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January 28, 2015

Why the Equity Market Is In Deep Trouble

Today's markets demonstrated why confirmations are a necessary precursor to action. Yesterday's letter noted potential turning points for gold and oil, yet both of these markets were lower today, oil strongly so. Trading on hunches will get you in trouble, hence my line that if I traded every time I had an opinion, I would go broke. We will get to the gold chart in a minute, but first let's address the big action of the day: the fact that equities could not hold together despite a softening of tone from Yellen.

So there you have it, folks. The ECB commits to counterfeiting a minimum of ¬1 trillion while the FOMC takes a step toward further delays in hiking rates, and equities still tumble. Failure to rally on a duo of bullish news items is a very bearish sign.

Unfortunately, I cannot yet lower my stop on my Nasdaq short, so I am not adding to the position. With a Day 28 count, this daily cycle should form a low within a couple of weeks, plus or minus a few days. With a Day 8 peak, however, price should tumble below the mid-December low before finding ground. But the decline is not likely to end there.

A second, failed daily cycle would certainly crack the October low, forming a failed yearly cycle and heralding the onset of a bear market. This outlook is really no different than what I have been writing all month, but reality is finally hitting home with the crowd. The question is, at what point does an orderly exit turn into a stampede?

This intermediate cycle does have one chance to rescue itself. If the current daily cycle decline stretches three more weeks, the DCL will form within the intermediate cycle timing band. In this case, an ICL could form on Week 18, resulting in a right-translated nature.

We will just have to judge the technical nature of that low when it arrives. If the coming DCL sports panic characteristics, I will close my short to avoid the risk of holding into a new intermediate rally. Otherwise, I will look to increase my short into the next daily cycle for the ride into an ICL.

Gold was only mildly lower today, but a down day for the yellow metal during a sharp equity sell-off is a weak sign. These days, gold will usually rally with equities plunging. So we may not see the early DCL discussed yesterday, but the possibility has also not been eliminated.

A normal progression would see gold below the UpperBand sometime between Days 18-24.

My yen trade is still intact. Price has only moved slightly higher since the trade was initiated, but if I have correctly identified the yearly cycle low, we should see a nice spurt higher in coming weeks. Patience is required here, along with a reasonable stop.

I don't know about you folks, but I find volatile markets much more interesting.


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