After two hard days down in the stock market I'm going to take a contrary position and say that this is just a normal profit taking event and that stocks are going to recover and head back up to new highs. I still think this market needs to have a final blowoff bubble phase before the bull can die. The final bubble phase for stocks should usher in the final capitulation stage of Gold's 2 1/2 year bear market. For those that are sitting in cash, this final capitulation is going to represent one of the greatest buying opportunities of this generation.
First off, let's take a look at the stock market:
We've had so many calls for a crash over the last year that you just know the bears are salivating right now thinking they are finally going to get their wish. However, I don't think we can have a crash in the stock market until we complete a true parabolic structure. Notice that during the final parabolic move in 2000 the NASDAQ had two back-to-back 10% corrections, one of them unfolding in only three days and completing what looked like at the time a double top. The shorts that jumped in at the bottom of that second 10% correction then got absolutely destroyed over the next six weeks as the tech sector proceeded to rally 34%.
Gold on the other hand looks like it is setting up for a final bear market capitulation phase where every gold bug finally throws up their hands in disgust and jumps over to the stock market right as it's putting in a final bubble top.
It's now been a year since gold broke through that $1520 support zone and gold has yet to ignite a new bull market move. We've had two very convincing bear market rallies but both have rolled over at that same $1400 level. I'm afraid this has probably so demoralized precious metal investors that when we get our next test of that sub $1200 level later this month there just aren't going to be any buyers left to defend that level. A third test of that support will almost certainly end in a break and final violent capitulation down to the next support zone at the 2008 high a little above $1000.
Also, when gold failed to move above $1434 it set the yearly cycle up in an extreme left translated pattern. For those that don't know what translation is, let me explain. Gold's yearly cycle, for instance, typically runs about 12 months from trough to trough. A cycle that tops in a right translated manner would find a high somewhere after the seventh month. A left translated cycle on the other hand would find a final top in six months or less. So if a cycle runs 12 months and tops in a left translated fashion on, let's say month four, it has eight months to decline. Much longer than the four months it rallied. So consequently, left translated cycles typically move below the previous cycle low. As you can see in the chart below golds yearly cycle topped in an extreme left translated pattern on month #2.
That's the point at which investors that have available cash will get the third great buying opportunity of this secular bull market. The first two delivered amazing gains as they came out of their bear market bottoms.
