Why the Dollar is Key
The move to a lower low on Friday puts the odds squarely in the “one more leg down” camp. I’ve noticed a couple of patterns emerging in the stock market. The first one is the tendency for a market cycle to bottom on an anticipated news event. The last two intermediate cycle lows bottomed on or one day prior to a jobs report.
The second is the tendency for a cycle to bottom only after a fake out earlier in the cycle.
I’ve been expecting a short daily cycle to balance out the extremely long cycle into the May flash crash (62 days trough to trough). But it doesn’t look like we are going to get one. Every cycle has either run late into the timing band or stretched long. So from here on out I won’t be looking for anymore short cycles (which probably guarantees the next one will be).
When the market starts to rally out of that cycle bottom we could see a pretty aggressive move as shorts panic and have to cover. I actually expect this will quickly drive the market above the 1130 resistance level. Then it will just be a question of when sentiment reaches bullish extremes as to whether the market can test the April highs. If we start to see large negative money flows (a sign institutional traders are exiting) prior to bettering the April high then there is a good chance the cyclical bull is on its last legs.
I’m going to spend a good bit of time today on the dollar because it is going to be the key to what I envision unfolding the next few months.
I’m going to start off with the largest 3 year cycle and then work backwards.
The last four major 3 year cycles have all run 3 to 3 1/2 years in length. The current cycle is 2 years and 6 months old. Now there is a chance the 3 year cycle could bottom this fall as the current intermediate cycle bottoms. However that cycle is due to bottom in November or early December. That would leave the 3 year cycle a bit short. For that reason I expect the current cycle to run at least one more intermediate cycle into the March – June time frame. This is a big reason why I think the C-wave in gold may have two legs up instead of just one.
Next let’s back down to the next smaller cycle – the yearly cycle.
A 50% retracement would take gold slightly below $1200. If you remember I was expecting smart money to push gold below the May pivot as the intermediate cycle bottomed last month. I explained at the time how big players routinely run stops to trigger heavy volume sell offs that allow them to take large positions into a very liquid environment. With the benefit of hindsight we know this is exactly what happened.
Now I don’t think gold will be dropping anywhere close to $1155 during this correction, but I do think there are probably plenty of stops to be run below the psychological $1200 level. So I think we can probably look for gold drop below that briefly as smart money again runs the stops in order to panic retail traders into puking up their shares. My suggestion would be for anyone looking to enter or add to positions to do so as gold breaks through $1200.
Let me remind everyone that gold is the single strongest trending market on the board today. It is the only asset still in a secular bull market with unimpaired fundamentals. I did my best last month to convince traders and investors to buy the intermediate cycle low. I suspect many were unable to do so. Those intermediate cycle lows are the single best buying opportunities one gets in bull markets and they only come around once every 5-6 months.
The approaching smaller daily cycle low will be the next best opportunity to get long or add to positions in the one remaining secular bull market. If you missed the last one in July I suggest you not make the same mistake twice.
But as I’ve been saying for a long time it simply isn’t possible to print prosperity. I’ll tell you what else is impossible to control – where the liquidity lands.
Ben would love for all that free money to create jobs, but as we know that just ain’t gonna happen. The next best thing would be for all that liquidity to levitate the stock market. And I think it will to some extent, but there are already problems starting to surface with this plan. Not surprisingly they are the same problems that popped up in `08 as Ben tried to stop the real estate bubble and credit markets from collapsing. I’m sure you’ve noticed the problem by now. That’s right, liquidity is leaking out of the stock market and flowing into the commodity markets.
It’s readily apparent in the above chart that stocks are already struggling as more and more liquidity leaks into commodities. The CRB however is having no trouble what-so-ever responding to the Fed’s printing press. It is rising in lock step with the declining dollar. The fact that the fundamentals are impaired in most commodities just goes to show how much liquidity the Fed is actually dumping on the world.
I expect this pattern to continue and accelerate as the dollar moves into the yearly cycle low. I have no doubt we will continue to see a weaker and weaker response from the stock market leading to more and more panic printing by the Fed causing commodities prices to rise and rise.
Commodities are already trying to tell Ben to shut down the presses. As this continues they will soon be screaming for the Fed to shut off the money spigot. I really don’t expect Ben to hear though. He was deaf to what his monetary policy caused in `08 ($147 oil and the collapse of the economy) and I expect he will not heed the warning signs this time either. Which, of course, just means he will get the same result as last time. Eventually his monetary policy will spike commodity prices, especially oil and probably food, through the roof which will destroy the economy all over again.
I’ve been looking for a swing high to possibly mark the top of the current daily cycle. Gold formed a swing on Friday that I think probably marked a short term top. If gold is now on its way down into the daily cycle low then I tend to think it will probably bottom along with the stock market sometime next week or early the following week.