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January 23, 2011

Inflections

The waiting game may be nearing an end with regard to an intermediate low for gold. A couple of weeks ago, we set a framework of expectations for spotting that low which revolved around the nature of gold's daily cycle. If the current cycle were to quickly find a low, the idea would be for another daily cycle to unfold into the intermediate low. If the daily cycle ran long, we would look for an intermediate low to form at the end of the current daily cycle. Time has pretty much run out on the former scenario.

Gold Daily

There can be, of course, no guarantee the coming daily cycle low will mark an intermediate low. However, we are playing a game of odds, and conditions are aligning which suggest favorable odds for buying that low, especially if price sneaks down to the 150-day moving average... the 150 DMA has halted all four intermediate declines since the 2008 liquidation. We are also going into Week 26 of the intermediate cycle... squarely within the 25 to 30-week timing band we have come to expect since 2008.

Furthermore, gold miners bullish percent has now dropped below the level that coincided with the summer low.

BPGDM Indicator

Apart from signals intrinsic to the precious metals market, the dollar appears to be facing its terminal plunge into a 3-year cycle low.

DX Daily

So, the dollar has lost a major pivot, formed a failed daily cycle, and is sitting barely a point off the 3-year cycle trend line.

DX Weekly

With the dollar in dive mode, I seriously doubt gold will stretch its intermediate decline through another daily cycle. I am therefore prepared to try to catch a bottom if gold slips down to the 150-day moving average or to buy the next weekly swing low. In the former scenario, I will be looking for a break below the $1320 pivot accompanied by a spike in volume. A volume spike under an important technical level would signal that sell stops are getting blown out as big money accumulates. If gold does not manage to test the 150 DMA, I will buy on the next weekly swing low. Buying a daily swing in the absence of a panic sell would be too dangerous as the swing could turn out to be a head fake before the final plunge.

My shopping list will consist primarily of silver futures and various mining shares such as Silver Wheaton, GDXJ, and some micro-caps. I am reticent to accumulate option positions without an intermediate equity decline behind us because the precious metals complex could easily set an intermediate low and then chop only moderately higher for a few weeks while stocks finish their own decline. And we all know a choppy market is not favorable to long option positions. If equities eventually unfold the expected intermediate decline and conditions are then still favorable, I will consider adding options at that time.

Speaking of equities, it seems we finally have at least a daily cycle decline under way. While the decline in the SPX has been mild thus far, tech and small-cap equities have already posted noticeable losses.

RUT Daily

So, I have no doubt a daily cycle correction is underway. Earlier in the cycle, I would have also anticipated an intermediate peak to have been marked. However, the SPX is 37 days into its daily cycle... 45 days without our minor rule change a few weeks back... so we cannot rule out seeing stocks quickly find a daily low:

SPX Daily

Traders with short books may be quick to label such action as carrying only a remote possibility, but I would caution against such hastiness. I've highlighted on several occasions the tendency of intermediate peaks to produce whipsaws before commencing a serious decline. Another new high might be irritating, but prudence demands we consider all reasonable outcomes.

Besides, with treachery comes opportunity. If stocks were to return to another high, they would leave a clear daily cycle low in their wake. If the action quickly rolled over and broke that low, we would then have a failed daily cycle in hand and the opportunity to get a little more aggressive on the short side.

As Members know, I have been mostly out of the precious metals play since early November. However, I believe some important inflections are finally upon us, and we could see our opportunity to jump back in at any moment. When I begin accumulating positions, I will try to get those moves posted to the Member comment area during the day.

 

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