Wednesday, February 17, 2010

The Bear Market Roller Coaster

Bear markets are one of the hardest times to keep your head on your shoulders - I'm not necessarily talking about you, reader, but using the word as a general "cutout market participant" descriptive.  Either that or I am referring to myself in the third person, which (I'll have to check the definition later to verify) might just make me crazy.

However, all insanity aside, you are here to read about markets and I am here to write about them.

So, let's recap what happened while I was away fishing and involuntarily away due to some router/phone system problems.

1)  Gold made a major spike down intraday followed by a nearly-full retracement of the new low - gold bugs celebrated and everyone who had a "mass email Derek a declaration of triumph" button has been mashing it ever since. 

But the story isn't over in gold just yet.  See, there's a funny thing about bear markets, however short or long - they never "just happen".  It's not like everybody all of a sudden wakes up and says "hey, I am going to sell this asset today because I don't like it anymore".

No, bear markets - while they are certainly faster in time and breadth than bull markets - are not an A-to-B affair.  They take time, they take a level of market bipolar-ism that only a bear market can produce.  Market participants experience denial, then relief, then disbelief, then feel angry, then feel despair (if they are long, mind you).

We are certainly nowhere near then angry stage, and therefore nowhere near the despair stage.  The DSI numbers were pounded down on gold blindingly fast, evidencing the elevated hope mentality (versus worry) behind the gold traders, which one could easily surmise a larger and more drawn out correction from.

One question many readers send me is:  What if you are wrong?  What if gold is just experiencing a minor correction and is still going to go up?

The answer to that is one I have written many times - the end goal of gold and silver is to use them as a savings vehicle - of course keep some cash on hand for functionality sake, but if you are truly a believer in gold and silver, keep a good portion of your cash savings in real money instead of fiat currency.  In late 2008 when my clients, friends, and family asked me for advice and I told them to buy as much gold and silver as they could get their hands on, they kind of thought I was crazy.  Now they ask me when to buy more of the stuff.

As a gold and silver saver, my goal is to accumulate as many ounces of the metals as possible - and it should be any gold and silver saver's goal.  So if I see a juicy buying opportunity approaching, I am going to wait for it, because in the long run it benefits me far more to do this than just blindly buy physical whenever I have an impulse to do so. 

That being said, what I'm working with here are probabilities, using price as my ultimate guide to determine group psychology towards an asset, and secondary indicators as confirmations or dissenting points (in which case a re-evaluation would be order).

And since, in late November 2009, gold busted right through the top of its long term log-scale channel for this entire bull marke, and since every time it has done that it has gone down to at least the bottom of that channel, the odds from a strictly one-look perspective are that gold will head down to the bottom of the long-term log channel, putting its correction at a minimum at around the 900 - 950 / oz range.

Then take into account the other factors - the massive pile-on of open interest in the COT report perfectly correlating with the upward price swings in gold.  The fact that buying gold is so in right now - with stores selling bullion bars out of their storefronts, Cramer doing a full 10 minute expose on gold and citing every cardboard cutout reason to buy gold that gold bugs have been passing about since time beyond, and the fact that every major financial site has a gold quote right on their front page, despite the fact that the two other most commonly quoted commodities (oil and natural gas) absolutely dwarf the gold market in size and contribution to the economy (i.e. functional nature).

There are a hundred other secondary and trivial reasons that gold should experience a larger unwinding than "the usual".  The sentiment towards investment in general is still far too positive - we are talking about a major unwinding of decades of optimism towards capital gains and markets.  Gold has now become a victim of its own greatness, and has been lumped in as an "investment asset" instead of being money, which you and I both know it truly is.

Even just a move to the bottom of the channel here indicates we have just experienced 50% of the barest minimum move acceptable to account for a real correction, even from a "perma bull ongoing shot to the moon" perspective.

And that's not taking into account the soon-to-be-realized fact of deflation in total money that is working its way inexorably towards the unfortunate asset-owner and investment community.

For every other asset besides gold the downside potential is still massive.  For gold there is a high probability of an exception based on some simple behavior that will most likely take hold of the general marketplace in the coming years.

There is still going to be a rush into dollars to pay off outstanding debts - despite the face that the dollar is, in the end, fiat currency, it still has one monopoly power that no other "money" has - you can't take a contract denominated in dollars to court and try to get paid in gold - dollars are what you get paid in, and so in order to go to the effort of doing so, one must have some modicum of faith in dollars.

However, this is not a scenario that will last very long - once the major deflation has pommeled the monetary system, the piper will need to be paid.  This is the point where we should see mass psychology shift to the final negative stages for the dollar and as a result into a positive sentiment towards gold as money.  Since most other fiat currencies are at least as flawed as the dollar or worse, the time where gold may once again be viewed as money is near at hand.  It is something that I am excited about from a historical perspective and excited about from a developmental progress perspective (i.e. the DOW went up 400% in gold terms - productivity to money - before fiat paper and the federal reserve system was introduced.  It is now below where it stood in 1913 in gold terms).

Now, enough on gold.  Here's a quick run-down on the Dow.

In this article, we posted a chart of the S&P 500 and pointed to the already existing lower trend line as a potential support point.  While the correction has played out longer than we anticipated, a correction it is nonetheless.

This morning the S&P500 hit the ideal initial resistance that we placed on that chart, and has thus far failed to break through.  One final stab could occur in all the major broad indexes to the secondary resistance, but the market should have a tough time breaking through that area.

However, again, we are dealing with probabilities, and as such there final possibility is a total correction of the initial move down from January 20 to form a double top before the major resumption occurs.  This is certainly the least likely of scenarios to play out but cannot be ruled out as an option.

The markets are still basically moving in tandem, with stocks and gold rallying in sync and falling in sync, indicative of a similar psychology towards all assets and as such, putting each at a similar level of risk for near term declines.
Once the bear market resumes it should hit fast and hard and wipe out this recent retracement in a matter of a few days.

Best of Luck!



  1. Derek,

    Totally enjoy your blog. Thanks for the information and guidance. How do I subscribe to your news, etc? Many Blessings, Dale.

  2. Hey Derek,

    if you're right here again, you have one more subscriber. What is your view on the recent USD strenght?


  3. You said in a recent post that silver would fall all the way to $8. Still sticking with that? Maybe only $12-$13 if gold is to bottom at $900-$950 and the two are to remain tightly coupled? Many thanks!

  4. Derek,

    Did you see that George, "Gold is the ultimate bubble", Soros has DOUBLED HIS STAKE IN GLD? What a double talking wanker!!! I concur with you regarding strong deflationary forces coming down, but I still think Gold will benefit. Guarantee helicopter Ben will increase money supply to the max to combat it(deflation ) and gold will be the "last man standing". I'm not smart enough to guess the bottom but if you have a 5 year time line you will be very very glad you own gold. I slightly disagree with your axiom that since gold is the "in thing" right now it should be avoided. If you were to poll 100 people, I would bet no more than 1 or 2 have any gold at all. The gold bull run is still in it's very early stages.

  5. Kung fu vic here
    Listen; India is buying gold by the tons to back thier money. I'll buy some more silver and gold soon, I don't buy a lot, maybe $500 to 1500 at a time, as a long term savings back up. If I sold what I had today I'm in the green. we're looking at stock trading, and mining stocks oil, etc, all are a trader's game. We're not investors anymore, Home work, charts and buy on fear and sell on GREED.
    Another issue is terrorism. One shootout will drive fear for many and if we can get past it there will always be greed. I'm a small timer so Derek keep making those charts, I like what you'll doing. My kung fu says "end of month dip" on fear. Great for traders!
    Thanks Derek!

  6. Hey Ben,

    It was me that said silver would go down to below $8.00. I don't know when Blain made the same projection.

    Go to and find out who the real jews are and their role is to be subservient in every country waiting for the Messiah. It should make you think.

    The Jews that run America and Europe are Khazars and converted to direct bloodline to Abraham and the house of David. They are opposite to the the true torah.

    That is why they care not about America...its people who are 98% Christian by religion..for the talmud if you ever get a hold of the unblemished English version blasphmes Jesus Christ. It states its ok for a Jew to deceive a non jew.

    What do you think is happening in America..but the jew is the zionist..not the observant Jew.

    All zionists are jews but all jews are not zionists. All semites are from the Middle East by birth and descendant...these Khazars are not semites. So the part about anti-semitism is a joke.

    Who controls hollywood, news, media, the government, your fools should get the picture but you to stupid and still believe that some muslim caveman did 911. they did not..its Mo**ad.

    Soros is part of the "Club" the NY club...which Safra was until he got murdered by the Russians. The zionist Mafia tried to control the commodities market through Gasinsky and Barinovsky and Safra running the show, but Putin usurped them and Barinovsky fled to London and Gasinsky to Israel..they harbour a lot of crooks in Israel. Just read Ynet from Jerusalem news and the Jews that murdered for Stallin.

    Read the Jews who were in Hitlers army and the Nazi Jew who was ordered by his superiors to take the Lubavticher Head and his family out and to New York. The Jewish Nazis escorted them out. This is in the movie.."The Jews that fought for Hitler." done by a Jew.

    There is a difference between Judaism and Zionism. One is a religion the other a plot to control the world written I belive in 1897 in russia. What's happened to the

    So don't believe Soros when you read he doubled up...bullshit. He's part of the scam. They are setting up the crash. Check the list of the Alpha Hedge fund managers who made the top 10. And you think they are smart...they are just betting against 200 million "goyim." its easy not to lose them, especially when you believe they bullshit they put out from New York.

    The most brightest and exemplary forecaster is in Jail on trumphed up charges for 7 years and no his " Full MOnty essay"

    go to By the way he's a Christian by birth....Wall Street is dominated by zionists.

    In that essay you will see all the beginnings of Wall Street to present day. Count how many Christians names you find...hardly...a lot of jewish names...but these are the zionist front runners...this is what is killing America....the snake. Yes, the same one in the Garden of Eden and the country that is in the news all the time and protected by America is surrounded by 7 hills.

    President Clinton can pardon March Rich the crook to fled to Switzerland but not Martin. I wonder why???

    All those prices will come to $640, silver to $8, US index to 95, ES to 550/420-38...etc.

    For the whole goal is to make all the 'goyim' broke and you guys are now and it will get worse for you are too stupid to get the picture. Christians Vs Muslims with the snake in the middle.

    Better wake up and take your country back and believe the observant Jews who know the Land of Israel does not belong to them....its all a way of deception is how I do battle.

    ES will break down in March from 1130 to 989.50 and 850 then pop to 927 then down to 550....well that's enough for now.

    These numbers are I get are from the Universal being/the savior that will come when One world gov't is upon us and Jerusalem is the capital...

    "It is written so shall it be done."

    Think it aint illegal yet.

  7. And the savior will tear down Jerusalem and its children who are not his people and have deceived the world.

    Read revealtion 2.9 as told by John

  8. I see you have backed away from your $650 target price. I wonder if my prior comments influenced you. Your analysis of mass psychology and thus impending probabilities is spot on. As I wrote in another comment on your blog, I sold SLV 8x leverage puts on Tuesday's +4% day, and sold for +12% gain on Wednesday's drop. Have sell the rumor (IMF gold sales, EU impending doom), then buy the news at juicy gold and silver prices. Do not hold out for $650 gold, you will never get physical for that again.

  9. The price target of $650 on gold is still a possibility, however we will have to see how the secondary indicators play out.

    One major note is that the D.S.I. plummeted so quickly in gold and silver, down to extreme levels of pessimism.

    It has since rebounded to almost 50% in a very short time, indicating the volatility of psychology towards the metals and further evidencing the fact that hope evaporates and returns so quickly. I.e. the real meat and bones of a good rally (worry) just aren't there, instead the gains-chasing hope is running the show.

    This does indicate further downside, and I suspect we will have to see an extended period of highly negative DSI readings (probably a few weeks below 10%) with a slightly upward biased sideways bottoming formation in the price to tell me that gold is ready to actually go on a genuine bull run.

    Silver's price target has not changed, and <$10.00 is a minimum projection for the "poor man's gold". The coming deflationary period will be like a tsunami, hammering quickly but leaving long-term devastation behind that takes a long time to rebuild.

    Nice trade, by the way. Generally reader comments won't influence my analysis unless some very interesting pieces of data are presented with original sources. I'm not biased to either side of a trade, and if the evidence becomes compelling (on a quantifiable basis) to start thinking about closing out a position, I am the first to let my readers know.

    Thanks for the comment.


  10. Derek, Why are you attracting 'Nut Cases' on your
    site? You could make a meaningful income referring
    them to the proper mental institutions that would probably pay you a bounty.I hope Nova Scotia
    carefully weeds out psychopaths who might wish to
    meet with you in person.

  11. @ anonymous.

    I perhaps could set up some sort of outgoing referral link. Maybe "If you feel the irrepressible urge to cause physical damage to the author after reading this article, CLICK HERE". I'll consider it!

    But I think some of the beauty of the internet (in this context) is a) instant reaction time, and b) anonymity. You can say whatever you want with no consequences because your name isn't out there and you aren't in person to be "rebutted".

    Besides, the more people I know hate to death what I write, the sounder I sleep at night. At least, financially speaking.


  12. Coincidentally Derek, I am a psychotherapist. Maybe we could work something out. You would need
    a very large and durable butterfly net and some
    good viable packaging for UPS.

  13. Look at this person perspective on Elliott Wave:

    It all depends on the crooked line. People make pretty art with charts and lines maybe sell them to make money.

  14. As you can see, I hide behind no pseudonym, especially the nondescript 'Anonymous' which so many use here making it impossible almost to separate one from another.

    I even include not only my nation of origin, but my wonderful city of London - the traditional gold market centre, incidentally.

    Here are some questions (all rhetorica):

    (1) Why does anyone get so steamed up over free speech? If what is said has no substance whatsoever about what it may call into question, then it will soon be noted, and forgotten.

    I can only see it being 'uncomfortable' for those upon whom it touches a nerve by its potential truth, in part, or whole.

    (2) If anyone really wants to understand what has been, what is, and what most certainly will be continuing, going on in our world. there is on open record, an agenda
    written with remarkable, almost unbelievable, accuracy and is available in libraries or on internet.

    The current updated version goes back to well over 100 years ago, but it is believed that it was based on earlier writing.

    Now, I am really not concerned who actually wrote it, at least, I know someone did, the facts supported by the physical evidence show this.

    Whoever it was, must have been the greatest soothsayer of historical events and trends that ever lived. Nostradamus had nothing on him (hardly think 'her') From its contents I know he, or they, who conspired to write them, were not of any accepted religion I know. From it's contents, they could not be. Though I know that a certain 'religious' body has been maligned as being involved.

    Let me add, people who may claim by intent or otherwise, to be of a recognised, accepted 'religious belief, are not necessarily so. Have you never heard of a 'front'?

    The knowledge what is written there has been invaluable to me in UNDERSTANDING that which puzzles so many because they lack that which Einstein claimed is more important than knowledge - IMAGINATION. He explains why if you doubt, and research.

    (3) Why does all this matter on a website devoted to participating in the 'financial markets'. Well, it is a question I should not need to ask, but unfortunately, there are so many who believe they can dissect market behaviour from 'world events'. This is just one of the reasons why no matter what the market does, it always finishes by the many, losing to the few. In other words - the masses are always wrong in the end, because they are so easily fooled. and led. So DON'T FOLLOW THEM, if you want to make money, and have a good life.

    Enough said for now. Fire away if you wish, I am wearing a flack jacket.

  15. Good reading Derek, I must say I agree with your outlook on gold, and you have summed up the possible bad news for gold very well. Messed up times we live in now sad to say.

    I for one, still feel the $1000 area will be good support as this area is the original breakout of gold, the upward trend line and several moving averages all converge in the same area. Time will tell my friend, and alot can change in a quick hurry in these markets.

    Also, I do feel the latest COT report is showing Commercial smart monies easing up on their short positions, thus possibly setting the stage for another big rally. Combine all this with advances in gold versus other currencies, and gold may sparkle again in the coming months.

    With the IMF releasing the statement that they are selling more gold, this will probably drive prices downward until they say that China or some country has bought it at the same price or lower than what India paid for it in 2009. After this fact came public gold rallied to new all time highs, maybe history will repeat?!?!?

    As far as trading, I did go short the S&P yesterday, for I do like that retracement area and above as my stop. In additon to your analysis I feel like the S&P has become over bought fairly quickly.

    Thanks again for your bloggin', keep it up Derek.

  16. 'Markets' are comprised of many individual companies. There are successful companies that in the long term will trend upwards in accordance
    with their ability to return profits to their investors in one form or another.

    During that trend, there will be corrections to bring the share price
    down to where the serious investor sees value in their purchase.

    Then there are failing companies which will trend downwards, long term, as share holders unload. Here again there will be 'corrections' upwards to give hope to the uninformed (misinformed?) that allows the 'informed' to dump more as they exit.

    The market as a whole, which if you check your chart history, is always in a long term uptrend with increasing volumes over time.

    Therefore there are only corrections (to correct over exuberance by clowns)

    Ergo, there are no Bull and Bear 'markets', only 'corrections', distinguished only by their size, and duration.

    Seeing things as Bull and Bear, is like seeing things Black and white. It is too rigid in focus. Black will never be white, and white will never be black. But markets can move from one 'direction' to another when you least expect.

    But we know that, in the very long term, collectively, as a market, shares move up. Note the word 'collectively'.

    Point being made. Don't focus on Bull, and Bear. It will only mislead.

    If your penchant is to trade the market, then watch for pivotal points, in the corrections or near to them, and don't be greedy.

    If you want to 'invest' then look for value such as return on investment via increased earnings, commensurate with the time you have allotted to wait for that return. It's a business, treat it as such.

    You all, or most of you, know this. Just remind yourself of it - CONSTANTLY.

    Incidentally, as to charts, though I use them, to a point, they are only a guide. They look fine in retrospect when one can draw lines to encase the direction, and other observations. But they can mislead.

    Those movements can be pretty scary at the time, and not so obvious as when looked at after the event. As I know from experience.

  17. Hi Derek,

    What do you think of the way George Soros substantially increased his position in gold all the while he was touting gold as "the next great asset bubble"?

    Cindy S.

  18. 10389 reached what now?

  19. Cindy S.

    Don't you know Derek and Soros are the same person.

  20. What now? People who went short taking advice on this blog now get to take it up the rear end.

  21. Heres hoping some sellers come into the market about now!!!

    Cindy S., from what I have read about Soros, he is notorious for saying one thing and doing the opposite......

  22. I hope Derek is right.

    I'm in DXD and SKF ETF's, and got in at the wrong time - near the height of the fear. Ignored the warning the daily stochastic was flashing because I thought a downtrend had kicked in.


  23. One indicator says buy, the other says sell. Like I said before, that stuff is all bull.

  24. I agree Cindy, the stochastics are bottoming out, extremely over bought right now.........

    I'm thinking good support at $29 for DXD......

  25. Bear markets are not easy times folks.

    "However, again, we are dealing with probabilities, and as such there final possibility is a total correction of the initial move down from January 20 to form a double top before the major resumption occurs. This is certainly the least likely of scenarios to play out but cannot be ruled out as an option." - from this article.

    I don't think the market is going to make it all the way up to that point. If it does, then I'll have to re-evaluate the situation from there.

    In the meantime, all of the secondary indicators are saying we are highly overbought, and the immense and rapid swing in DSI indicates that mood is fickle right now.

    This is just the start of things so the majority is far from close to a bearish view - that takes some time to develop. In the meantime, we can expect a slower downtrend that will accelerate over time as sentiment turns more negative.


  26. Derek, Watch out here. If one of the large gov's pay anywhere near the current price for imf's gold you will get your clock cleaned big time! Your charts won't mean diddly if the gold price is validated by India, china etc.

  27. Derek, How do you think the PPT apparatchiks affect what should be a free market? Are they propping, if so, how long can they sustain and why would they ever quit? Are technical probabilites valid in a rigged casino?

  28. Fed raises discount rate by quarter point, futures down 61 points...... to be continued....

  29. Hi Derek, I am interested in your blogs, although all this misguided anti-semitism of some of your readers is very off-putting. They have got their facts wrong but I wouldn't even know where to start in trying to prove the truth, and in any case they are hell-bent on their beliefs so it would be a waste of time.

    Your calls for a low in gold around the end of 2010/beginning of 2011 is in complete contradiction of Jim Sinclair's assurance that gold will reach $1650 by Jan 2011. Could you have your timing out by a few months or will Jim be proved wrong?

  30. I like the blog, but can we get rid of the "facebook" surfer pic for street cred sake? PLEASE? Thanks!

  31. Be very leery of any offer from a psychotherapist - they are some of the nuttiest fruitcakes ever baked!

  32. Derek, I agree with your reply, except I am slightly less pessimistic on silver, but definitely more so than for gold. Silver will rise more than gold after the bottom.

  33. I recently discovered your site and now regularly enjoy reading your commentary. Please tell: is there an Elliott connection here?

    I first bought a substantial amount of Gold in August 2004 at $406, selling last year - following Elliott's advice - at just under 1000.

    Elliott also 'predicts' the rising USD and Gold falling to below 680 and Silver to around $8 an ounce.

    One thing I read about - and have noted - is the 200 dma indicator. Prices 25% above or below mark good entry and exit points.

    Noting recent action, and the current dma . . . it might be another clue to substantiate what you and they are saying. But then what do I know?

    It's been one hell of a rollercoaster ride so far, that I do know! As you'll all have noted, the Bull threw me off just before his greatest charge, too!

  34. Derek, I vote for keeping your pic just as it is, but feel free to add some more. You don't need to look like the buttoned-down crowd. Your cred will come from getting it right.

  35. Another up day with DJIA shooting above 10400 and another no-show day by Derek.

  36. yep, looks like we've been duped if we've listened to this guy. or maybe that's just more probabilites. tell you what, the probability of anyone ever subscribing to the snake oil this guy will be selling should equal zero.

  37. Gold to $650....ya ok.

    Worst place to sell in 10 years and Derek nailed it!

    Bear TRAP!

  38. I still agree with Derek and think it's still a viable scenario. If it turns out to be wrong, I will not have enough money left to pay for the subscription

  39. Looks like a lot of fools lined up to stand in front of the frieight train.

    Your sell signal is invalidated. You are living on hope, good luck.

  40. The gap off the bottom is a clue that this is indeed W3 of major 3. If unfilled this could turn into a runaway gapping trend as the crowd finally realizes we are in wave 3.