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Has Gold's D-Wave Bottomed?


Right now investors need to be on the sidelines while we wait to see how gold handles the stock market's move down into its daily cycle low.


It seems like most analysts and gold bugs are now assuming that the reversal on December 29 marked the bottom of gold's D-Wave decline.

It's certainly possible that we saw a bottom two weeks ago, but it's still too early to make that assumption. Gold and most assets are about to be severely tested. How gold handles that test will be a big clue as to whether or not its correction is over.

What many analysts are overlooking is the impending daily and intermediate cycle corrections that are coming due in the stock market. When the stock market moves down into a cycle low, especially an intermediate cycle low, it generates a tremendous amount of selling pressure.

Invariably that selling pressure bleeds into virtually every other asset class, even gold, as you can see in the chart below. Over the last two years there were only two daily cycle corrections in the stock market where gold was unaffected (I've marked them with green arrows).

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The stock market is now in the timing band for a move down into a daily cycle low. As you can see in the chart below, those tend to occur almost like clockwork about every 35 to 40 days. As of Friday the stock market was on day 33.

On top of that we have a larger intermediate degree cycle that should bottom sometime in March/April. The selling pressure generated at an intermediate bottom is much more intense than a mere daily cycle low. That means sometime around the middle of March or early April things are going to be looking pretty bleak. My best guess is at that time interest rates will be spiking in France and maybe the UK (along with all of the other countries that are already having debt issues).

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It's late enough in the daily cycle that there is a good chance the market began that move down into its daily cycle bottom on Friday, despite recovering most of the sell-off before the close. I say that because we have a coil pattern playing out in the stock market.

Contrary to what most people believe, the initial breakout of a volatility coil is usually a false move that is soon followed by a much more powerful and durable move in the opposite direction.

In our case the volatility coil broke to the upside, and by Friday it was already trying to reverse. Once the stock market moves back through the coil zone, it would be very unlikely to recover those levels until after the next intermediate degree bottom, which as I pointed out isn't due until March/April.

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Sometime in the next four to eight days, we should see the stock market break its cycle trend line. It's very rare for a move down into a daily cycle low not to break the cycle trend line, so for our purposes I think we can probably assume that it will.

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If the stock market just retraces 50% of the daily cycle advance (assuming $1,303 is the top), then we should see a pretty hefty sell-off in the next week or two.

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That kind of selling pressure will almost certainly have some effect on gold. If the D-Wave is still in progress, it's going to have a sharp effect on gold, probably forcing gold back below the $1,523 December bottom. How gold handles the stock market moving down into its daily cycle low will give us a big clue as to whether the D-Wave has bottomed or not.

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No positions in stocks mentioned.

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