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March 30, 2011

Waiting for Resolution

About a week and a half ago, I noted on these pages that stocks had finally delivered a long-awaited correction, and that the big surprise would turn out to be not the depth of the fall, but its brevity. In fact, since that write-up the S&P 500 has posted gains in 6 of 8 sessions, regained the 65DMA, and is now flirting with a new, bull market high. All the typical indicators within my cycle analysis techniques confirm March 16th as an intermediate low, so the task now turns to spotting a top.

Unfortunately, cycle analysis does not provide any direct tools for spotting tops, but we can combine cycle analysis with more traditional technical tools. Consider the large basing pattern formed by the SPX in 2010:

SPX Weekly

Regular readers are familiar with my distaste for targets, but I do like to keep pattern projections in mind in order to get a feel for what other traders are watching. And such tools can be useful in combination with cycle analysis. If, for example, stocks were flirting with SPX 1450 late in a daily cycle (when there is a higher chance of seeing a decline into a low), a trader could initiate a short position with a close stop just above the pattern projection.

In fact, such a setup would be well worth the risk, in my opinion, because stocks are due for a 4-year cycle low sometime between late 2012 and early 2013. The declines into those lows tend to last at least 15 months, and so should start sometime this year. In other words, a trader would have a chance at catching a rather significant top for stock prices.

The action in gold is still conducive to seeing a rather spectacular run conclude in the first half of this year. Presently, gold sits very early in a daily cycle and should see another spurt higher commence any day now. In fact, a consolidation pattern in silver supports this notion:

Silver Daily

Given the earlier stage of gold's daily cycle, I expect the resolution of silver's consolidation pattern to be considerably more positive than the last.

 

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