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October 8, 2013

Trend Summary

The Member Letter recently received a pair of new features. The first is a statistical trend system (STS) which supports cycle analysis by providing early indications of cyclical turning points, as well as confirmations of the nature of different cyclical declines before such interpretations can be confirmed by cycle analysis alone. Use of this unified methodology enabled me to get short the equity market late last week in anticipation of the current sell-off.

The following paragraphs provide a quick summary of the trending states of several assets analyzed in the Member Letter:

Stock Market
I had been anticipating an early-September peak in stocks since equities bounced out of their last daily cycle low in mid-August. An initial indication in support of this interpretation was delivered by the STS almost two weeks ago. Stocks then lost their 65DMA and now threaten to flip the statistical view to outright bearish. Furthermore, today's weakness is slated to flip the weekly cycle view to outright bearish, as well. Overall, stocks are now in a strong downtrend.

Precious Metals
Precious metals, as interpreted by gold cycles, have been locked in a multi-year cycle decline since 2011. Until this decline is complete, weekly cycles will continue to form as left-translated and fail. The current weekly cycle generated a 9-week rally out of the June low, but did not manage to flip the statistical interpretation into the bullish mode that would have confirmed a multi-year cycle low.

Furthermore, both the daily and statistical configurations are bearish for gold, suggesting the current weekly cycle is already in decline. The current cycle should therefore form as left-translated and fail. In other words, gold should sink below the June low in coming weeks. Gold is in a strong downtrend.

Crude Oil
A little over two weeks ago, oil's daily statistical view provided an early indication that price was about to slip into a weekly cycle decline. A couple days later, oil's daily cycle failed, confirming that view. However, at this point the downtrend has only been verified on the daily scale. Oil's weekly stats still show a solid uptrend. If the bullish, weekly STS configuration endures the extent of the daily downtrend, we should see new highs for the black stuff as the weekly uptrend kicks back into gear. Overall, oil sports a near-term downtrend, but a strong uptrend in the higher time frame.

The Dollar
The value of the STS becomes apparent when an interpretation that is not otherwise obvious is revealed. The dollar sports such an example in the form of its June low. While not obvious from price behavior alone, the statistical configuration reveals that low as a yearly cycle low. This knowledge is important because price has already dropped beneath the June low. In other words, the dollar's yearly cycle has already failed, and therefore weekly dollar cycles should continue to fail into next year's 3-year cycle low. The dollar sports a strong downtrend.

The fact that both gold and the dollar suffer strong downtrends simultaneously is curious, but not without precedent. However, a positive correlation between these two assets usually does not endure very long. Since the dollar is due for a major low in the middle of 2014, a continued drop by the DX should materialize. At some point, this drop could spark gold to rally out of a multi-year cycle low.

Since such a low would leave gold with a very short, multi-year cycle, I will not try to guess when the inflection will take place. The unified system of cycles and statistics will serve as my guide to trading the next big gold rally.

 

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