CRB break

The CRB has now broken a long term trend line. It is oversold and probably due a temporary bounce but the odds are that the bounce will be of the dead cat variety. The spike in energy along with the ongoing problems in housing and the credit markets are most likely going to send the global economies into the worst recession in 25 years. That is going to cause demand destruction in the commodity complex.

Will it signal the end of the commodity bull? Not a chance! Once the recession ends, as they all do, demand will surge again and we'll go through another round of escalating commodity prices. I expect this whole cycle to be exacerbated by central banks who will turn to the printing presses to "halt" the recession.

I wouldn't be surprised to see this whole cycle of inflation and deflation cycle two to three times before enough production is brought on line to end the commodity bull and start the next great bull market in stocks.

Another 1-2-3 reversal in the making

Now it's oils turn to track a 1-2-3 reversal. This time the trend will be down however. The S&P confirmed the trend reversal today BTW by closing above the intial reaction.

Oil should now test the highs. I have my doubts as to whether it will be able to push above the 50 DMA before rolling over again though. Notice the 3 day RSI is already close to pushing into overbought. In a declining trend overbought levels get sold fairly quickly. We'll just have to see how this one plays out. Needless to say I'm not ready to buy oil yet.

1-2-3 reversal

I've been pointing out in the daily updates for a couple of weeks that we probably put in the 22 week cycle low on the 15th. The market is now in the process of completing the 1-2-3 reversal to confirm that low. A close above 1282 will skew the odds highly in favor of the trend now being up for a while.

The transports and the Russel have already completed 1-2-3 reversals suggesting that the rest of the market would eventually follow. Until the selling pressure in oil eases we can probably expect the market to trend higher. Well until the market finally recognizes the fact that collapsing oil is actually a bad sign. Which it will do at some point. Falling energy prices = falling demand which = recession deepening. This all leads to much lower stock markets in the future. Which is exactly what Lowry's selling pressure is and has been telling us all along.

Is it time for the dollar to rally?

When everyone starts thinking the same thing then usually no one is thinking. The dollar has gotten pummeled over the last 2 1/2 years. The Fed debasing the currency has led to the dollars decline and commodity prices skyrocketing.

Now don't get me wrong I'm still a long term bear on the dollar but I think too many investors are short the dollar at this point. Everyone has been thinking the same thing for a while now. It's probably time for the second counter trend rally. Note the 3 month basing action that we've been in similar to how the first counter trend rally started. This is probably a sign that the market is running out of sellers. If there's no one left to sell then the direction of least resistance is going to be up.

The first rally lasted a year. There's no reason why it can't do so this time also. As a matter of fact I suspect it will. The FED has to have noted the explosion in commodity prices as a result of their last attempt at devaluing the dollar. I think they are going to be a bit reluctant to expand money supply for a while. Of course if money supply is not expanding we probably can't expect too much out of the stock market. The S&P was up a grand total of 3% in 05 as the dollar rallied.

Since we are in a bear market now I expect the market to gradually work lower as liquidity contracts. At some point probably by the middle of next year the FED will start to panic again as the recession doesn't improve and most likely continues to deepen. Falling commodity prices should at that time give them the cover they need to start cutting rates again and expanding the money supply.

Until that happens I don't expect too much out of the precious metal or any commodity sector for that matter. Looking at the weekly charts of GLD and the GDX it's obvious that money flows have been diverging for a while.

Another clue is our strong partner Platinum is now breaking down. Platinum has been the leader during this bull market. It's now leading the metals lower.

I don't think for a minute that the dollar bear is over or the precious metal bull for that matter. We are just going through the normal counter trend moves that happen in all bull & bear markets.

Luckily for us, all we have to do is watch the gold and silver COT for signs that the commercials are covering their huge short positions. Once we get the big money back on our side it will be time to buy the metals aggressively again and short the dollar. Until that time we'll just have to be patient.

The next "big" thing

I've thought for several years that the catalyst for the next great bull market will come out of the biotech sector. Don't get me wrong we aren't finished with the secular bear market yet and probably won't be for a while. We may be taking the first baby steps toward the biotech revolution though. The BBh just broke out of a 2 1/2 year consolidation. I've shown here and here in the past that the size of the consolidation is often a sign to how large the rally will be. Usually the break out will be tested soon after the intial break. That test will be an excellent time to take long positions in this sector.

CRB trend is broken

In Jan. when Ben cut big to "save" the markets it turned on the afterburners in the commodity complex. At that point the trend in the CRB started to accelerate. Oil had already spiked more than 100% by then anyway giving us the makings of the next recession. The Fed just made things worse. Well that trend is probably over. Counter intuitively spiking inflation is ultimately deflationary. Oil along with the credit and housing debacles have forced the global economies into recession. Recessions are deflationary. Obviously in a deflationary environment demand drops so prices retreat.

It certainly looks like commodities are signaling deflation in the future. I wouldn't worry though the Fed will ultimately be true to tenet #1. No way Bernanke is going to let deflation set in as long as he has access to the printing presses. I fully expect Bernanke to use the same cure as Greenspan did during the 2000-2002 bear market. Print, Print, Print!

Has oil topped?

Despite yesterdays weak rally I do think oil has topped. Every single time oil has spiked more than 100% with in a year it has led to a recession. I think it's safe to say that this time has been no different. Oil actually rose almost 200% trough to peak.

Now let me say that every recession has crushed demand and eventually brought prices back down. It will be no different this time. This time we have a global recession and it's going to be severe. To think that somehow demand is going to increase or even stay the same in a severe worldwide recession is simply absurd.

Often after a long intermediate move the first counter day after at least 4 days in a row in the direction of the trend will signal a trend change. (The four day corollary).

Also after a long intermediate move four days in a row counter to the trend will often confirm the trend change (The four day rule).

You will notice that we have both on the oil chart. Oil is short term oversold so a bounce could be expected but the odds are now in favor of oil trending down.

Looking at the weekly chart it becomes apparent just how far the parabolic rally went and how overbought it became. I really don't think this is going to be corrected by four down days. I fully expect oil to correct back to the consolidation zone of the T1 pattern (the technical rules are at listed on the lower right side of the home page). That should take oil back to the $85-$100 level before this correction is over.

Investors looking to hide from the bear in the energy sector are going to be disappointed I'm afraid.

Are financials cheap?

The Wall Street Journal , New York Times and Barons apparently think the bear market is over in the financial sector. This has got to be the most ridiculous thing I've seen in a while. To think that the largest real estate & credit bubbles the world has ever seen will be corrected in a little over two years is to put it mildly insane. Heck we haven't even recovered from the tech bubble yet and it's been 8 years. The housing bubble dwarfed the tech bubble.

Now don't get me wrong there will be incredible bargains to be had in the financial sector at some point. But to think that the troubles in the financial sector are over is just plain nuts. This will be a multi year process to clean out the banking system. I suspect it will last longer than it should because it's apparent that the powers that be would rather try to patch things than let the cleansing process take it's course.

Let's go thru the process so far shall we. First of course there was the denial that housing was even in a bubble. Pretty amazing that anybody with a lick of common sense could possibly buy into that one in the first place. No doc loans, option ARMS, the public buying multiple houses without having the slightest knowledge of real estate, speculators standing in line to make offers on developments that hadn't even broken ground yet, etc. etc. No that wasn't a bubble (sic).

Next we have the subprime crisis last summer. It will not spread was the war cry at the time. I think it's safe to say it did in fact spread.

The soft landing and Goldilocks economy came next. That died a rather gruesome death pretty quickly.

No recession! Amazingly enough quite a few analysts are still trying to sell this one.

There will be another wave of foreclosures during the second half of this year and first part of next as more ARMS come due. Unemployment rises during recessions. That means defaults on not only home loans but also on loans of all types. All of this is still in the pipe and it's not going to magically disappear.

So while I agree at some point there will be incredible bargains in the financial sector it certainly isn't happening yet. Heck we've only seen a handful of bankruptcies so far. To think that this is now over is beyond reason. It is the height of stupidity in my opinion.

I'm going to suggest that there is absolutely no way that anyone can possibly know which banks are going to make it through the storm at this point. There will be hundreds of bankruptcies before this is over, not a handful.

There is simply no such thing as cheap in the financial sector at this point because we have no way of knowing who is going to zero.

So when you see stories in the media about the bottom in financials treat it for what it is...a joke.

Oils T1 and Golds A wave

Sounds like a 60's psychedelic rock band doesn't it?

Oil appears to be in the beginning stages of correcting the large T1 move out of the 07 lows. You can find all the technical rules on the lower right side of the home page. We should now see oil test the consolidation zone. I see where the media is already labeling this a bubble. Baloney! Bubbles form when the public piles in. Bubbles form when supply swamps demand but price still rises. Neither one of those has happened yet.

All that happened is human emotion got a little carried away and too many people jumped on the energy complex in a market where nothing else was working. Now that bullish sentiment needs to be corrected to set up the next leg of the bull. I suspect this correction will take some time. We're not going to wipe out the extreme bullishness in only a month or two. Oil is probably going to have to trade sideways to down for a year or more. Makes sense as we are now in a rescession and demand destruction is occuring.

The second chart shows Golds 4 wave pattern. We are currently in the A wave that may or may not top out as oil rolls over. I suspect that gold will follow oil down. I also suspect that Gold is going to resist oils pull. It's already happening as the gold:oil ratio is starting to trend in favor of gold. During the first phase of the commodity bull oil outperformed gold. During the second phase gold should significantly outperform oil. So far oil has increased over 1300% and gold about 300%. During the second phase expect gold to fill that gap.

Once Gold's B wave finishes it will be time to get long precious metals in a big way. It will also be time to concentrate on the metals and forget about oil. That's not to say oil won't go higher, it will. Just that the big % gains are now over in the energy markets. The real opportunity now lies in the precious metals sector for years to come.

I'm watching for the first sign the the FED is ready to panic again. Oil breaking is just the out the FED needs to start cutting, which is going to be necessary in order to save the banking system and Bernanke has made it abundantly clear that this is priority #1 and to hell with what happens to the rest of us. Once we smell the cuts are coming it will be time to load up on the metals.

Is the bear dead?

The big question in every one's mind is did yesterday mark the end of the bear or at least the end of this leg down?

I can assure you that every hedge fund manager in the world looked at that first chart on Monday night and came to work Tuesday ready to buy stocks, especially financials since they have been beaten up the most. There have only been a few times in history when new lows have expanded to the levels seen on Monday. Every one of those times the market was within a day of an important low.

Looking at the next chart we see that so far the S&P hasn't even broken the trend line or penetrated the 10 DMA. Unlike other bottoms we haven't seen the index accelerate away from the 10 DMA as investors panic. There never was any panic during this decline just steady selling.

So did we see the bottom yesterday? Most of the signs are suggesting we did. However I'm worried that everyone now thinks the bottom is in and it's safe to jump back into the pool. When everyone starts thinking the same thing then no one is thinking. This bear may just have another trick up his sleeve. I'm going to wait until we at least break the trend before jumping on the long side.

The weekly chart gives us an idea where we might want to exit those longs and start selling again. The first level of serious resistance if the S&P can make it past 1255 (the Mar. intraday lows) would be at the 200 WMA. In bear markets this level is rarely recovered once it's breached.

July 15th update

Today’s action was very telling. When oil broke it set up the potential for a strong snapback rally. That rally materialized within minutes as expected. However by the end of the day most of the rally faded away. Today’s action is suggesting that the bear just took a bite out of another sector with no benefit to the rest of the market. Thinking logically, just because oil breaks it’s not going to cure any of the problems in the banking sector. It’s also not going to turn the recession around in its tracks. What I didn’t know was whether the market would respond logically or irrationally. I think the time of irrational actions is probably over. I think we are now fully into the period where we are going to have to pay for the excesses that have built up since 1987.

I'll have a lot more to say in tonight's update.

Oil glut

Everyone knows by now that I'm a commodity bull. That being said I can still spot when commodities have gotten ahead of themselves. This has been the case in oil for a while now. Parabolic moves are rarely justified by the fundamentals. We repeatedly hear that emerging markets are driving demand despite the fact that the US is in recession. Baloney! There is always a lag effect and decoupling is a myth. There's just no way the emerging markets are going to hold up without the US. According to the WSJ we are already seeing some gulf states storing oil in tankers in the gulf because they can't find buyers for it. The IMF's forecast for global demand has plummeted this year. Every recession in history has cut demand and this one will be no different.

We are now at an interesting juncture on the oil chart. The first down day will complete a 4 day Corollary possible trend change. All that means is that long intermediate trends often end when optimism gets extreme enough to put in 4 or more rally days in a row. The first down day will often mark the intermediate top. As always nothing is 100% but since this is occurring right at the top of the T1 pattern this may be a signal we want to watch.

Leaks are sprouting everywhere

First it was BSC and Northern Rock. Now it's FNM & FRE. F and LEH are probably hanging on by a thread. I'm not even sure how many airlines have gone belly up in the last year. We've already seen one casino here in Vegas fall. Does this remind anyone else of the story about the little Dutch boy with his fingers in the dam?

When the Fed rescued BSC anyone with any common sense knew this wasn't going to be the end. As a matter of fact any rational person knew this was only the beginning. Obviously the market isn't rational because it rallied on the BSC bailout. Not for long though when reality finally returned.

Now I see that the government is going to nationalize FRE & FNM. Will the market irrationally rally off this news? Who knows, it's possible. Will that be the bottom? Hardly! Does anyone seriously think this is even close to being done. People we are just getting started. The bankruptcies are just now starting to snowball. We saw three last week. How many will pop up this week I wonder.

First legs down in secular bear markets usually shed anywhere from 60 to 75%. The financials are now in a secular bear market. The BKX needs to go to at least 45 before we can reasonably expect a counter trend bounce of any significance.

The market may be devoid of common sense but that doesn't mean that we have to be.

3 day bottom rule

While this doesn't apply 100% of the time (nothing does) an intermediate low rarely forms without seeing at least 3 down days in a row. Other than the Nov. low every intermediate decline during this bull market hasn't ended until we got at least 3 down days in a row. The same held for all the intermediate declines during the last bear market in 01 & 02. The exception was the final low in Oct. 02.

As long as we continue to see the market bounce every couple of days the odds of a bottom forming are slim.

Europe

I thought tonight it would be a good idea to see how the rest of the world is doing.

All three of the big European Bourses appear to be in midpoint consolidations. Well except the FTSE which appears, with my limited TA acumen, to be forming a bear flag.

Even more concerning is the rapid implosion of the European financial system. The 50 week moving average is headed sharply lower and is nearing a cross below the 200 WMA. It certainly looks like the mess that Greenspan & Bernanke created is going to take down not only the US financial system but a good portion of the rest of the world along with it.

Again one might want to think twice before selling the farm to go long here.

One thing that is kind of scary is the magnitude of the first leg down. If the global markets are consolidating for another bear move and the next move is roughly equal to the first leg we could see some very hefty declines in the weeks or months ahead. Something along the lines of what we are now seeing in the financial sector.

Just be cautious. If the market does break down into that kind of sell off I can guarantee you that nothing is going to be safe.

Bottom or midpoint consolidation

I've noted in the past that waterfall declines often have a midpoint consolidation before the final quick plunge. Of course not being able to see the future I really have no idea if we are trying to put in a bottom here or just putting in the midpoint consolidation which will be followed by 3 to 10 days of sickening declines. Just something to think about if you are listening to CNBC and contemplating going all in on the long side.

The oil stocks now join the party

I've been warning that the next sector to fall to the bear would be the energy stocks and sure enough the XOI has now moved into a down trend. The oil service stocks are showing a double bottom breakdown. My guess is they will be following the rest of the energy sector soon.

The third chart is the US coal index. This is what a parabolic collapse looks like.

While everything else is breaking down the PM and mining stocks are both entering uptrends. The XAU is currently sitting right on support. Now would be a low risk entry for miners with a stop two boxes down on the XAU chart.

Coincidentally gold is right in the middle of a timing band for a trading cycle low. I doubt that gold has too much downside from here.

Remember the fundamentals

There seems to be a lot of uncertainty about Gold and the dollar lately. I've pointed out in the past that trying to time the metals is pretty difficult. These are thin markets, especially silver. If you are someone that freaks out if they don't spot the exact bottom then you are going to probably lose money during Golds bull market.

At times like this I always return to the fundamentals. First: is there anyway way the US can possibly pay for two wars?

Is there any way the US can pay for Social security as the baby boomers start to retire in force?

Is there any way the US can pay for Medicare?

There is no way for the US to "grow" its way out of these problems. As long as this fundamental truth remains the dollar is going to remain in a long term bear market and gold is going to remain in a long term bull market.

Where ever you decide to take your position the bull will eventually cure any timing mistakes you make.

When the Dow:Gold ratio approaches 1:1 then it will be time to get nervous on the long side of Gold.

It's all about the global expansion

I must say the global growth story is starting to get pretty thin. I'm constantly hearing how the US recession won't affect profits because growth in the emerging markets will support international companies. I'm not buying it.

I don't believe for a second that the rest of the world is just going to go on about it's merry way as the US sinks into a severe recession. For the most part every stock market in the world is agreeing with me.

So is the Baltic Dry Index. After a brief breakout to new highs this index has rolled over and is heading down again.

The materials sector is also breaking down. If the world were still expanding then why are the material stocks on the retreat? The expansion in China for the Olympics is now finished. The Shanghai exchange and the XLB are both saying that the demand is over for now.

Folks bear market rules now apply. You don't trade from the long side anymore. You wait for the rallies and sell into them. That's how you make money in a bear market.

The warning shot has been fired

The warning shot over the bow has now been fired. As you probably remember I've been watching the coal stocks has an indication that energy is about to break. On Wednesday that warning came as the coal index plunged almost 14%. The parabolic trend has now been broken. If this plays out like 99% of parabola's play out then we should see a fast and spectacular collapse of the coal stocks as it becomes apparent to the market that the fundamental premises of this incredible rally proves false. Namely that demand is collapsing as the world continues into the global recession.

It shouldn't be too long before oil rolls over and follows coal. At the moment oil is struggling to complete the T1 move that started in the depths of the 5th year decline back in the 1st quarter of 07.

Almost every stock market in the world is telling us that the world is entering a severe recession. A recession causes demand destruction. A severe recession causes massive demand destruction. If the world goes from using 87 million barrels a day to only 82 or 83 million then we no longer have a supply shortage. As a matter of fact we will then have a demand shortage. To little demand and too much supply equals lower prices.

I've been pointing out for weeks now that the energy stocks have not been confirming oils move higher. That continued the last two days as the XOI and the OIH both moved lower. This despite the market rallying on Thursday and oil moving higher both days.

There will be a time to buy energy stocks but I don't think that time is now.

Now I think the market has gotten it into it's head that when energy breaks the all clear signal will be given. I do think we will get a relief rally. But no way is that going to be the end of the bear market. As subscribers know I've been watching Lowry's buying and selling pressure. As of Wednesday the spread between the two is the widest in 75 years.

Never in history has a bull market started with buying pressure at new lows 6 weeks into the rally. That's what we were seeing in May as the market rallied. This was never a new bull market it was always a bear market rally. The market didn't roll over in May because oil rallied. No, oil had been rallying all along. The market rolled over because sentiment finally got too bullish and there was never any institutional support behind this market.

As many of you know I think the Fed engineered a false bottom in Mar. with the bailout of BSC.
The market wasn't allowed to move to attractive levels. Levels that would have brought in the big value players. We need their money behind the market if we are going to have a sustainable bottom. We didn't get it.

Now we are seeing the COT reports roll over just like we did in the fall of 2000. So while we may get a relief rally when oil breaks don't expect it to last long. Unless the market were to fall 20% below the 200 DMA (subscribers know what I'm talking about) playing the long side in a bear market is a risky trade. Just like buying the dips in a bull market is the safe way to invest, selling the rallies is the correct way to trade bear markets.

Trying to catch rallies is going to be difficult in this environment. If you do manage to time the rally correctly it's then very difficult to time the top of the rally. In a bear market oversold levels don't mean the same thing as they did in a bull market. Oversold levels can become very oversold in bear markets.

Trading bear markets is difficult and it requires a 180 degree shift in strategies from what worked in the bull market. I will be looking to sell into the relief rally when oil breaks.

What few people realize is that when oil breaks it's not going to do anything to stop the recession or cure the woes in housing. It won't have any effect at all on the credit bubble bursting. All it's going to do in the long run is take out the one sector of the market that was still working.

Financial bear market

As everyone knows by now I think we are in a secular bear market for paper assets. Look at the chart above. This is the financial sector. It also is now in a secular bear market. I can tell you without a shadow of a doubt that when something like this happens it's not going to get "fixed" quickly. This is going to be a multi year process. I can also tell you that the Fed and government will only prolong the process by trying to band aid over the problems.

The financials are trying to cleanse themselves right now. Unfortunately cleansing is going to require that a lot of banks go bankrupt. The powers that be should just resign themselves to the fact that its going to happen no matter what and get it over with. If they do we will get through this much faster and come out the other side much stronger.

Now do I think they are going to do that? No way in hell. We're going to do the exact same thing Japan did when their banking system imploded. We're going to do everything possible to try to "repair" the problem. We're also going to end up with the same result as Japan. A long drawn out bear market. Only this time its much worse than what Japan had to go through because we've entered a commodity bull market. Trying to repair the problem entails printing money. The ole something for nothing cure. For the next 5-10 years that cure just isn't going to work. We've just witnessed the end result of the initial attempts to fix the banking system. A 200% spike in energy prices and an economy that got pushed over the edge into recession by the energy shock.

Don't underestimate the governments penchant for stupidity though. I can almost guarantee they will continue down this same path like a rat stuck in a maze for years to come yet. The question is whether this just leads to a series of vicious recessions or a hyper inflationary depression.

Rydex energy sector assets

Currently the % of Rydex energy sector assets as compared to all sectors is the highest its been in 4 years. Like I've said everyone is piling into the energy sector in the belief that this sector is immune from the bear. These levels in the past have triggered corrections in the energy sector generally at least back to the 200 DMA.

One of the contrary indicators I use is when Cramer becomes irrationally bullish on a sector. When that happens it's usually getting close to a top. Now I know Cramer is a very sharp cookie. So I'm doubtful that he's really so stupid as to keep missing these tops. BTW he was over the top bullish on housing in 05. He was also crazy for gold in Mar. Now he's constantly singing the praises of the energy sector. As I said I don't think he's stupid. I also don't think he's controlled by his emotions. You don't become a successful trader if you can't keep your emotions in check.

So I have to come to the conclusion that Cramer touts the hot sector because that's where the viewers of his show are invested. If everyone is buying energy then they don't want to hear that oil is in the largest parabolic rise of any commodity during this bull market. They don't want to hear that during a global recession energy demand is going to drop and drop drastically. They don't want to hear that the refiners have been telling us for a year now that energy demand is dropping. No that would not be good for ad sales now would it.

BTW guess what no one is touting right now. That's right lowly gold. I commented the other night that not one of the Fast Money traders wanted to buy gold or mining stocks. That was right before the XAU jumped 14% in 5 days.