Bear Market Rally
Gold & Silver
The stock market finally rallied today. In the last two market wraps I stated that I didn't think the market was beginning its final leg down, and that a rally of sorts was probable. The market cooperated today and closed up 379 points for a 5.80% gain.
So, what happens from here? No one knows for sure, but I have some ideas I'd like to share. These are simply probabilities or possible scenarios. The market will have the final say. The best we can do is to listen to its message.
First, a bit of preface: Since well over a year ago I called this a bear market, when many were saying a new bull market had started. I'm on record for saying that this will be the mother of all bear markets: we ain't seen nothing yet.
To be a bit more precise: this is a secular bear market as opposed to a cyclical bear market; and it is occurring at the end of what may be the death of paper money; or the end of a false monetary system based on debt. This is a once in a millennium occurrence in my opinion.
The stars are not well aligned for the markets, but that doesn't mean we cannot overcome the situation - we can. We can do anything we put our minds to. That is what makes America great: our unconquerable Spirit always in pursuit of freedom, no matter what the cost.
I am going to mention a couple of scenarios. There are more. These appear to have the highest probability of occurring, but I could be wrong. Caveat Emptor (buyer beware).
Bull or Bear
There is the possibility that the bear market has ended. I disagree. I think there is much more yet to come - the question is: when and from what levels?
This brings us to a second point: is today's rally a short term affair, or the start of an intermediate term move, or the start of a new bull market?
A new bull market is out of the question in my opinion, which leaves the first two options.
It is possible this is the beginning of an intermediate term move up, but I don't think so; however, I'll let the market decide, and I'll just tag along for the ride. More information is needed before such a determination can be made.
The recent move down has broken long term support levels and has been a tough grinding affair. A lot of money has been lost.
However, there has not been any huge spike in volume to the downside, or lopsided put to call ratios, or other extreme negative sentiment readings that usually occur at significant bottoms.
There has not been any capitulation or throwing in of the towel. Complacency abounds. Abject fear is not present - at least not yet.
This doesn't mean that a bottom hasn't been made, but it doesn't feel like it to me. As I said: more information is needed and I will be watching for tell tale signs.
The first chart shows the Dow breaking below long term support that has now turned into resistance. This marks the first significant overhead resistance area.
How the market fares at this level will determine if this is a short term bounce or an intermediate move up. As of now, I do not think this is the beginning of an intermediate term move up, but it is possible.
I'm watching the market to see what it does when it meets short term resistance. If it is repelled, then this is a short term bounce. If it breaks above resistance and holds, then an intermediate term move is beginning.
Based on the lack of capitulation, I favor the short term bounce scenario. I suspect the market may rally up to resistance and then retest the recent lows, which may or may not hold.
The next chart shows today's breakout. Note this is a 10 minute chart that shows only four days of price action.
I think the recent lows will be broken, and if they are, I will be looking for a spike in volume and other sentiment readings to confirm capitulation has occurred.
Even if the lows are violated, however, I do not think this will be the beginning of the final leg down of the bear market.
Instead, I think an intermediate term rally may unfold after the lows are tested or more likely broken below. Such a rally could last several weeks.
If a rally develops, it will meet stiff overhead resistance at the January highs, as the chart below shows.
The lower fib levels offer the first resistance levels that will be encountered. Any rally may fizzle out at the 38.2% fib level or the 50 or 61.8% levels above that. The 50 dma average also offers overhead resistance.
In other words, I think that there may be an intermediate term rally coming, but not yet. First, I'm looking for a bit more downside action once the first line of resistance is reached.
If there is a capitulation low put in, then we have a better shot at an intermediate term advance beginning. However, at this time, the best case scenario is the January high being tested. I do not think it will be broken through.
The more likely scenario is that upon a failed breakout of the January highs, the final leg of the bear market will begin.
I look for new lows to be made, testing the 1982 low that I do not think will hold. As I've said: this is the mother of all bear markets and we ain't seen nothing yet.
This is all pure speculation and could well be wrong, but a big move up from here is too easy in my opinion.
The market likes to shake out as many as it can. The above scenario will do just that, which is why I'm inclined towards it being the most probable.
If the stock market rallies, be it short or intermediate term, look for gold to move in the opposite direction.
In other words: if the stock market rallies short term and retreats, gold will rise once the retreat begins.
This is true for the dollar as well. If the dollar goes up - stocks will go down. If the dollar goes down - stocks will go up.
The dollar is at a crucial point. It is testing horizontal support around the 88 level. If support holds the dollar could rally up.
Any dollar rally will put a headwind to the stock market's rally and a tailwind to gold's direction.
The next chart shows the various support levels for gold. I have warned of this correction for a couple of weeks now (right after the recent highs) and now it is here.
If (?) I'm right on the short term rally scenario for the stock market; gold will rally back up when the stock market declines.
Today's rally indicates that investors are willing to take on more risk, although a fair amount of today's move was short covering.
Be that as it may, the move out of gold, the dollar, and bonds; and into stocks, is showing risk being embraced and safe havens shunned.
This behavior can and will turn on a dime. The operative description for all markets right now is volatility. Expected the unexpected in today's emotion dominated environment.
If and when the stock market enters a more protracted intermediate term advance, look for gold to move in the opposite direction.
This may mean an intermediate term correction for gold after the present correction and subsequent rally back up. The operative word is may.
Gold could correct back to its January low - IF the stock market rallies back up to its January high. Such a move would put gold right around $800, which is also where the 61.8% fib level resides.
When the stock market enters its final leg down, gold will shine the brightest. Fear will be hanging in the air and gold will soar, as it will be recognized as the only true protection against the death of paper assets.
Look for volatility to reign supreme - expected the unexpected and be prepared. This is all going to take longer than most think to sort out. There is more going on here than meets the eye. The world is at an important cross roads and the path taken will determine the future for our children and their children to come.
Good luck, good trading and good health.
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