By: Poly | Mon, Mar 4, 2013
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Nobody ever said riding a (gold) bull market was easy. Unless you're prepared to buy, close your eyes, and come back years later, then I'm afraid we have to take the good with the bad. There isn't too much more to add this week, we're obviously in a new Daily Cycle that we expect is also the 1st Daily Cycle of a new Investor Cycle. Under such an assumption, this 3 day decline is simply just this bull market "making it very difficult". See Glossary for terms and acronyms

I know that's a rather simplistic answer to describe this week's sudden reversal. But unless the Cycle breaks down and our working framework is proved incorrect, this is the best explanation I can give. The fact is that these types of "testing" reversals are all too commonplace coming out of major ICL's. So much so that I wanted to warn members of the possibility in the midweek report when I said "But even if this is a new Investor Cycle, the problem for "nervous longs" is that we could still see a decent drop back to the $1,570 area before really taking off. It's important for members to remain aware of this possibility".

So here we are, having faced a testing 3 day drop back to that level. It has induced a much more significant sell-off in precious metal miners, once again doing its finest to break any remaining hope and sentiment. At this point the bets are very heavily stacked (short) against gold and all but a very few are long. The speculative interest has moved to the short side and it's exactly the environment that we expect to see coming out of ICL's.

$GOLD Gold - Spot Price (EOD) CME
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Silver was punished much more this time around as it dipped below last week's low before reversing sharply. That's a Cycle failure for Silver and admittedly any Cycle failure is a concern. But as long as the dominant gold Cycle shows a reversal next week, then I believe this Silver fail will go down as a stop run and bear trap used to cover the remaining commercial short positions. We had the exact same situations occur in December and last May with the D-Wave Low.

Indeed this Friday's COT report showed a significant change in the bet against Silver. Clear evidence that commercial short positions were reigned in significantly, while the report did not include any part of the 3 day drop.

$SILVER - Silver - Spot Price (EOD) CME
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Like past weeks, sentiment just continues to deteriorate further than anyone thought possible. Again not including the end of week drop, we see gold sentiment continues to make deeper lows.

I know this chart has been presented in the past as complimentary evidence to support an ICL, so we know it's not a timing tool. But please keep this chart in mind when viewing the longer and more dominant Cycles presented further in the report. With sentiment at record lows, it makes it difficult to support a scenario where gold falls much further over a longer period of time.

Gold Public Opinion
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The Investor Cycle is just oversold, overextended, and throwing off buy signals that have generally always worked throughout this bull market. This is the 2nd straight weekly close below the Bollinger Bands, the first time ever for this bull market. Because in the short run markets can "do as they please", we know a slightly lower low can never be ruled out. But a sustained drop from this point just looks so extremely unlikely.

$GOLD Gold - Spot Price (EOD) CME
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This next chart is the most important chart this week. On the Daily, Weekly, and Monthly levels, we're now at that "show me the money" moment. Basically the 12 year bull market as we know it is being tested right here. How it responds in March will likely reveal exactly how this bull market will unfold over the next 1-2 years.

Firstly, the 12 year secular bull market channel on a monthly chart is being challenged. A break below this lower channel opens the floodgates to all sorts of bearish scenarios. A channel breakdown alters the landscape and removes the "known boundaries" of this great bull market.

$GOLD Gold - Spot Price (EOD) CME
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The monthly Bollinger Bands are also being tested for the first time of this bull market. This is a testament to the length of this consolidation. This 18 month consolidation and basing period has reduced volatility to the lowest levels of this bull market. The result being Bollinger Bands that have tightened to the narrowest levels ever, and this indicates that a massive multi-month move is imminent.

February marked 5 straight declining months for gold, yet another bull market record. If the bull market channel is to break, then we would see a 6th straight declining month, technical indicators and oscillators reaching unimaginable levels, and sentiment consistent with "secular bear markets".

In short, right here and now, this is either the dawn of a new multi-month rally, or it's the start of a breakdown to indeterminable levels, over many more Investor Cycles.

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Author: Poly

The Financial Tap

Poly is the founder of "The Financial Tap", a membership site dedicated to helping traders and investors navigate the markets while increasing their expertise and understanding. Poly has over 20 years of experience in trading the markets, is a life-long student of economics, and has an abiding passion for the financial markets. Much of his investment philosophy is top-down in nature, beginning with a global and macro outlook which is used to create a framework that drives his intermediate investments.

Poly is a leading expert in Market Cycles. His love of Cycles grew after his introduction to the work of Walter Bressert, one of the pioneers in the field. Cycles were a natural fit with Poly's passion for top-down analysis. As Cycles are intertwined on multiple time frames, understanding the global outlook greatly helps him to identify the long dated Secular Cycles. From that point Poly is better able to identify the shorter Cycles and to build a cohesive investment strategy. Poly's Cycle Analyzer, a software based analytical and intelligence system, is used to predict the future movements of the major financial markets.

Originally from Sydney, Australia, he is now settled and has been working in New York City for the past 13 years. His background and education is in Computer Sciences and he holds a bachelor's degree from Monash University in Melbourne Australia. He has extensive experience in the Financial Software area and has served as a senior executive at various Fortune 50 management teams developing financial trading and reporting software.

Happily married with two children, family is a big part of his everyday life. Other passions including golf and long distance running. He plans to complete the 2012 New York City marathon.

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Source: The Contrarian Take