It seems like
most analysts, and gold bugs are now assuming that the reversal on December
29 marked the bottom of gold's D-Wave decline. It's certainly possible that
we saw a bottom two weeks ago but it's still too early to make that
assumption. Gold, and most assets are about to be severely tested. How gold
handles that test will be a big clue as to whether or not its correction is
analysts are overlooking is the impending daily and intermediate cycle
corrections that are coming due in the stock market. When the stock market
moves down into a cycle low, especially an intermediate cycle low, it
generates a tremendous amount of selling pressure. Invariably that selling
pressure bleeds into virtually every other asset class, even gold, as you can
see in the chart below. Over the last two years there were only two daily cycle
corrections in the stock market where gold was unaffected (I've marked them
with green arrows).
market is now in the timing band for a move down into a daily cycle low. As
you can see in the chart below those tend to occur almost like clockwork
about every 35 to 40 days. As of Friday the stock
market was on day 33. On top of that we have a larger intermediate degree
cycle that should bottom sometime in March/April. The selling pressure
generated at an intermediate bottom is much more intense than a mere daily
cycle low. That means sometime around the middle of March or early April
things are going to be looking pretty bleak. My best guess is at that time
interest rates will be spiking in France and maybe the UK (along with all of
the other countries that are already having debt issues).
enough in the daily cycle that there is a good chance the market began that
move down into its daily cycle bottom on Friday, despite recovering most of
the sell off before the close. I say that because we have a coil pattern
playing out in the stock market.
what most people believe, the initial break out of a volatility coil is
usually a false move that is soon followed by a much more powerful and
durable move in the opposite direction. In our case the volatility coil broke
to the upside and by Friday it was already trying to reverse. Once the stock
market moves back through the coil zone it would be very unlikely to recover
those levels until after the next intermediate degree bottom, which as I
pointed out isn't due until March/April.
the next 4-8 days we should see the stock market break its cycle trend line.
It's very rare for a move down into a daily cycle low not to break the cycle
trend line. So for our purposes I think we can probably assume that it will.
If the stock
market just retraces 50% of the daily cycle advance (assuming $1303 is the
top) then we should see a pretty hefty sell off in the next week or two.
That kind of
selling pressure will almost certainly have some effect on gold. If the
D-Wave is still in progress it's going to have a sharp effect on gold,
probably forcing gold back below the $1523 December bottom. How gold handles
the stock market moving down into its daily cycle low will give us a big clue
as to whether the D-Wave has bottomed or not.
stiffer test is going to occur as the stock market moves down into its
intermediate bottom in March/April. If gold can't hold above $1523 as stocks
move into a daily cycle low then it is going to get driven much lower during
the intense selling pressure that will be generated when stocks move down
into a larger degree intermediate bottom.
A couple of
things to keep in mind:
C-wave was the greatest in both magnitude and duration of the entire secular
bull market. Is it possible that a 2 1/2 year, 100%+ rally can be corrected
with only a 38% retracement in four short months?
There is also
the problem with the last intermediate cycle in gold running very short at
only 13 weeks (normal duration is about 20-25 weeks). More often than not a
short cycle is followed by a long cycle that evens out the next larger cycle.
In this case the next larger cycle would be the yearly cycle.
29th did mark an intermediate bottom then we would've had two intermediate
cycles of only 13 weeks each. A short cycle followed by another short cycle
is a pretty rare occurrence. In our present case this would amount to an
exceptionally rare occurrence because the yearly cycle low isn't due until
February/March. If I take into account nothing else I would have to assume
that gold still has about 5 to 6 more weeks before the final D-Wave and
yearly cycle low are formed.
mean that gold has to drop a considerable distance below $1523. If it does
turn out that gold continues lower into a more normal intermediate timing
band I doubt that gold would move below the 50% Fibonacci retracement level,
which is at about $1400. That also corresponds with the extensive
consolidation zone in the summer of 2010.
One other thing
to consider is the powerful correlation of a stronger dollar whenever the
stock market moves down into a cycle low. We should continue to see the
dollar spike higher over the next couple of weeks as the stock market drops
down into its daily cycle trough, followed by a much more powerful rise
during the intermediate degree decline due later in the spring. As you can
see in the chart below gold has had little ability to resist a rising dollar.
So unless you
think that the stock market will never drop down into a cycle low again, or
that the market and the dollar will drop simultaneously (very unlikely), then
gold is going to be severely tested as the dollar spikes sharply higher
during the next few weeks and months while the stock market works its way
down into first a daily cycle low, and then a much more serious intermediate
investors need to be on the sidelines while we wait to see how gold handles
the stock market's move down into its daily cycle low. If gold can hold above
$1523 while the stock market suffers what is likely to be a rather sharp
correction then the odds will improve dramatically that the D-Wave did in
fact bottom in December.
gold follows the stock market down and breaches that $1523 pivot then the
odds are very high that the D-Wave is still in progress and will not bottom
until late February/mid-March.
currently still running the one week, $10 introductory offer for the SMT
premium newsletter. Since we should see the stock market form its daily cycle
low sometime in the next 1-2 weeks now would be a perfect time to sample the newsletter.