Erik McCurdy's  Instablog

On March 15, our computer models generated a cycle low signal for the weekly chart of gold, indicating that the latest intermediate-term cycle low (ITCL) was likely in place. Price behavior during the last two weeks has confirmed that a new intermediate-term cycle is in progress.

 

 

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In September 2011, our computer models predicted the likely development of a long-term correction in the gold market. The top formed as anticipated and the subsequent correction developed into a consolidation pattern that favors an eventual resumption of the secular bull market from 2001. However, the current intermediate-term cycle faces an important test and market behavior during the next several weeks could provide a meaningful signal with respect to long-term direction.

 

 

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The short-term cycle has maintained a bearish translation for the past several months. However, a cycle low signal was nearly generated today, indicating that the latest short-term cycle low (STCL) may have formed during the previous session, and the short-term cycle is on the verge of transitioning to a bullish translation.

 

 

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Technical indicators on the daily chart are effectively neutral overall, suggesting that direction is in question as prices hold above previous lows of the downtrend from October.

 

 

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Our Gold Currency Index (GCI), which tracks the intrinsic value of gold as an international currency, is also holding near comparable short-term highs. However, a slight positive divergence has developed between the GCI and gold in US dollar terms. Notice that the GCI momentum indicator (MACD) has moved into positive territory, while the gold momentum indicator remains in negative territory. As longtime readers know, divergences between the GCI and gold in US dollar terms usually forecast the direction of the next meaningful move, so the slight positive divergence is a bullish short-term development. It will be important to monitor this divergence during the next several sessions.

 

 

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The consolidation formation in gold is undergoing an important test and a meaningful signal with respect to long-term direction could occur during the next several weeks. Therefore, it will be important to monitor the character of the rebound off of the last ITCL closely.

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.

The S&P 500 index closed moderately lower today, retreating further from recent highs of the cyclical bull market from 2009. Technical indicators are slightly bullish overall on the daily chart, tentatively favoring a continuation of the advance. However, the uptrend from November has moved higher at an unsustainable rate and it will almost certainly be followed by a violent overbought correction.

 

 

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As we noted at the beginning of March, the five-phase rally from November is in the final phase of its development. Therefore, the uptrend will likely terminate sometime during the current short-term cycle from late February.

 

 

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Moving out to the intermediate-term view, the advance off of the low in November marks the second time that the angle of ascent has increased following the last intermediate-term low in late 2011. The cyclical bull market is moving higher at an unsustainable rate and it will likely be followed by a violent overbought correction.

 

 

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At a current duration of 48 months, the bull market is long overdue for termination and it is highly likely that the next cyclical top will form sometime this year. Additionally, the speculative nature of the advance during the last ten months indicates that the final blow-off phase of the rally is likely in progress, so a long-term reversal could occur at any time.

 

 

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The stock market is currently overbought across all time frames and the next long-term correction could begin at any time. Therefore, now remains a time for extreme caution from an investment perspective and we remain fully defensive. Stocks will continue to experience violent, extreme price swings in both directions and those moves will continue to provide excellent trading opportunities. The next optimal entry point for a short swing trade could occur during the current short-term cycle, so traders should monitor price behavior closely during the next several weeks.

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.

Our computer models analyze a large basket of fundamental, technical, internal and sentiment data in order to calculate our Secular Trend Score (STS) and our Cyclical Trend Score (CTS). The historical data used by our models extend back to the market crash in 1929 and have enabled our STS to correctly identify every secular inflection point and our CTS to correctly identify more than 90% of all cyclical inflection points during the last 84 years. Additionally, when analyzed together, these data identify extremes in the risk/reward profile of the stock market from an investment perspective. In early February, stock market investment risk increased to the highest 1 percentile of all historical observations, joining a select group of seven time periods. The additional short-term gains of the past month have increased investment risk even further, creating one of the five worst risk/reward profiles since 1929.

 

 

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It must be noted that this particular measurement of investment risk is not a top call or an indication that a severe market decline is imminent. Overbought rallies such as this one can remain overbought for a long time as speculative momentum carries prices to higher and higher extremes. What the current investment risk/reward profile tells us is that a severe market decline will almost certainly occur after the current cyclical bull market terminates. At a current duration of 48 months, the bull market is long overdue for termination and it is highly likely that the next cyclical top will form sometime during the next six months. Additionally, the speculative nature of the advance during the last ten months indicates that the final blow-off phase of the rally is likely in progress, so a long-term reversal could occur at any time.

 

 

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It is important to understand the difference between investing and trading. In order to properly evaluate the investment merit of a particular asset class or vehicle, a minimum time frame of ten years is required. By our measures, which are based on the historically reliable valuation model, the S&P 500 index is currently priced to produce a total annual return of 3.2% during the next decade. This is extremely poor projected performance, especially when you consider that the current yield on the 10-year Treasury note is 2.05%. Of course, given that stocks remain mired in a secular bear market that began in 2000, there will continue to be violent, extreme price swings in both directions. Those moves will continue to provide excellent trading opportunities, but the next true investment opportunity likely remains several years away. Now remains a time for extreme caution from an investment perspective and we remain fully defensive.

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.