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Prepare for Next Leg Down in Secular Bear Market, Beginning of Next Recession / Depression

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And this time it's going to be much, much worse than in 2008.

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Not only do we have a market that is testing the prior intermediate cycle low when it shouldn't be, we also have a clear topping pattern in place. Just like in '07 the market managed a marginal breakout to new highs in May that failed to follow through. You can see the same thing occurred in October of '07. This is quite often how markets top...or bottom for that matter. A technical level is breached; technicians either buy the breakout or sell the breakdown. Smart money fades the move and the market reverses. This is exactly how the '07 top was formed. It's also how the market bottomed in '02. And now the cyclical bull has topped with that exact same reversal pattern in 2011.



This isn't the only warning sign, unfortunately. The banks and housing have been diverging from the rest of the market for some time. These two sectors are still impaired and will remain so no matter how much money the Fed throws at them. They led the market down into the last bear and they are leading it into the next bear.



Here is what I expect to happen over the next two months: We should soon test the 1249 intermediate cycle low. Actually I think we will probably marginally break below that level. As most of you probably know by now, breakdowns and breakouts almost always fail to follow through. So I expect we will see a violent countertrend rally once the March low is penetrated. That should wipe out all the technicians who sell into the breakdown.



However the rally, although I'm sure it will be convincing, will almost certainly be a countertrend affair that will quickly fail. The problem is that the current daily cycle is only on day 12. That cycle on average runs 35-45 days trough to trough. So once the counter trend rally has run its course we should have another leg down. And that leg down will almost certainly cause tremendous damage to the global stock markets.

Once the market penetrates the coming low it shouldn't be long before traders recognize that something is terribly wrong. At that point everyone is going to head for the exits at the same time which should lead to some kind of waterfall decline bottoming around the middle of August. This is when I expect Bernanke to freak out and initiate QE3. I have no doubt the market will rally violently on the news as traders have become conditioned to expect QE to drive stocks higher. I expect we will see the market test and maybe even penetrate the 200-day moving average during the fall rally.



However this, too, will only be a countertrend affair. QE is the cause of our problems and more of it isn't going to make things better, it will only make them worse as it will start to spike commodity prices again into a rapidly weakening economy. Remember, spiking commodity inflation is what caused this in the first place. Doing it again as the economy rolls over into recession is only going to guarantee that this turns into a depression instead of just a severe recession.

Traders and investors need to start preparing for what's ahead. If you are still invested in the general stock market, I believe you should exit -- either now, or into the rally that should come off the March lows in the next week or two. Don't get fooled by the analysts who will be telling you the correction is over -- it won't be. This won't be over until late July or early August.

Get back into dollar-denominated assets as the dollar will continue to rally and gain purchasing power in a deflationary environment.

Once it's appropriate we will transfer assets back into gold and precious metals, but it's still too early for that. Gold needs to move down into an intermediate cycle low before we want to buy. My best guess is gold will dip down to somewhere around $1400 over the next four to five weeks.

Editor's Note: Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market.
No positions in stocks mentioned.

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