If you didn’t happen to notice, the NASDAQ Composite dropped almost 2% on Friday. Could this be an early warning of a major correction coming our way? I know that I had a price target on the S & P 500 of about 2200-2350 and that was recently overrun, currently we are at 2431. I have been following Gary Savage who has a service call Smart Money Tracker. He has been successfully tracking the stock, gold and energy markets for the nine years that I have been following him. Contrary to my thinking, he has been looking for a bubble phase in the stock market, which would imply that my ultimate price target was much too low.
Today, he wrote an article that would suggest that a large correction is possible as early as next week. He believes that the market will recover from this potential correction. He believes that this correction will dampen the sentiment and set the stage for the bubble phase in the market.
Gary is a technician and sometimes gets over my head in his analysis, however, when he makes these kind of calls he gets my attention. He has well thought out projections and has consistently been right on his opinions on the stock market. My service is all about preserving capital and I wanted to give you all a heads up!
Gary has allowed me to reprint his article on my blog. This is part of my service, trying to think outside the box and give you the benefit of my sources and experience.
His report is lengthy and most likely will cause some confusion with his terminology, but it is worth the read.
Special stock market report
Smart Money Tracker
A few things have bothered me about the stock market advance since the election. First and foremost if I pull up a long term chart, and then step back from my computer, I can’t identify anything that looks like a true ICL decline. That’s worrisome. Markets need corrections from time to time to reset sentiment. There’s certainly nothing on the first chart that resembles the panic of an ICL, or an even larger degree yearly cycle low. And we should get a YCL either early in the year, or by sometime in the summer during bull market phases. Yearly cycle lows don’t generally occur late in the year during bull markets, unless the market is dropping down into a multi-year cycle low. Since we just had the 7 YCL last year it’s really too early to be looking for late in the year YCL’s. The sideways chop back in March doesn’t even look like a ICL, and there’s definitely nothing about that drop the resembles the all out panic of a larger degree yearly cycle low. So I question whether the cycle low in March was either. It looks more like just a minor daily cycle low rather than a larger degree intermediate, or yearly cycle low. This market needs a distinct YCL, and it needs to occur during the summer. Something to scare the pants off investors and completely reset sentiment so the next leg up can begin.
Another thing that has bothered me is that the Nasdaq never tested the breakout. Most major breakouts like this generate a retest at some point before the rally can continue up.
Finally there have been no failed daily cycles since the election. An ICL should either occur as a failed daily cycle or a crash event. All other ICLs for the past three years occurred as a left translated and failed daily cycle. (The market stair stepped down at least one time). You can see in the chart below every ICL generated at least one daily cycle that bottomed below the previous one (a failed daily cycle). You can also see we have not met that requirement yet. The last three DCL’s have all made higher lows.
This is where it’s important to think outside the box and not get stuck with the obsolete cycle timing bands from the past. If I require the ICL to occur around week 20-25 (the old ICL timing band) then it should have occurred during the drop in March. But as I’ve indicated, that did not achieve the lower low o failed daily cycle. So that doesn’t seem to fit the DNA for a true ICL. If I allow that in our modern markets cycles are evolving, then when I look at this chart I have to accept the possibility that the current intermediate cycle may now be into its fourth daily cycle, and the true ICL lies ahead, and will likely occur as some kind of mini crash event when the current daily cycle bottoms.
If I look at this as one really long and stretched intermediate cycle created by multiple PPT interventions, I have to wonder if we aren’t setting up for a temporary deflationary event to retest those support and break out levels. This could possibly correspond with a sharp rally in the dollar after the Fed raises interest rates on Wednesday. Remember most ICL’s in stocks tend to occur in conjunction with either an ICL in the dollar, or an ICL in the euro. One of those two currencies is usually suffering a selling panic along with stocks at major cycle degree corrections. In this case if the dollar is rallying then I would assume it would be the euro suffering an abrupt crash into an ICL.
Notice that stocks, especially the tech sector, really seem to have taken off once the dollar started moving down into its ICL. Now the dollar appears to be starting an intermediate degree rally and tech stocks have rebelled. At this point I think the stock market prefers the dollar moving down. It may react poorly to a dollar rally, as will most likely gold.
A sharp rally in the dollar could trigger the bloodbath phase in gold, a semi crash in the stock market, and possibly scare the Fed into ending the rate hiking cycle, and maybe even starting another round of stealth QE. (And that would be the fundamental driver for the next bear market in the dollar. It would also be the fundamental driver for the bubble phase in stocks, followed by gold in the years ahead.)
We should get some kind of bounce on Monday as short term sentiment is extreme in the QQQ, and I would think the PPT will do everything possible to keep the market propped up into the rate hike on Wednesday, so we should get an opportunity to exit positions early in the week and get on the sidelines just in case this scenario is about to unfold. I also assume we will see a large selling on strength number show up before the market is ready to deliver a significant drop, and we haven’t had one lately.
Nothing is written in stone right now. There is always the possibility that the Plunge Protection Team just prevents the market from correcting. Or a correction could just focus in the tech sector. The energy stocks, banks and industrials look good, or are starting to perk up. That seems kind of weird if the market is about to correct hard.
If by mid July, when the next DCL comes due, nothing has come of this then we will quit worrying and re enter our positions. And this certainly isn’t a signal to do something foolish and start shorting the stock market. But come Monday morning I’m probably going to sell the TQQQ position and all but a minimum 10% core position in UPRO and then wait till the next DCL arrives before doing anything else in the stock portfolio.