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One month I wrote a piece titled
"Markets Trapped in a Contracting Fibonacci Spiral - Point of
Singularity in 2019". This was based upon the Fibonacci sequence, 1, 1,
2, 3, 5, 8, 13, 21, 34 etc. One item I forgot to mention was that from the
1932 bottom to 1966 was 34 years and 1966 to 1987 was 21 years...subsequently
we saw the 2000 top (13 years) and then the 2008 top (8 years). This is
rather more than coincidence that every major top since 1932 was identified
by following a contracting Fibonacci sequence. There is no indication for how
long tops last, but in general, corrections are severe...at least 40-50%.
Implications for quickly approaching
the point of singularity implies severe volatility, so do not take positions
where money is required or involve leverage...this could kill you on the
downside and if not, the sleepless nights could take a toll. We are just
beginning to see a sampling of how volatile things are going to get in the
coming years. Timing the tops and getting out before sharp declines will be
critical for ensuring no loss of capital.
At present, we have gold making new
highs, which is likely to have a mid-term top put in place. The US dollar
index has been basing all summer and appears set to bounce higher at some
point over the course of the next 2-4 weeks. If this scenario bears fruit, it
could cause a decline in precious metals, as well as some weakness in related
stocks. Any weakness in precious metal stocks is expected to persist into the
November time frame, while broad stock market indices are likely to have
weakness extend into late November/early January 2012.
Beyond January 2012, the US dollar
index is expected to put in a top around 81-83 and then subsequently decline
through most of 2012 until early 2013 between 65-67
(conservative estimate). During this time, gold and silver may make
new highs, but stocks are expected to do extremely well, particularly gold
and silver stocks. As Treasury Bill rates remain extremely low, individuals
and funds will require trying to find new sources of investment income to
meet their requirements. At some point, this will fly into precious metal
stocks, as the price of gold is now too much for most people run out and buy.
When 2013 does arrive, no one knows
the date that a top will occur...history puts the top in place sometime
between February and March, but it could occur later. When huge volume hits
the market with no increase in share prices, this will be one HUGE INDICATION
that a top has been put in place. The expected 2013 top is likely to be
similar to 2008, except far more rapid in its decline. It likely will be a very
sharp crash that takes 12-18 months to find a bottom. If commodity prices
move higher (i.e. Oil), then this will at some point pop another more recent
bubble and cause short-term deflation. At some point in 2013-2014, interest
rates will likely begin to rise as governments require more financial
stimulus to keep things propped up. Under a deflation scenario, gold and
silver will likely decline in price, albeit not as severely as stocks.
Time going forward between now and
early 2013 will represent a window of opportunity to generate extra cash to
pay down bills and live off of when the wrath of 2013-2014 hits. These two
years will occur during the first two years of the US Presidential Cycle, so
they naturally will be "soft years". When the bottom of the 2013
decline hits, there should be a strong rebound during the latter part of 2014
into 2016, which again will be met by a huge top and a subsequent sell-off.
Analysis of the S&P 500 Index
today will be woven into the above theme to try and more accurately describe
what to expect, on the request of several subscribers over the course of the
past two weeks.
Update of the S&P 500 Index
The daily chart of the CBOE Options
equity put/call ratio is shown below, with the S&P 500 Index denoted in
black. The ratio closed at 1.04, again indicating an extremely oversold
reading which in turn suggests that a bottom is forming. For this chart and
this chart only, the %K above the %D is a sign of general weakness in the
broad stock market indices, while a move beneath is a sign of strength. At
present, the %K is above the %D, suggestive that extreme volatility seen
during the past few weeks is likely to persist for another 1-2 weeks within a
trading range of 1100-1200.
Figure 1
The daily chart of the S&P 500
Index is shown below, with the lower 21 and 34 MA Bollinger bands in close
proximity to the index. The lower 55 MA Bollinger band continues to decline,
suggestive that a bottom is looming. Full stochastics
1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1
and beneath the %D in 2 and 3. Extrapolation of the %K trend in stochastics 1 and 2 suggest that a tradeable
bottom is not likely to be put in place for at least 7-10 trading
days...sometime before September 10th appears to be a reasonable expectation.
Upper 34 and 55 MA Bollinger bands continue to move up well above the index
suggestive that at least 3-4 months will be required to consolidate this
decline. This fits with a bottom in the broad stock market indices due later
in 2011/early 2012.
Figure 2
The weekly chart of the S&P 500
Index is shown below, with Fibonacci price retracements of the 2008 bottom
till recent highs added, as well as Fibonacci arcs. At present, there is
strong support at the 38.2% retracement level. The index had an excursion
beyond the lower 21 and 34 MA Bollinger bands, indicating that a low likely
has been put in place, with a bottom not due until sometime in Decemberish (A bottom referring to the end of the
correction before heading higher). Full stochastics
1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in
all three instances. Extrapolation of the %K trend in stochastics
1 and 2 suggests that a bottom is not likely to be put in place until late
December/early January 2012. Once this bottom is put in place, 2012 should
see new highs put in place later in the year.
Figure 3
The monthly chart of the S&P 500
Index is shown below, with the lower 55 MA Bollinger band still drifting
sideways, suggestive that a longer-term correction is not likely to be put in
place until at least 12-18 months out. Full stochastics
1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in
1 and above the %D in 2 and 3. Positioning of the %K in stochastic 2 and also
the lower 34 MA Bollinger band near the 55 MA Bollinger band suggest
collectively that a top is not due until...late 2012/early 2013. In 2000 when
the crash occurred as well as 2008, the lower 34 M A Bollinger band was in
closer proximity to the 21 MA Bollinger band as well as stochastic 2 at
oversold levels. Neither of these occurrences can be seen in the present
setup, which suggests we are experiencing a painful mid-term correction
rather than a devastating style of crash as per 2000 and 2008. The crash
expected in 2013 is likely to be very intense and wipe out many investors, so
keep this in mind.
Figure 4
The mid-term Elliott Wave count of
the S&P 500 Index is shown below, with the thought pattern forming
denoted in green. Obviously the correction occurred at a much more rapid rate
than expected...I was expecting a bottom around 1100-1150 to take until
November, not August. Wave (Y) fit best to a diametric triangle, given that
each wave was similar in time and complexity but not price. It is thought
that wave (XX) is forming at present, which is expected to last until Decemberish/early January 2012. Once complete, wave (Z)
is expected to last for at least 10-12 months before putting in a new high
with a subsequent sharp decline to follow. The following correction should be
viewed similar to wave (X) which formed during the summer months of 2010.
Given the sharpness seen for wave (XX) so far, the corrective phase might take
longer than expected...the longer it takes for wave (XX) to form, wave (Z)
will have that much more power and upside potential.
Figure 5
The long-term Elliott Wave count of
the S&P 500 Index is shown below, with wave (XX).[B]
still thought to be forming. If the pattern plays out as expected, then the
decline from 2013-2014 will represent wave [C].c. Wave [B] would have taken
far longer than wave [A], so this would be the perfect setup for a flat to
form, which in turn implies that the 2013-2014 decline will be impulsive in
nature. Wave [A].c was approximately 14 months, with wave [B] likely to be
around 40-45 months. Wave [C].c then in turn is likely to be 24-30 months.
This implies that the 2013-2014 decline extends into
early to mid 2015. This presumption is based upon a
flat structure forming...if a larger degree structure is forming, then the above thought can be negated. The same sort of
implication is seen for whatever wave structure pans out...a major top in
2013 would imply major weakness extending beyond 20 months. The next 8 years
are going to be very difficult, so ensure that some wealth is protected in
gold and silver bullion, as well as related stocks.
Figure 6
That is all for now. I will update
the US dollar index tomorrow and try to tie in the 10 Year US Treasury Index.
David Petch
Treasure
Chests.com
Treasure Chests
is a market timing service specializing in value-based position trading in
the precious metals and equity markets with an orientation geared to
identifying intermediate-term swing trading opportunities. Specific
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