Markets: Why The Next Major Selling Wave Is About To Begin (GLD, SLV, VXX, TZA, SDS, FAZ)
Toby Connor: As many of you already know I expected the dollar index to put in a major three year cycle low sometime this year. The normal timing band would have been for a bottom in the spring. The recent breakout and move to new highs has confirmed that the May bottom did in fact mark the three year cycle low. As expected that also marked the top of the cyclical bull market in stocks.
It’s widely expected that the Fed will announce operation Twist at today’s FOMC meeting. Obviously if printing several trillion dollars didn’t save the economy, then rotating the Fed’s balance sheet from short-term interest rates to long-term in the attempt to hold down the long end of the yield curve isn’t going to have any effect at all as the approaching recession intensifies. Interest rates are already at historic lows.
Interest rates aren’t the reason why people are not borrowing. With continued high unemployment there simply isn’t enough demand for businesses to expand their operations. The American consumer is so deeply in debt that he can’t service it. Unfortunately, we can’t print money like the US government so it doesn’t help us to go deeper into debt. The US consumer will not be borrowing money any time soon.
The bottom line is operation twist will be a miserable failure just like QE1 and QE2.
The stock market (NYSE:SPY), and gold (NYSE:GLD) are now moving into the timing band for the next daily cycle low (selling event). The only question now is whether the announcement of operation Twist this afternoon will initiate a short term knee-jerk reaction higher, or whether the market will immediately continue to sell off into that next cycle low that is due to bottom sometime in the next 11 days.
I expect gold to bottom a little sooner as its daily cycle tends to be slightly shorter.
But gold also is at a critical stage. It must hold above the prior daily cycle low of $1705. If it fails to do that it will signal that an intermediate degree decline has begun. It would also signal a left translated intermediate cycle which would have high odds of moving below the prior intermediate degree bottom of $1478.
As you can see in the chart below gold began to struggle just as soon as the aggressive stage of the dollar rally began.
As the stock market moves down into the next daily cycle low and the selling pressure intensifies, this should drive the dollar index much higher. It remains to be seen if gold can reverse this pattern of weakness in the face of dollar strength, especially since the dollar will almost certainly be rallying violently during the intense selling pressure that is coming in the stock market.
All we can do now is wait to see what the initial reaction to operation Twist will be this afternoon. Will there be a temporary knee-jerk rally that quickly fails, or will the market just continue down after yesterdays reversal?
Related ETFs: Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA), ProShares UltraShort S&P500 (NYSE:SDS), Direxion Daily Financial Bear 3X Shares (NYSE:FAZ), iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX), SPDR Gold Trust (NYSEGLD), iShares Silver Trust (NYSE:SLV).
Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market. Mr. Connor’s analysis skill of the markets is largely self-taught, though he admits to being an avid reader of Richard Russell and Jim Rogers, among several others.