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Sustainable Trends and Unsustainable Ones

By: Toby Connor | Thursday, March 28, 2013

Today I'm going to start off with a look at the big picture. The next chart pretty much says it all.

$GOLD Gold - Spot Price (EOD) CME
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There is a fundamental reason why gold has been going up for 13 years. That same fundamental is driving the cyclical bull markets in stocks.

For gold the fundamentals are sustainable and that's why the gold chart is rising almost parabolic inter-spaced with normal corrections/consolidations along the way.

For stocks the fundamentals aren't sustainable. You can't drive a true bull market in stocks by printing money. It just creates bubbles and crashes. That's why each one of these bull markets is followed by a devastating bear market. It's why the stock market chart has gone nowhere in 13 years while gold has gone up, up and away.

Until the fundamentals change this pattern isn't going to change. Pretty soon the stock market is going to stagnate and start to drift sideways (followed by another bear market, probably due to bottom in 2016). Pretty soon gold is going to generate another C-wave leg up (followed by another sharp move down into the next 8 year cycle low, also due in 2016).

Gold: Did we bottom two days ago or not? I don't know. What I do believe is that the QE4 manipulation has basically created a double B-wave bottom. As we saw last summer, B-wave bottoms are frustrating SOB's that whipsaw back and forth until everyone is knocked off, or dizzy and ready to puke. Then they take off and leave everyone behind.

$GOLD Gold - Spot Price (EOD) CME
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I think gold is in the process of breaking the manipulation but as we have seen it's been tough to get a sustainable trend going. That is the hallmark of a B-wave bottom. Ultimately I think the manipulation just stretched the precious metals markets much further to the downside than would have occurred naturally, so once gold breaks free of this volatile bottoming process the rally will be just as aggressive if not more so than the rally out of the first B-wave low last summer.

As we saw last summer, B-waves can churn to the point we're it's difficult to determine correct cycle counts. It appears to be happening again. Considering the current daily cycle is left translated it should drop back below $1555 before bottoming. That being said today's move looks like the cycle low may have come on Friday. I wouldn't count on gold to give us a clear signal in this environment though. So it's anyone's guess if we now have a strange left translated daily cycle that bottomed above the prior low. For those of you trying to hold on to positions during this mess let me put up two more charts.

On the gold chart you can see the level that triggered a 99 and a 98 Blees rating on the COT report. Historically that kind of extreme only occurs when price is at, or very close to a final intermediate bottom.

You can also see that this price level generated an 88 million buying on weakness day in GLD. Again this is almost always a sign that price is about as low as it's going to go. Let me emphasize I said price, not time. Just because price has reached a level that halts the selling doesn't necessarily mean that a sustained rally will start immediately. As we have seen the market may still have to chew up a significant amount of time before it's ready to take off. In our case I think gold is waiting for the stock market to stagnate before hot money starts to flow back into the sector. So we may have one lower low to endure before this is over, and we may not, but two years from now traders will be knocking their head against the wall saying "all the signs were there, why didn't I buy?" Or; "Why didn't I hold my Old Turkey position?"

$GOLD Gold - Spot Price (EOD) CME
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GDX Market Vectors Gold Miners NYSE
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This bottom is going to be too complex to time perfectly, and even if it did bottom on February 20th it's already shown that it can still throw most people off just by chopping back and forth for a month. Maybe that chop has finally ended. Maybe the daily cycle is still going to make one more trip below $1600. I'll let others compete to see who can second guess the next wiggle in the precious metal markets. All I can say is that the signs are there. Save your head the abuse two years from now and pay attention to them.

 

Author: Toby Connor

Toby Connor
Gold Scents

Gold Scents is a financial blog focused on the analysis of the stock market and the secular gold bull market. Subscriptions to the premium service include a daily and weekend market update emailed to subscribers. If you would like to be added to the email list that receives notice of new posts to Gold Scents, or have questions, email Toby.

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