Aug 21st weekend 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 cycle to balance out the extremely long cycle into the May flash crash. 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).

So if we factor in the fake out principle and news driven bottom theory we are probably looking at the current daily cycle bottoming next Friday (day 40) on the GDP revision. Lately the daily cycles have tended to run between 35 and 45 days with 39 or 40 being about the average.

I think we all realize the revision is going to be bad and common sense would suggest the market should go down. However the market is already in the process of discounting a bad number and has been for 9 days now. I suspect this is going to be one of those sell the rumor buy the news type events. And I expect it is going to catch the bears leaning heavily in the wrong direction expecting the market to act rationally and continue down.

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.

Dollar:

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 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.

I’ve marked the last two yearly cycles in blue (notice how they are making lower lows). Notice how the last two yearly cycle lows occurred in December. The current intermediate dollar cycle should bottom in late November or early December. That will line up perfectly with the last two yearly cycle lows falling late in the year.

At this point I think there is little question the dollar has begun working its way down into the yearly cycle low. The only question is how long before the current intermediate cycle tops. I suspect it will be fairly quickly. As a matter of fact I think the current daily cycle will most likely be the last right translated daily cycle imbedded within the current intermediate cycle.

Once this daily cycle tops, which I expect it to do next week or early the following week, there is a very good chance that will also mark the top of this intermediate cycle. As I’ve illustrated on the chart, I then expect every daily cycle after that to be left translated (tops in less than 10 days), and each to move below the prior cycle low (failed cycle) until the dollar puts in the yearly cycle low late this winter.

It’s been my contention for some time that the only way stocks can rally is if the Fed continues to debase the currency. Remember this is an election year so I think we can pretty much bank on the dollar moving down into the yearly cycle low right on schedule, possibly with extreme prejudice as Ben desperately tries to keep asset prices inflated into the elections.

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 from collapsing with his printing press. I’m sure you’ve noticed the problem by now. That’s right, liquidity is leaking out of the stock market and landing in the commodity markets.

You can see that stocks are already struggling as more and more liquidity leaks out into the commodity markets. 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 off the presses. As this continues they will soon be screamingfor the Fed to shut off the money spigot. I really don’t expect Ben to hear though. He was deaf to what hismonetary policy caused in `08 (spiking 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 willdestroy the economy all over again.

Gold:

I’ve been looking for a swing high to possibly mark the top of the current daily cycle. Gold did form a swing on Friday. 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 next week.

My best guess as to how far the correction drops would be at least 50% of the recent rally. Most daily cycles dotend to give back at least 50%.

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 that 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 expect to see 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 who took off some leverage into the recent top and is waiting to put it back on, to do so as gold breaks through $1200.

Short term indicators:

Neutral

Portfolio:

50% in 7-10 junior miners (GDXJ is an option for those not wanting to pick individual juniors)

50% in a basket of the five largest silver miners (SLW, SSRI, CDE, HL, PAAS) (SIL is an option for those not wanting to own individual miners)

20% margined position in AGQ

Gary