Stocks:
As most of you know by now I decided to take profits on all stock portfolio positions. As of yesterday a warning bell went off as breadth has turned negative even though stocks were at all time highs yesterday. This divergence has occurred at almost every major market peak over the last 70 years, so it’s warning I’m going to take seriously. That doesn’t mean it guarantees a market top. There have been plenty of false signals over the years also. 

For the signals that did correctly predict trouble, the market started down immediately, and that is what has happened today. As of right now I’m treating this as just a normal move into a half cycle low (HCL) that will find support at 1850 and then head back up on the way to Nasdaq 5000. However if we never manage to get back above 1880 then we will have exited at the exact top of the bull market. So at this point I’m content to wait and see if the move into the HCL continues and if it does, will it recover and close back above 1880.

Gold:
In the Saturday article I noted this week should be the perfect week for gold to breakout of it’s consolidation and move above this stubborn $1350 resistance zone. I was looking for a little help from stocks and the dollar. So far it looks like stocks may cooperate and drop down into a HCL. Now we just need the dollar to continue down into it daily cycle low (DCL). It still has plenty of time as today was only day 14. I’m expecting a test of the Oct. lows by the FOMC meeting on the 19th.

With a little help from stocks and the dollar I think gold should be just about ready to break out of this consolidation its been stuck in for the last two weeks. Tomorrow should be the perfect setup for the breakout after the reversal on Monday, and a recovery today. 

Today was the fifth test of that $1350 resistance. Once gold breaks through it should trigger a bunch of buy stops and I think we could see a pretty good move in a short period of time. Maybe $1400 by the FOMC meeting if the dollar finishes it’s DCL.

Gary

As most of you probably know by now the regular SMT site was hacked this past weekend. So until we get it running properly again I’m going to have to publish the nightly reports to the blog. Unfortunately until I can get back into the admin side I also can’t post new chat rooms so we are going to be stuck with the current weekend report and March 8 chat for comments for the time being.

The reports here on the blog will be brief until the SMT premium is back online.

Stocks:

After today I have to think it’s pretty clear the Fed has no intention of allowing the stock market to correct ahead of the next taper. What began this morning as a good start for a dip into a half cycle low has been pretty much terminated.

Dollar:

It’s still too early for the dollar cycle to bottom. This bounce should peter out in the next day or two and finish moving down into it’s cycle low by the FOMC meeting on the 19th. I’m looking for a full test of the Oct. low before the dollar musters enough of a bounce to qualify as a daily cycle low.

Gold:

After last nights manipulation attempt to drive gold down failed, it looks like gold is just waiting for the dollar to make that final dive into it’s DCL to breakout of the consolidation it’s been in for a couple of weeks now. 

The longer gold continues to trade sideways the less likely it’s going to be that we get a deep dive into a DCL. As today was the 26th day of the cycle, the odds are increasing every day that the cycle low occurred on Feb. 28 and gold is now in it’s third daily cycle. We need a breakout above $1360 to confirm it though. 

Trying to predict short term direction is notoriously difficult, especially in the volatile metals market, but I’m going to take a stab at it today. 

First off let me start with the big picture: For almost a year now I’ve been saying that the inflation that’s been stored in the stock market for the last three years is eventually going to start leaking into the commodity markets. You can see in the next chart that process has begun as smart money investors begin to move capital out of an overvalued and overextended stock market that is destined to top some time during the first half of this year, and into undervalued commodity markets where they are getting a better return on their investment.

While the stock market is up 10% over the last month and a half, the CRB is up 12%. But that’s not the whole story. Gold is up 14% in the last two months, oil 15%, wheat 20%, corn 23%, sugar 27%, and the big winners, coffee at 90%, and natural gas at one point over 100%. 

These kind of gains are going to draw more and more capital away from the stock market, at least until commodities form an intermediate top (probably around the first or second week of April). Yes this kind of explosive rally is going to have some kind of corrective move later this spring, but I don’t think the rally is done just yet. I’m looking for an acceleration of the move in March to at least test the 2012 high at 320 on the CRB index before commodities enter a multiweek correction/consolidation phase in April and May.

Next week has the potential to begin this acceleration phase if a couple of things fall into place. First off I think we need to see the dollar continue down into its next daily cycle low, potentially on the March 19 FOMC meeting.

I’ve also taken the liberty of extrapolating on the chart my expectations for the dollar index over the next month as it moves into an intermediate degree bottom. 

If I’m right about the next week and a half, then I’m looking for the dollar to drop down and test the October low between now and March 19. As that level is a major support zone I think we will probably get a strong enough bounce at that point to produce a daily cycle low. However, considering that this intermediate cycle topped on week two I don’t think this intermediate decline will be done until the dollar breaks below that October bottom, producing a failed intermediate cycle. So I’m going to look for a shortened daily cycle during the second half of March with a final intermediate bottom probably on the April jobs report. 

With the January and February employment reports coming in very weak, and the March report respectable at 175,000, I think the market is going to want to see confirmation from the April report before the intermediate trend in the dollar reverses.

Make no mistake, currencies are what is driving the commodity markets, not demand, and I don’t expect them to top until the dollar index finds its intermediate bottom.

While it’s not absolutely necessary, it probably wouldn’t hurt if the stock market were to drop down into a half cycle low over the next week and divert some buying pressure into the commodity markets as well. If Ukraine concerns were to flare up again this weekend that could presumably tip stocks over into a mild corrective event for a few days. I’m not sure last Monday’s one-day drop qualifies as a true and complete move into a half cycle correction. If that’s the case then next week would fit the timing band perfectly for this minor profit taking event that usually occurs around day 18-25 in the stock market daily cycle. (Monday will be day 21.)

So how does this all tie in to next week’s move in gold you ask?

Well, if the dollar continues to drop into its daily cycle low over the next 8-10 days, and especially if the stock market lends a bit of a boost by falling into a half cycle low, I think gold should break through this resistance zone at $1350 and move up to the $1380-$1400 level over the next week and a half.

Then assuming that I’m right about a short dollar cycle into the April jobs report, gold should finish its intermediate rally with a test, or marginal break above the $1425 resistance zone in early April before dropping down into a multiweek correction that should form a yearly cycle low sometime in late May to early June.

It’s the move out of that yearly cycle bottom this summer where the real fireworks are going to begin in the commodity and metals complex. I’ll have more on that in later articles.

Now that the first leg off the bear market bottom has been completed the mining shares have been consolidating for the last three weeks in preparation for another leg up, and I expect the second leg will be almost as powerful as the first.