The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 28th, 2008.

Uninformed odds players are calling a bottom on the stock market citing extreme technical and sentiment related readings. It's too bad they are not history students as well, but that was the boring and unnecessary elective in school most declined to take seriously. These dip buyers are about to learn a very expensive lesson in my opinion, as in terms of market internals and sentiment, we are currently poised for a crash of potentially monumental proportions. Finding religion will have a new meaning for these guys afterwards as their futures become more uncertain, and their appreciation for gold should be raised a notch or two as well as a panic attack shakes some trees. This is when we expect the CBOE Volatility Index (VIX) take out closing basis triple top resistance at 31 on its way to 45, and perhaps beyond.

And that's why the Dow / Gold Ratio is heading to 10 directly in my opinion, because the stock market is set to see a panic directly ahead, which we have not witnessed as of yet. Remember our targets in this regard. The Dow should be plumbing 10,000 while gold is tickling the underside of $1,000 before meaningful reversals occur in present trends. And all this could happen by mid-March, to correspond with a Martin Armstrong panic cycle low. Certainly with gold production in South Africa under severe and possibly sustained pressure on the supply side, this will do nothing but help the gold price against a rising tide of demand in coming days. Gold and silver bullion will become increasingly difficult to obtain in the future, as sustained power related supply disruptions will become more frequent and widespread, so be sure and accumulate now while you still have the opportunity.

Just how precious metals shares perform during this period and into the summer should be quite surprising to most if people think gold has hit an interim high at that time. But as was the case in the 80's, when stability returns to the stock market (and even if gold prices flatten out) risk takers will also return to precious metals stocks. And when the juniors begin to outperform larger companies again, the beginnings of a fresh bullish sequence for precious metals shares will be signaled. As per Dave's analysis this week, expect a bottom in precious metals shares by the end of March, coincident to stability returning to the stock market. So although we may have a brief deflation scare in coming days, signaled by a turn lower in the Amex Gold Bugs Index (HUI) / S&P 500 (SPX) Ratio (see Figure 3) anytime now, such an occurrence should be viewed as corrective and brief.

How can we know a deflation scare would be brief? In one word the answer to that question is found in the term 'extremes' as it pertains to technical analysis and sentiment measures. Here, when the Dow / Gold Ratio hits the large round number at 10, you can count on a significant bounce, I will assure you of that right now. As you can see on the monthly plot attached (it has been downloaded to the site for all to see due its importance), it took almost three-years of consolidation below this level for the Dow to build enough energy to punch through higher on the way up; so correspondingly, it should take somewhere in the neighborhood of a year (a Fibonacci ratio) to gain the energy to punch through this barrier on the downside if history is a good guide. Of course with the real price of gold so low (see Figure 1) anything can happen, so one should not be surprised if this process is accelerated as well.

In terms of technicals for the Dow, your attention should be drawn to the monthly plot in attempting to confirm trend changes, so we have uploaded it to the site for those who do not subscribe to StockCharts.com. Sure enough a look at the attached (see directly above) long dated (Supercycle) snapshot of the Dow tells the story in terms of the 'big picture', time elements and all. In this respect notice time lines joining all significant tops in the Dow since the '87 crash correctly intersected a top in the summer, with the slightly higher highs in October acting as a test. Of course once the decline got rolling the Dow was down to test Primary Wave C highs in no time, where as denoted on the attached, a sustained penetration of this level would signal a panic related fractal decline could occur. Further to this, one should also take note of other important technical observations denoted on this snapshot that suggest a panic sell-off in the stock market could be upon us anytime, not the least of which would be a break of Moving Average (MA) support in On Balance Volume (OBV). A break here would signal an undeniable change from up to down in trend.

Such an event would also be accompanied by the closing basis triple top breakout in the VIX discussed in our opening remarks, along with a test of long-term bull market defining channel support at 1200 for the SPX undoubtedly. (See below.) But just to stay with the Dow for a minute longer, one should also notice how a decline to 10,000 (our Dow / Gold Ratio target), and possibly to 8,000, could be the beginnings of a potential larger degree head and shoulders pattern, which would signal the possibility of a much larger long-term top. Here, whether or not such a top would become a reality would certainly depend on the economy to an extent, but far less than most realize given the development of a conducive sentiment profile in the stock market could support prices, sending them right back up again. This is why it's so important to follow the true sentiment in the stock market, which we will discuss directly below. (See Figure 1)

Figure 1

The reason following true sentiment in the stock market has become so important is with the current mania so mature now, technical formations / trend channels / etc. have little significance in terms of probable outcomes anymore. Here, depending on where we are in the larger cycle (earlier than present), the appearance of a head and shoulders pattern will cause newly awakened / semi-sophisticated technicians to short stocks, which of course could cause a negation of pattern follow-through as stocks are squeezed higher on a sea of increasing liquidity. And as you can see in the attached, liquidity has definitely been plentiful for quite some time, where in fact we are essentially at all time highs in this regard. So, if we were to have a great deal of short positions to squeeze out accompanied by all this liquidity, where it should be noted total short sales are vexing all time highs once again, in spite of an ominous structural set-up in the stock market, prices reverse higher anyway.

And if it were not for the fact several important open interest put / call ratios on the major US stock indices were still at their lows, with updated charts that can be seen here, and the others potentially set to join them, I would be a great deal more optimistic with respect to future prospects for stocks. But as with our appraisal of the situation last week, although a move back up to trace out a 50-percent retrace (1400ish on the SPX) of the previous wave may not appear likely with Friday's reversal lower, it's still possible for the reasons discussed above. What's more, let's say the SPX were to bottom today in the 1320 area, with the first corrective wave last week being 98 points, if we were to see equality here, a move to the 1420 area would be the result, which just so happens to correspond to options related ceiling price resistance, as can be seen in the chart below showing the Open Interest (OI) distribution pattern for the SPX series in Chicago. (See Figure 2)

Figure 2

Source: Schaeffer Research

So, however unlikely such an outcome may appear with stock markets around the world down again overnight, with the most notable feature of these declines being Chinese stocks taking out last years lows on a confirmed (tested) basis now, because short sellers are back in the market it should be realized such an outcome could occur. The alternative is because put / call ratios are still low, and could get lower as stocks continue to fall if bearish speculators are truly exhausted, stocks snap off in the fractal discussed above looking for a bottom some time in the second week of February. Just to keep you up to date on how such a fractal developed post the '37 echo-bubble top, here is the chart comparing the NASDAQ of today to the Dow back then as of Friday. There is a tight correlation here to say the least. (See Figure 3)

Figure 3

Source: The Chart Store

And there is an even tighter correlation when comparing the SPX (see below) as you may know in following our chronicles on the subject, where again in this regard, a match would indicate people's behavior patterns in such circumstances (panics / manias / etc.) are no different today in spite of all the technology and intervention the current batch of price managers can muster. Again in this regard, it could be argued that because of all the interventions currently being applied to the equation, which include an economic stimulation package in the States accompanied by plunging administered rates, price managers are making it impossible for surface dwellers to consider shorting stocks. Of course we know from this week's data, if these stats are accurate, short selling has become very popular once again, which as you may know from previous experience in this regard can make short selling yourself a very expensive activity. (See Figure 4)

Figure 4

Source: The Chart Store

For this reason then, we of course cannot recommend opening new short positions again just yet even though fractal declines in stocks could develop any day now, with a passing of the Fed meeting this week as good a time as any if short sellers are perhaps sufficiently squeezed out by then. And if this appears to be the case we will be sure to point that out to you at the time. But until short selling becomes unpopular again, the risk associated with doing so is elevated, where only foolish money would have a large position on at this time. Certainly if you already have substantial profits in positions put on when we first talked about this opportunity to leave a 25 or 50-percent position in place given history may rhyme this time around, not match exactly, meaning the fractal could be delayed a week or so. As mentioned previously price managers will want to close stocks on a positive monthly basis if possible, so expect a great deal of futures buying to accompany what looks to be a shoe-in 50-basis point rate cut by the Fed this week with stocks threatening to fall off a cliff.

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. However, if the above is an indication of the type of analysis you are looking for, we invite you to visit our newly improved web site and discover more about how our service can help you in not only this regard, but on higher level aid you in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

So, if this is the kind of dedication and attention to detail you are looking for in a market timing service that delivers accuracy consistently, then look no further. How would like to have been short from the top like our subscribers? Only through a genuine understanding of the psychology and technical aspects of markets can this be accomplished. So, give us a try before it's too late for your portfolio. We can help with some of those tough decisions you are currently facing.

And certainly, if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.