Is it a bear market, or is it a bull market, that is the question.
On one hand Europe is obviously in a recession. China is slowing
dramatically, and the US economy is clearly in “stall mode” at
best, and slowing rapidly at worst. That alone would suggest that a bear
market has begun.
On top of that, the S&P broke through its daily cycle trend line
Thursday (although it did manage to rally back before the close).
A break of the trend line usually indicates that the daily cycle has started
its decline into a cycle low. If this turns out to be the case, then this
cycle would have topped on day 21 which gives it quite a few days to move
down into the cycle bottom. (Average daily cycle length trough to trough is
about 35 to 40 days). If it does turn out that the cycle topped on the 21st
day then there is a strong chance of testing the June lows at the next daily
As a matter of fact I think if we break below the June 25th half cycle
low it will indicate that the intermediate cycle has topped and we should
break below the June bottom if not during this daily cycle then probably a
sharp break below that level during the next daily cycle.
On the other hand, there are quite a few bullish signs that
are popping up.
For starters, this is an election year. Does anyone really think that the
politicians won't pull out all the stops to try and keep the economy and
markets inflated up until the election?
Next, the advance-decline line managed to make a new high even though the
S&P was still 3% below its 52-week high. As Jason Goephert
at sentiment trader.com has pointed out,
this has almost always lead to new highs. As a
matter of fact, Jason noted that since 1940 there have been 13 similar
occurrences and all but one led to the market making new highs within three
months, on average within 18 days of the advance-decline line breakout.
Another positive is that the CRB's rally out of its three year cycle low
appears to be consolidating in a bull flag in preparation for another leg up.
If stocks are caught in a bear market then the CRB should be rolling over
Oil is also resisting the short-term weakness in the stock market and
appears to be consolidating the initial $10 thrust off its intermediate
bottom, and preparing for another leg up.
A different but related vein of thought is the US dollar index. Thursday
was the 16th day of the dollar’s daily cycle (average duration 18 to 28
days). This being the case, it's getting late enough in the cycle that the
dollar should start to move down again any time now. A major concern for
bears would be any move lower by the dollar as risk assets tend to trade inversely.
An even bigger concern is dollar sentiment. It is currently at levels
that have generated intermediate tops almost without fail in the past.
Chart courtesy of sentiment trader.com
The fact that we still haven't seen a left translated daily cycle out of
the dollar makes me think that the dollar still has an intermediate decline
ahead of it. This week will be the 17th week in an intermediate cycle that
usually runs 18 to 25 weeks and there's a good chance this sentiment extreme
is going to force an intermediate top as soon as this daily cycle runs out of
A possible negative is the fact that gold seems unable to gain any upside
traction in this new intermediate cycle. If the CRB has formed a three year
cycle low why isn't gold generating any upside momentum?
If gold were to drop below $1,547 it would indicate that a left
translated daily cycle is in progress and, as many of you know, a left
translated daily cycle often indicates that the intermediate cycle has topped
Another negative is the fact that mining stocks as represented by the GDX
ETF did move below their prior daily cycle bottom. The one small sign of hope
is the reversal Thursday, which if it holds above the May lows could indicate
that miners are just moving through a 1-2-3 reversal, and this was the #2
test of the lows.
Of course we won't know whether this is in fact what is happening until
miners either break below the May bottom or move back above the June high.
For the bulls, the S&P needs to move above $1,375, the CRB must
generate another leg up, and gold must make a higher high by reclaiming the
$1,622 level. These are the bullish lines in the sand.
The bears need to see the stock market drop below the half cycle low of
$1,310, the CRB must break downwards out of the consolidation, and gold has
to drop below $1,547.
I think the appropriate position for traders at the moment is to stay in
cash until we see which one of these lines are going to be crossed first.