Erik McCurdy's  Instablog

Last week, our cycle analysis identified the potential development of the latest short-term cycle low (STCL) in the stock market. On Friday, a cycle low signal was generated, confirming that a new short-term cycle is in progress.

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With respect to technical analysis, the uptrend from November remains extremely overextended and a break below key support levels would signal the likely start of a potentially violent overbought correction.

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This is an important short-term cycle and market behavior during the next several sessions could have a meaningful impact on the long-term health of the bull market from 2009.

We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

At a current duration of 51 months, the cyclical bull market from 2009 is long overdue for termination. Fueled primarily by a historic amount of stimulus from the Federal Reserve, the stock market rally has accelerated into a prototypical speculative blow-off phase, suggesting that the next cyclical top will almost certainly develop when the advance terminates.

 

 

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Driven by euphoria, highly speculative rallies of this character will often continue to advance even after the market has become extremely overbought across all time frames, and predicting the timing of the inevitable reversal with a high degree of statistical confidence is nearly impossible. However, several subcomponents of our Cyclical Trend Score (CTS) are flashing warning signs that suggest a long-term top is approaching. Our sentiment score has moved below the -80 level for the first time since May 2011, indicating that the market is vulnerable to a severe correction.

 

 

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Additionally, our price oscillator score, which monitors overbought and oversold conditions from a cyclical perspective, has moved below the -80 level for the first time since June 2011, indicating that the cyclical bull market from 2009 has become extremely overbought.

 

 

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Although internal measures such as market breadth and volume have yet to break down, the degradation in multiple other measures suggests that the inevitable reversal could occur at any time. The cycle high signal that was generated last week remains in effect, indicating that a half cycle high (HCH) likely formed during the week ending May 24. Only a quick move above the stop level at 1,667 this week would invalidate the signal and suggest that the initial rally phase of the intermediate-term cycle from April is still in progress.

 

 

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At this very late stage in the cyclical bull market from 2009, every intermediate-term cycle high is also a potential long-term top, so it will remain important to monitor price behavior closely during the next few months.

We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Gold closed sharply higher today, reacting further off of recent lows of the downtrend from October. We have been monitoring the development of a positive divergence on the daily chart since early last week and the strong advance today has created a slightly bullish condition overall that tentatively favors a return to congestion resistance in the 1,475 area.

 

 

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Our Gold Currency Index (GCI), which tracks the intrinsic value of gold as an international currency, has developed an even stronger positive divergence, resulting in a moderately bullish condition overall on the daily chart that favors a return to its comparable previous high near 37.60.

 

 

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Last week, we noted the potential development of the latest intermediate-term cycle low (ITCL) on the weekly chart of gold. The advance this week has caused both cycle analysis price oscillators to experience bullish crossovers and a bullish engulf pattern has formed on the weekly chart. In the absence of a sharp decline tomorrow that returns to the close on May 24 near 1,386, an intermediate-term cycle low signal will be generated this week, indicating that the latest ITCL likely formed during the week ending May 24.

 

 

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The Gold Miners index is also exhibiting bottoming behavior. A weekly close above 813 tomorrow would generate an even stronger cycle low signal on its weekly chart, suggesting the likely formation of an intermediate-term bottom in the gold sector.

 

 

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The long-term downtrend from 2011 remains in progress and it is too early to know with any useful degree of statistical confidence if the correction is in the process of terminating. However, the character of the rebound off of the latest ITCL will provide the next assessment of gold market health, so it will be important to monitor price behavior tomorrow for the potential development of this important intermediate-term signal.

We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

Disclosure: I am long SGOL.