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February 26, 2009

Stocks to Recover as Gold takes a Breather
by Jordan Roy-Byrne

My previous editorial showed the super-bullish intermediate term (12 to 18 month) outlook for Gold. My technical work called for a correction that would lead to a massive surge beyond $1,000 and to $2,000. It now appears that the gold correction is here. More importantly, the near term peak in Gold is coinciding with what will be the first major tradeable rally in stocks during this historic bear market.

Below is a long-term monthly chart of the S&P 500. All of the gauges show an oversold condition. Keep in mind this is a monthly chart so oversold signals have greater importance. That being said, we expect the market to bottom out in the mid 600s. The market already fell through the super long-term 50% retracement (in the low 800s) and looks headed to the 62% retracement. (Weather you measure from the 1974 low or 1982 low, the retracement is in the mid 600s). Even though the market broke the key 2002-2003 and 2008 support level, it did so in an already oversold state and major support lies not too far below.

Our next chart is a daily chart of the S&P 500. The market has traced out a clear Elliot Wave formation, including a third wave extension and a triangle in the fourth wave. The new lows in the market will be short lived. Be advised though that we are anticipating a 15% drop before the rebound. While sentiment is bearish it is nowhere near a bearish extreme. The put-call ratios indicate way too much complacency. Look for further lows to spark capitulation and force sentiment to bearish extremes.

Now let's get back to Gold. Below we show a weekly chart with a long-term channel (dating back to 2000) as well as the 60, 80 and 160-week moving averages.

At this point it is very difficult to forecast the bottom. There is a lot of support from $800 to $900 in the form of trendlines, moving averages and Fibonacci retracements. It is difficult to find a single confluence of support. I can narrow the range down to $825 to $885. At this point, there just isn't enough evidence for us to hazard a guess. Certainly sentiment data (which we track in our newsletter) will play a vital role.

Conclusion

We are looking for stocks to make a key bottom in the next four to eight weeks. We think the rally will last months and stocks will rebound significantly in percentage terms. In addition to the technical evidence, we should mention that both the Yen and Treasuries, which turned up prior to the peak in stocks, have peaked ahead of the bottom in stocks. Furthermore, the bank stocks may be ready to rebound. In the meantime we are looking for a pause or correction in the Gold market, which is gearing up for a vertical advance.

Jordan Roy-Byrne
www.trendsman.com

Copyright © 2007-2009 Jordon Roy-Byrne

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