Over the past few weeks I was hoping the Fed would stay out of the market and allow a natural intermediate degree correction. Unfortunately with the Humphrey Hawkins speech this week and an FOMC meeting at the end of the month it was not to be. Instead the Fed aggressively intervened last week to prevent the market from continuing down ahead Yellens speech to Congress. This has been a familiar pattern for the last several years. Obviously it’s much easier to handle Congress if the markets are rising and everyone is happy with their 401K’s.

However, the Fed has traded some short term gain for massive pain further down the road. By not allowing the market to fully correct into an intermediate degree pullback the Fed has prevented the market from building the energy necessary for a strong breakout and rally higher. Yes the intervention made it easier for Yellen to deal with Congress, but that has come with a price. The price is that stocks will now remain in the same choppy range they’ve been in all year. And come this fall when the yearly cycle low comes due (and probably the 7 year cycle low) we are almost certainly going to experience some kind of crash event.


I doubt it will manifest as a one or two day spectacle like it did in 87, but more likely as a several week collapse similar to what happened in China recently. Ultimately I think we will see the S&P retest the breakout at 1550 before the final low is struck.

In the chart below you can get a feel for just how stretched the market is above the 200 week moving average. A move back down to 1550 would only be a 38% Fibonacci retracement. Quite mild actually. But it won’t seem that way because much of the drop will probably occur in the last 2-3 weeks.


In order to confirm the 7 year cycle low the market has to at least break the 7 year trend line.


I know this seems virtually impossible at this time. Recency bias does that to traders. Because we haven’t had a serious correction in years we assume it will never happen again. But I assure you it will. Back in 2007 no one could have imagined the market dropping 60%.

Now let me show you some of the subtle warning signs that are appearing.

First off we have a divergence in the advance/decline line and semi’s. This happens at most multi-year cycle tops and specifically at the last two bull market tops.

ad line

Next we have the weekly money flows diverging sharply as institutions have been slowly exiting the market over the last two years.

money flows

Ever since QE3 ended fewer and fewer stocks in the NYA are holding above their 200 day moving average.


Finally the speculative driver of this bull market, the biotechs, are now stretched quite far above their 200 DMA and due for a severe regression to the mean event.


I’m not saying biotech is going to crash tomorrow, Stretched can certainly get even more stretched, but when the crash comes don’t expect biotech to just drop back down to the 200 DMA. They will almost certainly oscillate far below that level. A 50% haircut back to 200 or lower wouldn’t be abnormal for an asset class so obviously overvalued.

Don’t get me wrong, despite what I think will be an extremely vicious correction this fall, I don’t think that will be the end of the bull market. I think a 20-30% crash will panic the Fed and they will start QE4. The correction will just set the stage and clear sentiment for the final bubble phase rally in stocks. Who knows how high the S&P could go during this last irrational phase. S&P 4000 or 5000 isn’t out of the question…


  1. Stefan

    I support your view 110% Gary, I positioned myself today in a BEAR certificate for S&P500. The resistance at 2130 is a multidecade one and the markets today do not have the power to break it imho

    This is a good setup for me it will repair most of the damage caused my gold&silver miners for the last 4years.

    I wish us good luck 🙂 maybe some interesting event week 32, a major inflection for stockmarkets in general and FTSE in particular, according to my trading mentor, and FTSE leads Spx?

  2. james moffett

    Thanks Gary. I would agree with your prognosis. There are however a few bullish stats not to be ignored such as the S&P 500’s breadth over the last 5 days (A/D line) which has been the strongest of the year. I would assume you are not long and won’t be until we get that meaningful correction. Best

    1. gary Post author

      Small long position that I intend on channeling over the next couple of months as I expect the market to continue to be choppy.

  3. Kosta C


    Been following your blog recently, really appreciate and value your insights.

    I agree with all your points in this post, I was wondering what your thoughts are on the potential bullish falling expanding wedge forming in the SPX?

    1. gary Post author

      Most of the time I can’t even see these wedge patterns everyone is talking about. A couple of weeks ago the talk was a contracting wedge would trigger a big move down. Well the PPT stopped that in its tracks

  4. Tom

    Right on Gary, thanks for the tip, just bought NUGT to ride the wave higher in miners per ur call.

  5. james moffett

    Gary, realistically, what specifically will trigger that much of a deep selloff for the yearly low (and maybe 7 year low)? That kind of selloff is usually caused by an earnings recession, a sharp rise in interest rates & inflation, a hostile Fed, or disastrous geopolitical events. What events do you see happening?

      1. AlexP

        a T-bonds’ (i.e. TLT) cash implies significant rise of CRB index (and of oil particularly). Such an upturn would require CRB to produce a new high while WTIC to grow above $62

          1. AlexP

            on the contrary, end of QE in DEC2013 drove long-term rates lower (and TLT to new high grounds) until April current year. Bond rates are not directly linked to FED actions but rather the immediate connection lies with inflation expectations of which proxy are trend in commodities.
            thus, a crash in t-bonds (hence higher yields) are warranted solely by higher inflation expections which in turn should directly head CRB index well above 230 (maybe even 26).
            we cannot see a crash in t-bonds without an aggressive and sustained (throughout half a year at least) of CRB index.

  6. Daryl

    Gary….just wondering whether real estate will top out with the end of the stock bull in a few years..any long term thoughts say 25 years out???? Thanks Daryl

  7. Jakk Daws


    I love the chart analysis but what I’ve learned over the years is the market usually does what causes the most pain and right now we have everybody continuously preparing for when they think the market is going to crash- I would propose the thing that would cause the most pain would be to grind up far more than what we currently have now.

    Also in regards to your money flow graph – a grind up would cause more pain to insti’s and their inability to keep up with their benchmarks.

  8. Stefan

    I think the Greek crisis is far from over … it will eventually jump up and kick us in the nuts

    I have been censored several times today in the largest forum for share discussions in Sweden. The only thing I ‘ve written about is that I think we are facing a major correction sooner or later this year. For me this reminds me of North Korea or the former Soviet Union. The newspaper is probably owned (Sweden’s largest financial newspaper) of a bank that wants us to remain in an euphoric mood until we are ready to be fleeced. This is a sad day in my humble opinion.

  9. SMB

    Totally agree…with the move down…then new all time highs…the final top probably in 2017…
    I think will be difficult to locate the first top, which I think will be early part of 2016…not this year.

  10. Jay

    By the time the crash occurs, trading volume will be so low that they can just magically prop it right back up to whatever level then want, without any effort whatsoever.

  11. Frank

    Yes, I agree 100%. I’m the Elliot guy and I said last week that we would fall hard now. Well, we went up in wave 5 of the diagonal triangle (yes, I thought it was over, but it built another 4-5 wave set) Elliot calls for a “throw over” at the peak of the triangle, then all downhill. It has to be soon, but anything can drag. So we’re all on market death watch!

  12. Stockman

    Ain’t buying it…

    how can one be short with concerted worldwide CB support?
    3 TRILLION Yuan!

    That’s how much money State-run China Securities Finance has pledged to support the stock market. It’s 7% of the market’s entire value, which is now about $7Tn, still down from $10Tn at the top. That would be like the US putting $4Tn into our own indexes ?

    3,000,000,000,000 Yuan is going to help at least a little – just like $800Bn worth of TARP did in 2008, when Congress held the markets up for a couple of weeks before falling another 38% into March of 2009.

    How can you be short?

    It’s not rational to be short when this kind of effort is being put in to propping up equities by the Government.

    1. Jay

      “It’s not rational to be short when this kind of effort is being put in to propping up equities by the Government.” // Agreed. I’d rather try and pick a bottom in GDX than short equities! 🙂

  13. Dan

    I’ve got a few December out of money puts on IBB, but a crash seems virtually impossible right now. They’ll probably just keep smashing commodities and spiking the NASDAQ to new highs. Unbelievable.

  14. Frankenstein Government

    Thanks Gary. I love your style. We all know that there are serious interventions going on and I love the way you write about this- matter of factly. The PPT is real.

    Your call on gold in early June allowed me to sell a little- about 6k worth and buy the same amount back soon for 5k. I also linked that blog- which I had bookmarked back in June- and put it out yesterday. I have been idly on the sidelines- with fresh powder waiting for the blood in the streets phase. Coming soon, I think.


  15. ted

    The market has begun to crash – only going UP! That’s right, markets can crash up. It’s called parabolia. It started this week! The consolidation is over. You will all be looking back at DOW 35K in a couple years out, and realize you missed one hell of a move!

  16. Kevin B

    From @jessefelder and @sentimentrader, Nasdaq 100 was up so much with only 26 out of 100 names participating
    “This could be the 2nd time $NDX up 1% to a 52wk high with more decliners than advancers”
    The other time – duh duh duh – March 2000!

      1. Jay

        Yeah. The probably is in 2000 everyone and their grandmother was long the Nasdaq. Not enough of the general public are involved with equities this time. When the butcher, the baker, the candlestick maker, as well as shoe-shine boys all start talking about their GOOG and AAPL, then it’s time to exit. 🙂

        1. ted

          That is correct. And we are far from that point. Hence, watch the sky. I like Gary’s work. But his prediction for a major correction will not come to fruition and keep many people out of the market. This week was seminal and a turning point.

  17. Dollar

    Miners took a pounding today. What do you guys think is next. Anyone buying JNUG for a ST pop.

  18. Crawford

    I am very interested into IBB (the BIOTECH sector) it trades at ~$400.
    What would you guys recommend buying the call option, low-cost alternatives?

    1. Kevin B

      Just buy a 400 call and a put out to Jan. Sure it will cost a lot, but I don’t see IBB standing still. In fact it could go strong in one direction, and then go the other direction and then you make money both ways.

  19. Peter

    The Fed is not protecting the economy its protecting its high roller friends from being on the wrong side of the bet. Hence these high roller friends can only win by having the government rig the market once again for them. The fools saving the market for a handful of scoundrels and destroying the economy to ultimately ruin America. Hopefully God punishes these scumbags when the time comes. I pray.

  20. Rick

    Do you think the coming drop will cause gold/silver to drop also, as it did in 08? This is what I expect.

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