, which is not unusual if the market is experiencing a hard decline.

Another possibility, although one with lesser odds in my opinion, would be a final intermediate, and yearly cycle low on the November employment report, or the presidential election results which would stretch out the daily cycle to its normal duration of 35-40 days.

Based on the current cycle count, and taking into account the timing band for the next two FOMC meetings, and the dollar's current intermediate cycle we should trigger a top in the stock market sometime around the end of August. However let me warn bears that the move down into the intermediate bottom is not going to be an easy short. I expect we will see most of September chopping back-and-forth with several retests of the highs before finally rolling over. Most of the losses will probably come in the final 5-10 days before the bottom. Like I said not an easy market for bulls or bears either one.

Gold is a bit of a different animal than the stock market and its intermediate cycle has a different duration. But gold is still tethered to the dollar index as it continues working through the consolidation phase of this new C wave. Here is a chart I posted back in February depicting the extended consolidation that I was anticipating this year.

Considering that gold is still in this consolidation phase I think we are probably going to see a test, or more likely a break of the D-Wave trendline as the dollar completes its move down into its intermediate cycle low later this month. That should be followed by an intermediate decline that should bottom ahead of the stock market in mid to late September.

At that point I suspect gold will start to sniff out the next round of QE and will begin to resist the remainder of the dollar rally, very similar to what happened between May-July.

Open ended QE, which I expect to begin at the October FOMC meeting (there is a small chance that the Fed will act early in September), is going to be the driver of what should be an inflationary spiral, culminating with a parabolic move in the CRB and the next leg up in the secular gold bull (probably to $3500-$4000) as the dollar drops down into its next three year cycle low in mid-2014.

SMT newsletter.

3 WEEKS TO GO

3 weeks, that's how long the bulls have left before stocks roll over and begin the next intermediate degree decline. That being said the next 2-3 weeks we should see some very healthy gains in virtually all asset classes. Why is that you ask? Because the dollar has begun moving down into an intermediate degree correction.

As of Friday the dollar was on the 11th day of its current daily cycle. The normal duration of a daily cycle is 18 to 28 days, with the average being about 23 or 24 days. That would suggest that the dollar should bottom somewhere around August 21st or 22nd. As you can see in the chart below whenever the dollar moves down into an intermediate degree trough it generates strong gains in asset prices.

What follows once the dollar bottoms and the next intermediate degree rally begins is not going to be pretty. Stocks are going to start to struggle and ultimately move down hard in September and probably October if the Fed doesn't unleash QE3 at the September FOMC meeting.  

By the end of August, and certainly by the time we get into September the markets are going to call central bankers bluff, and it is going to take more than words and the threat of quantitative easing to keep asset prices propped up.

I have covered the rest of the forecast in depth in the weekend report available to premium subscribers.

I will again offer the $1 two day trial subscription to traders that would like to sample the premium newsletter. If you like the newsletter do nothing and it will automatically convert to a monthly subscription when your two day trial expires. If you decide the newsletter isn't for you just cancel your subscription by following the directions on the homepage before your trial expires.

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Comment Cleaner

Just as I expected the stock market is back knocking on the door to new highs. My expectation was for the Fed to do nothing. The ECB I really had no idea. But I was looking for a couple of days of mild selling following the Fed statement and then a resumption of the intermediate trend.


I said last week when the bears started calling for a new bear market that it was too early in the daily cycle for stocks to top.


Mark another victory for cycles :)

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WEEKEND REPORT

I think the next couple of weeks and next Fed meeting are going to be a biggie. I've laid out the scenarios in the weekend report. I've also opened a $1 trial subscription for two days so everyone can access the report.

If you don't wish to convert to a monthly subscription just make sure you cancel auto renew before the second day by following the directions on the home page. 

Offer closed.

TOO CLOSE TO CALL

Is it a bear market, or is it a bull market, that is the question.

On one hand Europe is obviously in a recession. China is slowing dramatically, and the US economy is clearly in stall mode at best, and slowing rapidly at worst. That alone would suggest that a bear market has begun.

On top of that, the S&P broke through its daily cycle trendline today (although it did manage to rally back before the close).

A break of the trend line usually indicates that the daily cycle has started its decline into a cycle low. If this turns out to be the case, then this cycle would have topped on day 21 which gives it quite a few days to move down into the cycle bottom. (Average daily cycle length trough to trough is about 35 to 40 days.) If it does turn out that the cycle topped on the 21st day then there is a strong chance of testing the June lows at the next cycle bottom. 


As a matter of fact I think if we break below the June 25th half cycle low it will indicate that the intermediate cycle has topped and we should break below the June bottom if not during this daily cycle then probably a sharp break below that level during the next daily cycle.


On the other hand there are quite a few bullish signs that are popping up.


For starters this is an election year. Does anyone really think that the politicians won't pull out all the stops to try and keep the economy and markets inflated until the election?


Next; the advance decline line managed to make a new high even though the S&P was still 3% below its 52-week high. As Jason Goephert at sentiment trader.com has pointed out, this has almost always lead to new highs. As a matter of fact Jason noted that since 1940 there have been 13 similar occurrences and all but one led to the market making new highs within 3 months, on average within 18 days of the advance decline line breakout.

Another positive is that the CRB's rally out of its three year cycle low appears to be consolidating in a bull flag in preparation for another leg up. If stocks are caught in a bear market then the CRB should be rolling over rather quickly.

Oil is also resisting the short-term weakness in the stock market and appears to be consolidating the initial $10 thrust off of its intermediate bottom, and preparing for another leg up.

A different but related vein of thought is the US dollar index. Today was the 16th day of the dollars daily cycle (average duration 18 to 28 days). Which is just to say that it's getting late enough in the cycle that the dollar should start to move down again any time now. And a major concern for bears would be any move lower by the dollar as risk assets tend to trade inversely.


An even bigger concern is dollar sentiment. It's currently at levels that have generated intermediate tops almost without fail in the past.

Chart courtesy of sentiment trader.com

The fact that we still haven't seen a left translated daily cycle out of the dollar makes me think that the dollar still has an intermediate decline ahead of it. Considering that this week would be the 17th week in an intermediate cycle that usually runs 18 to 25 weeks and there's a good chance that this sentiment extreme is going to force an intermediate top as soon as this daily cycle runs out of steam.

A possible negative is the fact that gold seems unable to gain any upside traction in this new intermediate cycle. If the CRB has formed a three year cycle low why isn't gold generating any upside momentum?

If gold were to drop below $1547 it would indicate that a left translated daily cycle is in progress, and as many of you know a left translated daily cycle often indicates that the intermediate cycle has topped as well.

Another negative is the fact that mining stocks as represented by the GDX ETF did move below their prior daily cycle bottom. The one small sign of hope is the reversal today, which if it holds above the May lows could indicate that miners are just moving through a 1-2-3 reversal and this was just the #2 test of the lows.

Of course we won't know whether this is in fact what is happening until miners either break below the May bottom or move back above the June high. For the bulls the S&P needs to move above 1375, The CRB must generate another leg up, and gold must make a higher high by reclaiming the $1622 level. Those are the bullish lines in the sand.


For the bears they need to see the stock market drop below the half cycle low of 1310, The CRB must break downwards out of the consolidation, and gold has to drop below $1547.


I think the appropriate position for traders at the moment is to stay in cash until we see which one of these lines are going to be crossed first.

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