The current cycle is already stretched to 45 days. Usually this cycle bottoms between 35 and 40 days so you can see we are now overdue for a top. That covers the cycles part of the equation.
Sentiment has now reached bullish levels (contrary sign) that should be enough to force at least a daily cycle correction. We haven’t yet reached the extreme level that is normally required to turn the larger intermediate cycle. In bull markets it usually takes a push to new highs to get to that kind of extreme sentiment level.
Finally I like to see some sign that smart money is exiting the market in preparation for a correction. For me that sign comes when we see a large selling on strength day in the SPDR S&P 500 ETF (NYSE:SPY).
Today we got that final sign.
Not surprisingly we now have a volatility coil forming on the S&P chart.
As most of you probably remember the initial move out of a coil is often a false move even though it is usually very aggressive. Typically the initial move will run 3 to 5 days and then reverse leading to a much more powerful and more durable move in the opposite direction.
Since we are 45 days into the current cycle and we now have all three signs for a correction lined up I think the odds are strong this coil will break to the downside. There are implications for the dollar (NYSE:UUP) and gold (NYSE:GLD) if this unfolds.
I went over them along with a game plan in tonight’s report so I won’t repeat it here but I think we will likely see a correction soon and since we still haven’t eclipsed Monday’s intraday high it may have already begun.
Written By Toby Connor From Gold Scents
GoldScents is a financial blog focused on the analysis of the stock market and the secular gold bull market.