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S&P 500 Crash Potential And Possible Final Low In Gold

Published 08/12/2015, 04:37 AM
Updated 07/09/2023, 06:31 AM

I’ve said all along that if the Fed didn’t get out of the way and let the market correct normally it would have serious consequences. Well they have not let the market correct naturally. On the contrary, ever since QE3 ended there have been more interventions than ever before, and to a more aggressive degree. This has kept the market propped up but it’s also built up extreme complacency. We now have a bubble in central bank confidence. When this bubble pops it’s going to unleash a tsunami of selling as everyone runs for the exits all at once.

From time to time I’ve published charts and articles warning that we are moving into the timing band for a major multi-year cycle low in the stock market. Something of the same magnitude as 2009, 2002 and 1998. Those were all multi-year cycle lows. We are due for another one of those at any time. And considering the multi-year cycle has played out as an extreme right translated cycle, those typical correct as some kind of crash scenario. Examples of extreme right translated multi-year cycles are 1987, 1998 and 2009. Now, because of Fed intervention we are currently in the most extreme right translated cycle in history. At this point the Fed has virtually guaranteed this 7 year cycle will end in a crash event.

Based on the previous daily cycle low having occurred 26 days ago, the next cycle low will come due sometime between the first week of September and the FOMC meeting on September 17th. So as unlikely as it seems right now there is a scenario that could generate that move down into the 7 YCL over the next 3-4 weeks. I’m of the opinion that tomorrow is likely to be a key day for the S&P 500. We’ve already seen two interventions fail in the last week. If the market breaks hard to the downside tomorrow then I doubt there will be anything the Fed can do to stop the train at that point. If the market drops hard today or Thursday, then traders will start to lose confidence in the Fed and the run to the exits will begin.

SPX Daily

Keep in mind that in order to confirm a 7 YCL the market has to drop far enough to break this multi-year trend line. That gives you an idea of the magnitude of the fall that is due. Stocks could conceivably lose three years of gains over the next 3-4 weeks.

SPX Daily 2009-2015

It’s been my belief that the S&P will probably test the 2000 and 2007 highs at the final 7 YCL.

If this scenario unfolds over the next 3-4 weeks, then not only will the Fed not raise rates, but they will be forced to initiate QE4 to halt the crash. As soon as QE4 begins, the bull market in the dollar will be over, and the consolidation that would otherwise be destined to break out to the upside will instead break lower and the next bear market in the dollar will begin.

USD Daily 2013-2015

If this plays out, then gold isn’t just starting another bear market rally. Instead it is anticipating QE4 and will have already formed the final bear market bottom a couple of weeks ago.

USD Daily vs Gold Daily 2009-2015

Either way, gold has begun an intermediate degree rally that should last at least a month and a half to two months. And if stocks deliver the move down into the 7 YCL, then gold is starting a new bull market. Which ever scenario is in play, now is the beginning of a tradeable rally in the metals sector. The longer one waits, the harder it’s going to be to chase...

…and you might be getting in at the very bottom of the bear market depending on what happens to the stock market over the next several weeks.

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