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January 10, 2015

Why I Believe a Bear Market Has Begun

We have a lot to cover in this weekend's letter, so I am just going to take a top-down approach, beginning with the dollar. As noted in Member comments, I shorted the dollar Friday, and here's why:

Only a few days ago, I promised not to short the dollar until we saw a setup for an intermediate-degree decline. A Day 15 peak nearly assures us this cycle will achieve a RT nature, leading to further highs before an intermediate decline, so I am breaking my promise. That 2-point ramp is what appeals to my shorting senses. If price tests a pivot point on its way into a DCL... a not uncommon occurrence... we could see the buck tag DX 90 before bouncing into a new cycle.

I am very curious to see how precious metals behave should the dollar sink into a cycle low here. Gold has held up very well against the dollar rally, so if the yellow metal can react higher along with a dollar drop, gold bugs can notch another positive point on their collective belts.

A move above this important moving average would constitute a bullish turn for gold and PMs in general. But keep in mind that gold's weekly trend remains statistically down.

I remain long gold, but the time has not yet arrived to get aggressive. However, if the yellow metal can flip its major trend and push the intermediate cycle high past Week 12... to lock in a right-translated nature... gold bugs can begin to get excited about a renewed bull market.

The stock market's early-year woes may also be a positive sign for gold. Gold seems to move higher during almost any session in which stocks move lower, and I believe am equity bear market would see funds flow into beat-up sectors such as precious metals. As noted in recent letters, the breakdown in equities is warning of a major turning point.

The problem for equity bulls rests in the intermediate cycle count.

Math is working against bulls here. Unless the current daily cycle extends, a DCL is due in about 3-5 weeks, or around Weeks 15-17 of the intermediate cycle. The intermediate timing band runs from Weeks 18-24, so another daily cycle is going to be required to find an ICL. Therefore, if the current daily cycle fails, we are going to see two failed daily cycles into the next intermediate low, effectively assuring us of a failed intermediate cycle.

Now, remember that the last ICL was also a yearly cycle low. A failed intermediate cycle therefore heralds a failed yearly cycle, and yearly cycles only fail when bear markets begin.

You can now understand just how important holding the October low is to the prospects of extending the equity bull market. Our TrendBand signals have already delivered a strong indication of a bearish turn. Once we receive cyclical signals, as well, I will move from mildly short to aggressively short.

I bought some Japanese yen Friday. As noted earlier in the week, I expect a rather strong counter-trend move as the yen bounces out of a yearly cycle low. However, I took my entry signal from the daily chart.

First, the early-December bounce saw price turn lower and then begin rallying again without setting a lower low. Combine this point with the second observation that price just broke higher out of a coil with an uptick in volume, and the yen's yearly cycle stands a strong chance of having seen its low in December.

My final Friday trade was to short copper. Copper's weekly cycle failed several weeks ago, but I was waiting to build confidence that we were, indeed, witnessing a failed cycle and not just an extension.

Only on Week 12, copper's cycle should decline another 6-12 weeks to find a low within the normal timing band. This decline could be rather vicious because copper's major cycle, which saw its last low in March, has already failed. The major cycle forms a low about every 5-8 quarters, so we can expect at least another two quarters of downside as copper works its way into a major low, likely in conjunction with the 3-year commodity cycle low due this year.

Furthermore, copper has almost no support nearby. You'll need to zoom in on this one:

One pivot does exist at the $2.40 mark, but has less significance, being older than the 2008 low. Furthermore, a 6-month decline is not going to knock only $0.35 off the price of copper. Copper could very well be the next oil in terms of legging it lower.

Docfolio Update: Bot yen; Shorted dollars and copper


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