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.