Stocks:
It looks like the S&P is going to try very hard to tag that 50% retracement level (1120) this week. Since there still was no selling into strength today I expect we may consolidate for a day or two and then make a stab at that level by the end of the week. That would put the market in position to drop into the half cycle low towards the end of the month. If we see one of those really big negative money flow days somewhere in here then I’m going to assume this will turn into a sharp intermediate decline. One that should break below the half cycle low and maybe below the last daily cycle low of 1029.
I would caution anyone who is going to attempt to short this decline to only do so if we see a large negative money flow day. Hey I would want to see the big money (think Goldman) exiting the market too before braving the short side wouldn’t you?
Dollar:
Ok we got our lower low that we were expecting. Now that we are in the timing band for what should be an intermediate bottom we just need to watch for a swing low. That will come tomorrow if the dollar can move above 75.31. But whether it comes tomorrow or sometime next week it is becoming increasingly dangerous to be long. When an intermediate cycle bottoms you usually get a huge wave of short covering and the initial rally tends to be explosive. Look what happened in June when the intermediate cycle bottomed. I think the dollar is getting ready to shake out all the late comers in the precious metals and stock market real soon. Gold: Here’s the one thing that I think is most important with today’s move to new highs. Gold has now moved into week 19 of this intermediate cycle. There has only been one other cycle that managed to rally this long and that was the first leg up in the `06/`07 C wave. Unless this is the final move of the secular gold bull market (doubtful) then I think we will see an intermediate decline this time just like we have every 15-24 weeks for the last 9 years. Just like intermediate bottoms suck everyone into believing the correction is going to continue for the foreseeable future so do intermediate tops, especially ones that last 19 weeks. And I’ve got to say it sure seems like a lot of investors can only see blue skies ahead. Now let me throw this out there for you to ponder. As hard as it is to take some off the table now and then watch the market continue higher it’s going to be one hundred times harder to do at a C-wave top. But if you don’t do it you run the risk of getting dragged down into a D wave decline and trust me at the bottom of a D-wave fear and panic is going to override any common sense and I can assure you that 99% of you will be unable to avoid the urge to sell at the bottom. Consider this a small practice run for when we have to exit the C-wave. Plus keep in mind we’ve only trimmed ¼ of our positions. We still have a big portion invested to catch any further advance. Next let’s look at the daily charts (only because I want to look at the 200 DMA). Remembering that we are on week 19, gold is now stretched 19% above the sharply advancing 200 day moving average. That’s even more stretched than the top of the A wave. Now granted at the top of this C-wave we are probably going to see gold stretched 30-40% above the 200 DMA. The problem is there’s no way this is the top of the C-wave. Not even close. That will come with the next intermediate cycle top. But in order to get that leg up we need an intermediate decline to separate the two cycles. When I look at that weekly chart I only see three small one week declines. None of those qualify as an intermediate correction in my opinion. The daily chart of the miners is in a similar situation. There’s no way gold is at a final top but miners are now stretched 32% above the sharply advancing 200 DMA. We are getting into levels that have marked C wave tops or tops in first legs of C waves. Not to mention the HUI is now butting right up against that huge resistance level (475-480). And again don’t forget this is week 19 of the intermediate cycle. These are not the levels that one wants to be shifting into 5th gear. It’s more likely there’s a sharp curve up ahead and we need to be taping the brakes. At this point I’m going to use a heavy selling on strength day as a sign to exit the other ¼. Every intermediate correction since 05 except one has been marked by one or more of these negative money flow days at or close to the top. The odds are pretty good we will see one here too as soon as the big money is ready to exit this market. Here’s another bad sign. We now have a large gap on the GDX. I don’t think for a second this gap signaled a fundamental change in the market like the one in September when gold broke out of the triangle consolidation. This gap was purely emotional trading as everyone is beginning to feel euphoric that this will continue for the foreseeable future. This is about the time dumb money enters and then starts calculating just how rich they are going to get. Needless to say it rarely works that way. Actually I’m going to say that we desperately need a sharp correction and soon. We need to scare the bejeepers out of all the gold bugs. As a matter of fact the more scared they get the better. If gold can correct enough to turn all this optimism into black pessimism we will then be set up for the second leg of this C wave. A leg that I suspect is going to be like nothing we’ve seen yet in this gold bull. The thing is it’s not going to be born out of this kind of euphoria. Monster moves are born in the depths of despair. Gold needs to create some despair before the second leg can begin. Now I really have no idea if it’s still possible for gold to correct back down to $1000, probably not at this point. But another move back down to that breakout level of $1034 would probably do the trick and shake off just about everyone and set the stage for a huge move higher. Short term indicators are still mildly overbought. Gary www.garyscommonsense.blogspot.com
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