MAJOR TOP IN STOCKS & MAJOR LOW IN GOLD

For months and months now I've been warning traders that QE3&4 were going to have a major effect on stocks. I knew that analysts claiming that each new QE was having less and less affect would not apply to this latest round of quantitative easing.

I was confident the latest counterfeiting operation by the Fed would push stocks to at least test the 2007 highs, and I really expect we will see a marginal break above that level sometime this year. Probably by the end of the month. My current guess is that we will get a sell the news type of event as soon as the sequestration can is kicked down the road and that will mark the top of this particular intermediate cycle.

Make no mistake though we are still in a secular bear market. Stocks are testing their all-time highs at the same time earnings are in decline, GDP has turned negative, and unemployment is starting to tick up.

It has been my expectation that the stock market would put in a final top sometime this year. I also expect this will be a very extended and difficult topping process lasting months if not a year or more.

During this topping process I expect to see an inflationary surge very similar to what happened in the oil markets during the 2007 top.

Notice the breakdown in early 2007 that convinced everyone that the bull market in oil was finished. This set up a massive parabolic move into the 2008 blowoff top.

This time however I don't think it's going to be oil leading the inflationary charge. In order to generate that kind of move we need something that has formed a long consolidation similar to what happened in oil, and preferably an asset that has declined long enough and far enough to push sentiment to negative extremes capable of convincing everyone that the bull market is over. Those are the conditions necessary in order to generate a massive parabolic move over the next two years.

The only asset that qualifies in my opinion is the precious metals markets. 

The breakdown after the QE4 announcement, and now the extreme move into a yearly cycle low has, I daresay, convinced everyone that the gold bull is over. I would argue that it is impossible for the gold bull to be over as long as central banks around the world continue to debase their currencies. Gold is just creating the conditions necessary for its next leg up, similar to what oil did in early 2007.

A very similar pattern to what happened in oil is also unfolding in the gold market. I'm talking about the T-1 pattern that formed in oil during 07-08.

Here are the rules of T-1 pattern for those not familiar:

T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. 

I think the gold chart is setting up to produce a monstrous T-1 pattern with a target around $3200 sometime in the late 2014 or early 2015.

Investors just need to get through the bottoming process of this yearly cycle low. Considering that gold is now on the 15th week of its intermediate cycle, which usually lasts about 18-25 weeks we should be getting close. 

Actually we are probably closer than it appears by that previous statement. The last intermediate cycle ran a bit long at 25 weeks. Long cycles are usually followed by a short cycle. So I would expect this cycle to run a bit short at 16-18 weeks.

All in all, I expect a final bottom sometime in the next 5-10 days. And once that bottom has formed gold should be ready to break out of the consolidation zone it has been in over the last year and a half and get busy delivering the second leg of that T-1 pattern.

THE REST OF THE STORY

I see a lot of people lately agonizing over what we should have done. By that I mean it’s obvious to all by now that the correct move was to buy stocks back in November instead of precious metals and miners. I mean seriously, it’s obvious that liquidity was going to flow into every asset class except precious metals. Well it’s obvious now in hindsight anyway.

Of course everyone has conveniently forgotten how tough it was coming out of that November low. There were ongoing concerns about the approaching fiscal cliff, not to mention a significant sell off as we approached the end of the year. Once the fiscal cliff was resolved the markets rallied violently. Of course no one was positioned ahead of the rally because there was the risk that politicians wouldn’t make a deal. So the upshot was almost everyone missed the first day, and virtually no one was expecting a second day of huge gains.

So by that time the market was overbought and right up against resistance at the September highs. It’s pretty tough to buy into an overbought market that is butting up against a major resistance level, so I don’t think anyone could be faulted for abstaining at that point. Once the market broke through 1475 it only took five days for it to reach the next resistance level at 1500. So if you didn’t buy immediately you missed that move also.

At that point we moved into the timing band for a half cycle low. Again, probably a dangerous time to be initiating long positions. Unfortunately the market didn’t give us a half cycle low and continued higher, with two strong down days thrown in to keep traders off-balance.

It’s easy in hindsight to rationalize the correct trade, but as I have just shown, tough to do in real time.

Next I’m going to show you a market progression. Imagine you are experiencing this in real time.

In August of 1990 the stock market stagnated, formed a double top, and proceeded to plunge sharply below the 200 day moving average. At this point, as we’ve heard many times, chartists were screaming that the market was clearly headed down.

 
Imagine your emotions on that Thursday in August. Realistically, how many people would have been able to pull the trigger and buy at that point? The answer is, not many.

But buying on that Thursday, even though one’s emotions were screaming sell, was the correct move.

 
Or was it?

Well after two weeks the market certainly appears to be building a base for another leg higher. At this point, although almost certainly nervous, one could probably rationalize adding to positions.

 
So let’s see how that worked out.

 
Holy crap! That was a mistake. A huge freaking mistake. Sell, sell, sell!

Whew, that was a close call.


Son of a b***** no sooner did the market break down then we get a strong reversal candle followed by another reversal candle five days later. I have to say, it looks like we finally hit a bottom. Buy everything back.

 
You’ve got to be kidding me! Wrong again. This is obviously a bear market, time to sell short.

 
A couple of days later; Time to add to shorts.

 
A week later; This sure looks like we finally made the right decision, as this is clearly a bear market, and obviously about to begin the next leg down.

 
But did one really make the right decision? Remember this was a secular bull market.
As Paul Harvey used to say, now let’s look at the rest of the story.

 
As you can see, clearly this was the buy of the decade, although actually doing so and holding through that bottoming process was agonizing to say the least, or more likely virtually impossible.

So might I suggest that when the gold bull becomes too frustrating, and you’re ready to give up, you come back and review that 1990 bottom.

Bull markets never make it easy. Very few traders have the determination, stamina, foresight, and focus to make it all the way through one. But the rewards for the very few that can weather every punch the bull dishes out… are huge.

Weekend report

Considering the extreme complacency in the stock market, (I’m starting to hear multiple calls for a new secular bull market) it would probably be fitting that the next crisis is now sneaking up on us completely out of the blue as the Japanese currency begins to collapse. By the way secular bear markets don’t end until PE ratios reach extreme levels of undervaluation. Notice in the lower chart the extreme levels from which this bear market began (PE’s above 40). I think we can safely assume that this bear market is not going to be any different than any other one. 

It certainly didn’t end with a PE ratio of 15 when every other bear market in history ended below 10 and every one of them began from much lower valuation levels (usually with PE ratios about 20-25). This bear market has much bigger excesses to clear than any other bear in history. The rubber band got much further stretched to the upside this time. Normal regression to the mean forces will demand that the bear market should be deeper and more severe than probably any other bear in history.


So I don’t think we need to take anyone calling for a new secular bull market in stocks seriously. I think we all know this is about currency debasement, as there is no new technology to drive a new secular bull market yet.

I warned traders that we were about to enter the euphoria phase of the cyclical bull. This is an ending phase by the way. But the end of a bull can span many months and even a year or more, which is why I keep warning the shorts to be patient.

More in the weekend report. 

HAS THE FIRST CURRENCY CRISIS BEGUN?

As many of you who have read my work in the past know, I expect the eventual endgame to this whole Keynesian monetary experiment that has been going on ever since World War II, to finally terminate in a global currency crisis. I'm starting to wonder if we aren't seeing the first domino start to topple.

I'm talking about the Japanese Yen of course.

I think everyone just naturally assumes that the Yen is dropping in response to Prime Minister Abe's intent to imitate US policy and print it's way out of its troubles. The problem with this strategy is of course, eventually you will break your currency. Japan is in a particularly tenuous situation in that their debt to GDP dwarfs most of the rest of the world. The only hope they have of servicing this debt is for interest rates to stay basically at zero. 

Any move by interest rates above this artificially low level and Japan's debt becomes unserviceable, without resorting to a greater and greater debasement of the currency. Unfortunately that will also result in an acceleration of the collapse of the currency, which would just cause Japanese bonds to be sold even more aggressively. A nasty catch-22 situation.

At this point there is no way out for Japan. The only question is when will the endgame arrive. Japanese bond bears have been asking themselves that question for almost 2 decades. 

The recent move in the Yen has started me wondering if that end game hasn't now begun.

In the chart below I have marked the successive yearly cycle lows with blue arrows. As you can see this major cycle bottom tends to arrive between March and May most years. If the 2013 yearly cycle low arrives in the normal timing band, then there may be a big problem developing with the Japanese currency. The reason I say that is because the Japanese Yen is basically already in free fall and we may still have another one-three months to go before a final bottom.

Another warning sign is the fact that this decline cut through not only the 2012 yearly cycle low, but also the 2011 yearly cycle low and never even blinked. In an orderly decline both of these levels should have generated at least a decent bear market rally. In my opinion, it's very worrisome that the Yen didn't even slow down as it moved through these major support levels.

The next major support level is at the 2010 yearly cycle pivot. If the Yen slices through this support level also, then I think we have a major currency crisis on our hands.

Needless to say if the world sees a major currency collapse, which up to this point I think most people would consider to be an absurd idea, it's going to spark a panic for protection. Despite stocks entering the euphoria stage of this bull market, stocks are not going to protect one from a currency crisis. Only hard assets will do that, and the two hard assets that are best at protecting one's wealth are gold and silver.

Wouldn't it be fitting that at a time when gold and silver are about to be most cherished, they are now completely loathed by the market?

THE CHARACTER OF THE MINING SECTOR IS CHANGING

The big news for Thursday is that gold formed a weekly swing. Considering that the QE4 manipulation stretched the intermediate cycle way beyond its normal timing band, this weekly swing should confirm that the yearly cycle low is complete.

 
We did see profit-taking come into the market as soon as gold tagged its 50 day moving average. I don’t see anything unusual in that, as gold has delivered a 75 point rally in only nine trading days. The 50 day moving average is a logical place for short term traders to lock in some profits.

On another note, this was the third attempt in two weeks by the shorts to drive gold down. It worked for a couple of weeks after QE4 and even for two days at the beginning of January, but I think the complete failure today to hold gold down against its natural trend is probably the signal that the market has broken the short-term manipulation. I think any further attempt at short-term manipulation and the shorts are just asking to get their head handed to them. Shenanigans are not out of the ordinary on options expiration. So we could very well see another attempt to drive gold down on Friday. If this one fails also, and it probably will if the dollar is falling, then I don’t think it will be long before the gold chart starts to look like the platinum chart.

 
Next I want to discuss the mining stocks. It seems everyone has an excuse for why the miners have underperformed lately. Needless to say I don't really buy any of that nonsense. However I am as confused as everyone else to come up with a reasonable explanation for why miners continue to sell for these ridiculously cheap valuations.

Whenever I am confused, usually the first thing I do is pull up a very long-term chart so I can get a feel for what is really going on, and eliminate the distraction of the day to day wiggles. I think we are all wondering when the miners are going to join the party as it certainly appears that gold and silver both have formed major yearly cycle bottoms.

What I saw was quite a surprise. The character of the mining sector has changed completely. For the first time in this bull market miners are forming a rounded base instead of the typical V-shaped bottom. A rounded bottom is a much more powerful basing structure than a V-shaped recovery.

If you believe like I do that gold is going to  $3500 - $4000 over the next two years, then I would have to say there is no way it is going that high without taking the miners with it. As a matter of fact, I don’t think there’s any way gold goes to even $1900 without taking the miners with it.

 
The complete loathing & disgust that we are seeing for the mining sector, coupled with the character change in the bottoming process is the setup in my opinion, for a huge move in this asset class over the next two years.

I can’t tell you exactly when the move will begin, but like I said, I don’t believe for a second that gold is going to $4000 without taking the miners along for the ride.

For what it’s worth, I saw the exact same sentiment in silver back in August of 2007. When silver broke through its last support level everyone threw in the towel. As you can see from the chart that was the exact moment one should have been buying, or if you already had positions, it was a huge mistake to get knocked off the bull.

This is just another example of technicals not working in the volatile precious metals sector. I’m pretty sure every technical trader in the world sold when silver broke through that $12 support level. It caused them to miss an almost 100% rally over the next six months.

 
If you believe in the bull market, and I think most everybody here does, as I tend to focus on gold, and I suspect that is the reason most people bought a subscription in the first place, then all one needs is the patience to let the bull run its course. If you get sidetracked like the silver traders in the summer of 2007, you aren’t going to do yourself any favors.

If you are here to ride the bull market, then ride it and don’t worry about whether or not you made money today or yesterday. The only thing that makes any difference is how much money you make by the time the next C-wave tops, and that has nothing to do with what happened this week, last week, or last month. It has to do with what is going to happen over the next two years. If I’m right about where gold is going then it is definitely going to be worth the hassle of letting the miners complete this rounded base, because the upside once it’s finished is huge.

If you don’t believe in the bull market then you probably have the wrong newsletter. My goal isn’t to make a couple of percent trying to jump in and out of momentum stocks. My goal is to double or triple your portfolio by 2014. However, I can’t do that unless you have the patience to hold on through all of the bulls tricks and curve balls. I can keep subscribers focused on the big picture, but patience is something everyone has to learn on their own.

I can say that the traders that had it during the last C-wave were well rewarded.

January 12 Weekend report

I realize that this extended (and somewhat manipulated) move into a yearly cycle low has frustrated most investors to the point where they have no more patience left, and have lost sight of the big picture. So I am going to go over it again, because I think it is a huge mistake to lose sight of the reason why we are investing in this sector to begin with.

To start, I’m going to assume that gold will drop down into another eight year cycle low pretty much on schedule sometime in late 2015 to mid 2016. As long as that assumption is correct then I think we also have to assume that there is another C-wave advance between now and then.

The reason I say this is because all markets are governed by the forces of action and reaction. Hence in order for gold to drop down into a correction severe enough to be considered an eight year cycle low, it first has to generate a rally big enough to trigger a profit-taking event of that magnitude.

So let’s begin by looking at the last three C-wave advances and the corrective action that followed each one...

That is a small sample of the latest  Weekend report.

In all fairness I have been warning traders that this was coming. This is a chart I posted to the blog on November 24 2011.

Frustrated gold bugs may want to read the entire weekend report before you throw in the towel on the sector. The 16 month correction is completely normal and should soon generate another huge leg up in this massive bull market. 

I will reopen the $1.00 two day trial subscription  for anyone interested in reading the report. If you decide you want to continue accessing the nightly reports do nothing and the trial will automatically convert to a monthly subscription after the second day. If you are only interested in reading the weekend report just cancel the subscription by following the directions in red print on the home page before the second day expires.  

OFFER HAS EXPIRED 

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.