Three Peaks.

It might just be my overactive imagination, but the visual in the short-term S&P 500 on Friday triggered this pattern in my mind.

I haven't studied this formation and know very little about the nuances for correctly identifying it other than the definition that follows.

George Lindsay defined the three-peaks process as one of rapid advances in brief spurts between which the market goes through long stretches of consolidation. The tops are typically somewhat rounded or flat and the tops usually occur within a similar price range, perhaps with a slight upward bias.

After the third peak (at point seven), a rather severe downtrend begins. It's called the Separating Decline because it separates the Three Peaks from the formation that follows. This decline usually encompasses at least two selling waves, labeled from point seven to point eight, and point nine to point 10. The decline eventually achieved at point 10 is always at a lower level than either point four or point six, and usually lower than both. Unless at least one of these lows is broken, one cannot label this formation as a Separating Decline.

A new advance and overall formation begins after point 10. It's the beginning of Lindsay's Domed House. After a sharp reverse from the point-10 low, first there's a small requisite double test of that low. This transpires during the period labeled points 12 and 14. After point 14, the market shoots higher into point 15. Lindsay labeled this advance the Wall of the First Story The Roof of the First Story follows, and typically takes the form of a flat or expanding zigzag with at least 5 reversals (down into point 16, up to 17, down to 18, up to 19, and down to 20). After the fifth reversal is achieved at point 20, the main uptrend is resumed into what Lindsay referred to as the Wall of the Second Story.

The advance that begins at point 20 has one major hesitation at point 21, a potentially sharp decline into point 22, and then a final rush up to point 23 before quickly falling back to point 24, retracing practically the whole move from point 22 to 23. Prices hold up and typically rally a little until point 25, leaving an imaginary line that could be drawn through points 21 and 23 that marks the edge of the Roof to the Second Story. Falling back from point 25 and penetrating this line leaves an overall formation that suggests a cupola or small dome on top of a building, and thus the reference to a "Domed House." A significant and lasting decline then commences immediately thereafter.

Today The World Believes The Word - "Reschedule" Translates Into "Default".

Whether Dubai debt is just a catalyst and excuse for profit-taking, something more fundamental, or a set-up for to trap the majority of fund managers sitting fat and happy and waiting for the obvious trend higher, doesn’t much matter at this point -- it is what it is. The trigger for an unwind of the dollar carry/risk trade has been squeezed off. And isn’t it special that the "redistribution" of wealth trade occurred while the US was stuffing its face.

The telltale sign that not all was right with the world was the inability of our markets to capitalize on the "breakdown" in the dollar on Wednesday. Moreover, the Dubai world-standstill was in the news on Wednesday. Was The Fuse, a distant cousin of The Hand, at work? The standstill was in motion and carefully planned, not a kneejerk move. Were the last two weeks of sideways action at 1111 what Gann would have called "time on the side"?

And, what it is, is the magic axis of the 1111 square out.

It is what it is -- and what it is, is the fact that while the trading world may have felt "safe" in assuming that the markets were buoyant to up at least until the S&P had satisfied its 50% retrace of the bear at 1120, the S&P satisfied another 50% mark inasmuch as 1111 is 50% of the range from the March 2000 peak of 1553 to the March '09 low of 666. Apparently, the Dow Jones Industrial Average did a "lone walk" up to its 50% retrace. But, as shown recently, the 10,400 level, plus or minus, has been critical for a decade.

Now come the pundits with their rear-view mirrors about how the correction was overdue and how there was no way to know it was here.

But, as you know, there were signs aplenty, and when the weight of evidence stacks up and there's a confluence of time and price harmonics, sometimes stops just don’t work and the market knifes through stops with a vengeance. Like a thief in the night when you least expect it.

The market usually (not always) offers a graceful exit. The snap-back to a marginal new high in November after the break in October was, in my opinion, that graceful exit. Few likely took it. Moreover, more players probably bought into the mindset that stocks were on cruise control into year-end and were waiting for the Santa Claus rally.

However, as you know,1080 months ago in November 1919 -- a key 90 years ago -- the market traced out a blow-off into November and proceeded to sell off approximately 10% into year end. I suspect the last thing that market participants of the time were expecting at that time was a 10% decline into year end.

The most crowded trade -- the most prevalent position and mindset in the financial markets of late -- has been short of the dollar, closely followed by the notion that the markets would melt up or at least mark up into year end. I think that mindset is poised to shift significantly today, with the scramble to protect profits going into year-end coming front and center and overshadowing the buy every dip strategy.

As offered above, the market usually gives a graceful exit: The two-day sell-off from 1111 to 1086 into November 20 was the last exit from Tape Town this year in my opinion.

That decline failed to tag a 90-degree move down from high at 1080/1078. This morning’s breakaway gap to below 1080 suggests the die is cast for lower prices; 180 degrees down equates to 1046; 360 degrees down equates to 980ish and the roughly 10% break that played out 1080 months, or 90 years ago. A momentum gap below that 1 X 1 monthly "tunnel through the air" or one point per month, or 1080 S&P equates to a break of the prior high in September. September 23 and the Autumnal Equinox to be precise -- which was a Key Reversal Day.

A move below 1080 going into the end of the year here suggests the Risk Trade is in trouble as money managers rush to protect profits rather that perceive the sell-off as just another setback and a buying opportunity.

Worth considering is the swiftness at which the market turns when it tags a price harmonic. The low at 666 was a .618 retrace of the entire range from the 1982 to the 2007 peak. The 2002 low was precisely 50% of the 2000 high. Note the low in July, which approximates 50% of the range from 1576 to 666 at 840ish. The normal expectation would be for the market to pullback from the 1111 level. Now what remains to be seen is the nature of the pullback. Will it get to 980/990 or even the opening range for the year at 950ish?

The November 2 low of 1029.40 is a critical level. Trade below that level in December will turn the Monthly Swing Chart down. If the market accelerates on such a turn down should it occur it will be a bearish sign? Keep in mind that 1015ish S&P represents a .382 retrace of 666 to 1576.

We hardly know what the ramifications are and what it means if Dubai is telling the world it wants to "reschedule" debt. But today, the world believes "reschedule" translates into default, and is selling first and asking questions later.

Fiat Paper Is Crashing Against Gold

As we near the end of the month with gold now closing in on another all-time high around $1200 in US dollars and nearing or already at new all-time highs in all the other G-7 currencies, I thought it was worth pointing out that despite gold appearing “extended” in the short run by any definition, that's what happens during a “crash.” And the ongoing “crash” of all fiat paper against gold appears to be set to potentially accelerate.

Why is the world suddenly hungry for gold and defying the numerous “top callers”? The answer is complicated as always, but when you boil it all down, it really comes down to the fact that gold is the only truly hard currency ( how many times I have to repeat myself ) that can't be actively debased in an attempt to prop up the dollar like the rest of the major fiat currencies.

In essence, the gold market appears to have finally reached a “recognition point” with respect to the global “race to debase” that continues to unfold, as the world's fiat dollar-based monetary system continues to implode right before our eyes.

That's the big picture, but it may be worth pointing out that an opportunity may be approaching even in the short-term for gold bulls to potentially take advantage of.

As you can see above, each leg up in gold and especially in the gold the stocks (GDX) since September has begun on the first or second day of the month, as the dollar index has correspondingly begun a move to new lows.

I can only assume this phenomenon may have something to with beginning of the month investment flows, and make no mistake, it's investment demand that's driving the current rally in gold.

But whatever the exact reason, the fact is that this beginning of the month phenomenon has been a trend, and while gold has obviously never corrected during mid-November as it did during mid-September and mid-October, it's a good bet that the metal and the gold stocks are creeping steadily higher in anticipation of upside acceleration early next week during the first couple days of December, when these beginning-of-the-month investment flows once again hit the market.

We may even get some extra rocket fuel at month end when the 19 million ounces of open interest in the December gold futures contract could potentially stand for delivery this month, which would be nearly three times the amount of gold available for delivery in the COMEX warehouse.

For that many contracts to stand for delivery is always a low probability event, but with the world currently hungry for gold, it certainly wouldn't be all that surprising. After all, December is by far the worst month for the dollar index from a seasonality standpoint, and it's been the second best month of the year for gold over the past nine years of its secular bull market, so to see somebody actually want to take physical delivery next month would certainly make sense.

In any event, the stars seem to be aligning for another leg higher in the gold complex to begin early next week in my view, and this time the gold miners should be the real stars because they have never really discounted the last $180 of gold's rally. We talked about this months ago and now we are here !

Traps Are Set Before Major Moves.

We trade what we think is the truth based on the time frame under scrutiny. Time bends the truth. Are we trading "the truth" or trading to make money? Opinion tweaks truth -- often monstrously. If we don't trade "the truth" and we make money, should it be considered dirty money? By that I mean, will winning with the wrong approach or strategy come back to haunt you, causing bad habits?

Not if you use discipline. Translation: You can do anything as long as you're disciplined enough to know where you're wrong. Discipline doesn't just equal a stop; it means exiting if the reason that got you in appears to be a shadow and not substance. You don't have to wait around for a price stop to get hit; you can employ a time stop.

Every good move in the market (either up or down) seems to start with a trap or a hook -- on all time frames. Such was the case in the secular bear (US) market from 1929 to 1949. Why do I say legitimate? Because that was the low prior to the advance that led to a new record high over the 1929 high. That was soon after the US government stopped crowding out the private sector, by the way.

Major moves on whatever time frame seem to erupt from traps that catch players wrong-footed -- a breakout puts many traders in the mode of buying all pullbacks, thinking the former thrust will be revisited; a breakdown puts many market participants in the mode of selling all rallies, thinking the former weakness will be revisited.

Markets KNOW this. This is their way of accumulating and distributing and clearing the decks before the ship sails, giving it an easier berth (birth?) as it were. In my speculative skepticism as to the markets, my thinking is that these bull and bear traps don't just happen -- they aren't just coincidences. Put another way, as my dear old dad used to drum into me, “Stocks don't move, they are moved.”

It may not be so much that the Street doesn't believe the Fed last week as much as it is that they realize they're winging it. They may be on this "extended" interest-rate holiday because it was a one-way ticket, and they're trying to get enough bonus miles together for a trip back to reality, out of the cave and into the light. Or, it could be that the market is sniffing out that they are clueless as to the next song in the rain -- after all, who was in the watchtower when Risk threw a riot in the prison yard?

Last Thursday morning, the Street was rife with the sentiment that Fed days that are strong pre-FOMC end strong. I don't know the stats on that but it seems that if the above is correct, then it's fair to say "Houston, we have a problem"; it's fair to say that the notion may be true but doesn't hold up when the trend has turned. This is the second time the market has slipped doing the FOMC Cha Cha. Remember that the September 23 Key Reversal Day was a Fed Day.

The market. 985 S&P or bust?

From the 1101 swing high to the recent low of 1029 is a range of 72 points (72 x 5 points/waves = 360-degree circle cycle). Yesterday's rally high came in pretty much as expected, as shown by the hourly S&P chart in yesterday morning's report, shown here again. And, as you know, 1060 is 50% of the range for the month of October's Doji month. A measured move of 72 points down from 1060/1061 projects to 989. At the same time, 50% of the July/October range is 985.

Connecting the dots from the daily dollar to the weekly shows that while the Street is crowded with dollar bears and chatter of a crashing greenback, when you hold a candle to the cave wall of the weeklies, in reality, the dollar is above a nice base from last year. Is the dollar carving out the mother of all backtests? When you step to the next drawing on the cave wall to peer at the VIX, it looks like a decisive breakout with a backtest over the last few days, which suggests a possible acceleration higher (chart above).

Gold Could Still Triple From Here.

Gold broke out to a new high yesterday of $1084, and the yellow metal is glittering again today.

More impressively, strategists note, gold prices moved higher on Tuesday even as the S&P 500 ticked up two points and the DXY index modestly rose to 76.3.

What has triggered this headline-making move in the gold price?

For one, the International Monetary Fund reported that it had sold to India 200 of the 403 tonnes it wants to sell this year. All that remains, market pros note, is the prospect for the other 203 tonnes to be sold, with speculation upon China as the eventual buyer.

But strategists point to another, perhaps equally important reason for gold’s surge: fiscal policy in the USA.

Specifically, Peter Orszag, the Administration's Director of the Office of Management and Budget (OMB), delivered a speech yesterday morning at New York University, in which he said that the federal deficit during the current fiscal year will match last year's record high of $1.4 trillion.

But he continues to predict the administration will cut that in half by the end of President Barack Obama's first term.

Is there a relationship between the price of gold and the US federal deficit and the amount of US public debt outstanding?

Apparently there is, says Ed Yardeni of Yardeni Research.

In a client note this morning, he notes that the price of gold has tended to lead the US federal deficit since the 1990s. The 12-month deficit peaked during the previous decade at $332.1 billion during April 1992. It then turned into a surplus of $277.8 billion during April 2001, on a 12-month basis.

During the previous decade, the price of gold peaked at $414.80 on February 5, 1996, Yardeni points out. It fell to $255.95 on April 2, 2001.

"It then took off without much downside volatility to yesterday's record high," Yardeni emphasizes. "As gold soared, the federal surplus evaporated and turned into a structural deficit that Orszag's OMB projects at $9 trillion over the next 10 years."

The investment strategist concludes: "So why did gold rally so much yesterday despite Mr. Orszag's assurance that the federal budget deficit will be cut in half? Apparently, the gold bugs don't believe him."

The American Enterprise Institute for Public Policy Research (AEI) published a paper indicating that "by all relevant debt indicators, the US fiscal scenario will soon approximate the economic scenario for countries on the verge of a sovereign debt default."

Steven Hess, Moody's lead analyst for the US, put it this way on Reuters TV: "The Aaa rating of the US is not guaranteed. So if they don't get the deficit down in the next three to four years to a sustainable level, then the rating will be in jeopardy."

David Einhorn of Greenlight Capital, recently speaking of why he's become a fan of gold, had this to say:


I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker's austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

Einhorn added, "Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis."

David Rosenberg, chief economist and strategist at Gluskin Sheff, also continues to favor gold. The fact that the yellow metal continues to surge higher -- even with ongoing deflationary developments -- suggests that other factors are driving bullion to new bullish heights, he says.

"It's called scarcity of supply relative to fiat currency, "Rosenberg argues.

The strategist wrote today in a research note that he thinks gold can at least double if not triple from here.

"The cup is still half full -- and still can be filled with gold eagle coins," he said.

For investment advice about how to play gold, checked with Curt Hesler, the longtime editor of the Professional Timing Service newsletter.

Hesler says there's no doubt that long-term gold will reach at least $1600. However, he thinks the near term is still a bit "dicey." The veteran says he'll get more excited about buying gold at $950 to $960.

Harlloween Dollar Rally Spooks Stocks.

It got pretty ugly out there on Friday, or downright spooky (lame Halloween joke).

The S&P 500 got whacked today by -2.82% to 1036 finishing right at the low for the day, and the low for the week.

The biggest culprit today was the dollar as the green back rallied 0.73% against the Euro today.

Keep an eye on EURUSD. Not just because it is by far the biggest weighting in the DXY (The Dollar Index) , but because it is testing its uptrend dating back to March (again)(chart abpve).

The double bottom in DXY that was setting up early this month did not materialize, however it seemingly broke its downtrend line on Monday. My weekly work has been choppy but still positive since late last month, and as of today, my monthly turned positive as well. That being said, we really need to see EURUSD break its uptrend to confirm the aggregate shift in dollar trend.

If DXY can hold above 75.80 and EURUSD breaks below 146.50, things could start getting interesting for it on the upside.

Side Note: Can you think of a more crowded trade right now than being short dollar (for the carry or otherwise)?

We began the week talking about the change in tone of the market, the dollar rally certainly suggest something is afoot.

Some thoughts on the S&P 500 (analysis usding TD Sequentials- 1st chart above):

We're finally arrived at the point where the bullish percent indicators are suggesting supply has overtaken demand, and today sets up an important day via DeMark indicators as well. Looking at SPZ9, a close below 1050.05 would set up potential qualification of TD Propulsion Momentum Down. What would then be needed is a lower open Monday and at least one tick below the open to qualify that level. The Propulsion Down Exhaustion level is 1001.60. As well, the TDST Down level is nearby at 1046.50 This would potentially be qualified as well if the open restriction is met on Monday.

This would be the first break of a TDST Down level since the rally began in March.

The close should be interesting because the TD Range Projections are suggesting the close will be within the range of 1050.10 to 1075.50 since the tolerance level high (1061.04) and tolerance level low (1055.96) have both been exceeded. Obviously, if the range projected close is correct we will not get a potential qualification of those breaks.

Spooky...spooky...! Interests rates going up.. Stocks likely to crash...Bonds too..VIX above 30s!

Do It Again..

The DJIA has crossed 10,000 maybe 50 times since first breaching it in 1999.

Is the market in another liquidity bubble like it was in 2003?

Bubbles don’t breathe, they don’t inhale, they just expand until they explode.

Is the market mirroring the relatively short-lived panics in 1987 or 1907, or is something more pernicious growing?

After the Long Term Capital Management debacle in 1998 caused a bailout and injection of nearly $4 billion on September 23 to avoid a wider collapse in the financial markets, another equity bubble emerged with a top 17 months later.

Are we doing it again?

It's noteworthy that on the decennial cycle, the September 1998 fiasco was followed by the Lehman debacle 10 years later in September 2008. It may be well worth watching the behavior in the first quarter of 2010 -- specifically March 2010, which will be 10 years from the March 2000 peak and 17 months from the October 2008 "internal low".

Are we doing it again?

And, if we are, what will the silver bullet be? Although sentiment has been fluffed up profoundly, what concerns me is that it may be a lot of smoke and little roast.

What if the current situation more closely mirrors the situation after the Crash in 1929?

If we turn down again and the crisis has a second wind, where will the full faith and credit come from?

Has moral hazard been hazed in return for a semester or two of stock pranks, Bluto? Did the failure to save Lehman for $50 billion, which instead cost trillions to save the world financial system from imploding, create another bubble?

While the popular indices are far from their record highs, some stocks have made the return trip. It reminds me somewhat of the test failure of the March highs as September 2000 began with some of the leaders making all-time highs above their March record highs, leading many on the Street to conclude that all was well in market.

The Market: I always assumed the Big Gap from last year's Lehman Deluge would be filled -- just not here and now. I expected a deep correction, first with a higher low and then another rally back that exceeded the gap and made a higher high in the first quarter last year. That's what the cycles suggested. So much for scenarios. But now what, what happens now that the gap has been filled? Will the other indices follow the NAZ, which filled its gap from 2008 and immediately extended? Anything is possible.

If the Ascending Wedge on the S&P isn't bearish and the crash of 2008 was an isolated event and huge buying opportunity like 1987, what should be expected from the price action from here? What should we be looking for in the charts?

First of all it's worth mentioning that one year after the crash in 1987 the market was up just over 25%. It took 20 to 21 months for a 50% rally to unfold. Currently the S&P is up more than 50% in just seven months.

However, as to the price action, it may be worth watching for an overthrow, which is seen as a breakout by the bulls and a failure of the bearish pattern (point A) followed quickly by an undercut of the wedge, which is embraced by a confirmation of the bearish pattern by the bears. The third move was the genuine bias as the market moved higher with many in both the bear and bull camp being dislodged and scratching their heads. Kind of a big picture cha-cha-cha. 1987 style.

How to spot tops.

Here are just a few simple and reliable signs of a top:

First, insiders are selling at a furious pace and insider-buying has abated. The insiders are the smart money so this is a sign that stocks are high and ready for a reversal.

Next, the Volatility Index (the VIX, on the left of this page ) has collapsed from a high of 89 to the low 20s (recently). This means that fear has turned to complacency right as we approach the often dreaded month of October.

Finally, the record number of 72% bears hit in the AAII in March 2009 has turned into a high and rising number of bulls in the various investor polling services. The market psychology has gone from a depression in March to near euphoria as we close out September.

A manic market is about as healthy as a manic mental patient so be extremely careful in here. After the 47% rally in early 1930, people were singing “Happy days are here again.” That was right before the market plunged another 86% to hit the 1932 bottom.

Technical analysis can also be very helpful in spotting and timing market tops. The two best patterns to watch for are the head-and-shoulder tops and my favorite, the double tops.

Let's look at a couple recent double tops so we can be ready for the next one.

On May 2, 2008, the Dow Jones Industrial Average (DJIA) closed at 13,058 and then dipped to 12,745. On May 19, 2008, the DJIA went back up and touched the highs but closed at a lower low of 13,028, putting in a double top.

From there the market collapsed to 6626.94 at the March 2009 bottom. This was the 49% slow motion repeat crash that had a near identical price pattern to the famous 1929 48% crash.

As a side note, we've also just completed the near 50% (a favorate GANN number!) multi-month rally that happened in early 1930 right before an 86% plunge.

The most famous double top was Nasdaq 2000 at 5000. Nasdaq collapsed 35% in just two months after the double top was completed. In my next piece, I'll show some famous head-and-shoulder tops as that may be developing as I write.

In summary, it's not time to be a hero on the long side of the market. Yes, a close above 1065 on the S&P 500 would target 1120, the 50% retracement of the entire 2007-09 collapse. That's only about 5% upside from here versus the 86% potential downside if we continue to repeat the 1929-32 depression era move in stocks.

Some other warning signs of an imminent top are oil topping, copper topping, China topping, the Baltic dry index weakening, gold spiking and the fact that almost every talking head on TV is bullish! Remember, if your sell list is getting longer than your buy list, it's time to get shorter!

JAPAN, Will Drive US Interest Rates Up!

In investing, it's important to think unconventionally and creatively while considering risks -- no matter how remote or unmanageable they are -- at the same time. I keep thinking: What would drive our interest rates up in the US? China is the obvious culprit as it's the largest holder of US's fine Treasury obligations.

If China's exports to the US don't recover to the pre-Great Recession level, considering its large overcapacity and bad debt, suddenly it may not be able to buy as many of oUS bonds/bills. Or even worse, it may start selling them.

Then you start looking down the list of who's who in the ownership of oUS government debt, you'll find Japan is only slightly behind China. Japanese interest rates were circling around zero, but they still failed to stimulate the economy that's been in a recession for as long as I can remember. Japanese savings rate were very high and, thus, as government debt ballooned over last two decades, it was happily absorbed by consumers that were net savers -- they had extra funds to invest. However, Japan has one of the oldest populations in the developed world. As people get older they save less, thus the savings rate has been on a decline in Japan (The fact that their exports fell 36% didn't help their savings rate, either. To save, you need income!).

The appetite for Japanese bonds will decline in tandem with the savings rate. The Japanese government (and corporations) will have to start offering higher yields to entice interest in its bonds. Interest rates in Japan will rise, and this of course will put a significant interest-servicing burden on the already highly-leveraged Japanese government. But more importantly, (at least from the selfish US perch) Japan will finally become a formidable competitor for borrowing. US borrowing costs will rise.

Not to appear as “on another hand” economist (I'm not one), but the counter argument to this is the US consumer may become a net saver and will be able to offset declining demand from their friends across the Pacific.

Life After The Autumnal Equinox.

The closing low for the Dow Jones Industrial Average (DJIA) this year was 6547 on March 9. On September 22, the autumnal equinox, the DJIA closed at 9830 -- which represents a 50% gain from the low -- and stalled out.

The S&P 500 hit a 50% gain off its March intraday low of 666 at 999 in early August. A 50% gain off its closing low of 677 equates to 1015, or approximately a Fibonacci 0.382 retrace of the entire bear market.

Did the market hold up until the DJIA could reach its 50% mark off the low -- until quarter end, until the Autumnal Equinox?

Markets seek equilibrium. The 50% Rule is powerful -- acting as a point of balance in the markets. For example, the decline in the S&P from its 2000 peak found its low precisely 50% off that high in 2002.

The S&P attempted to turn down after hitting its 50% mark off the low with a stall out in early August and a stab down on August 17. There was no follow-through.

This period coincided with the five-month retracement after the crash low in 1929. When the fear of that analogue was broken, prices headed higher. The DJIA had a date with destiny apparently.

Both the DJIA and the S&P had dates with their respective overhead 20-month moving averages. This week, both averages returned to the scene of the crime -- the gap down from October 2008. The market reversal from that gap was dramatic, underscoring that many factors converging at this one-year cycle may very well indicate the high for the year may be in.

In addition, a daily chart of the DJIA shows a “Pinocchio” just above the upper channel of resistance. Such overthrows and subsequent violent reversals often define significant turning points.

It's possible of course that the market is undergoing some shenanigans courtesy of mutual fund gamesmanship, and that following quarter end we'll turn back up.

However, do I think there's a better-than-average likelihood that any turn-up will be a retracement and snapback -- a test toward the high? It's possible that the DJIA and S&P will mimic the pullbacks in early August and then again at the beginning of September, but I doubt it. Why? Too many square outs, the calendar, and there are three drives to the top of a channel -- just as there were prior to the correction into July. That has been the only meaningful correction since the March low. At the very least, I think the market has scored an interim high and the ensuing correction should be on par with the sell-off into July. That was just under 10% on the S&P.

In addition to the three drives to a high, the current reaction is the third knife down in the DJIA and S&P. The market often plays out in threes. With the DJIA perched on a rising trend line just above its 20-day moving average going into the week end, it's do or die for the bull thesis.

Conclusion: With the S&P quickly tagging 90 degrees down from high at 1045, the normal expectation would be for a rally attempt. The key word is attempt. There's a good possibility that we're in a downdraft that breaks 1045 more quickly than the “buy every pullback thesis” is allowing for. The bears have learned to cover all support areas when there's no follow-through.

A weekly close below 1045 puts the market in a weak position. A break below the rising trend line on the DJIA from July suggests a test of the 50-day moving average which coincides with a test of the opening range of the year.

The Weekly Swing Chart on the S&P has not turned down yet. That should be the minimum projection before taking the market's temperature. Today that level is trading under 1035. If we get acceleration after the first hour to the downside, the weekly chart could turn down.

Yesterday's follow-through was the normal expectation after the up open: After large down days, especially prominent reversal days, you don't get a reversal back up with an up open -- you need a down open by definition to carve out an upside reversal in those instances.

At the same time, most stocks pretty much hit low after the first hour and went more or less sideways after the S&P tagged 1045. A down open on Friday's morning that holds a first half hour to hour low suggests an attempt to hold today.

I think the S&P could leave a Doji or topping tail on the monthly bar, trading back to the opening range of 1018. It will be interesting then to see if it rallies then like 1978 after the initial drop into October 8. The bottom line is that the end of the first week of October sets up as a turning point. It's 90 degrees from the July 8 low and the mother of all anniversaries: the 2002 low, the 2007 high, and the October 10, 2008, internal low.

The Writing Is Already On The Wall.

After this recent 68.5% move up in the NASDAQ from the March lows, and a 47.5% rally in the Dow Jones Industrial Average (DJIA), this is the question that's on every investor's mind.

To answer it, we must look back in history to crashes comparable to the one we just experienced from the October 2007 highs to the March 2009 lows, a fall of over 50% on DJIA, NASDAQ, and the SP500. Similar periods would be the famous 1929 crash, and the crashes of 1973-74 and 1987.

The Good

In a Clint Eastwood analogy of The Good, The Bad, and The Ugly, there are no "good" crashes, only "good" bull markets that eventually follow. On that hopeful note, let's move on to the bad and the ugly.

The Bad

The 1987 crash with its comparatively modest 36% decline, while not good, was the least bad or ugly of those we'll now look at. It was of such short duration and recovered so quickly that this severe correction isn't nearly as good a "comp" to our present market as "the bad" and "the ugly" crashes of 1929, 2000, and 1974.

When we look at today's powerful 68.5% rally in the NASDAQ, the DJIA of 1974-75 comes to mind. After the DJIA crashed 44.5% between January 11, 73 and October 4, 1974, it rallied a comparable 73.5%. It’s possible that our current rally in the NASDAQ could turn out to be greater than the 1975 DJIA rally because the current NASDAQ had a much worse collapse of 55.5%.

In the past, the DJIA was the proxy for "the marketplace." Many believe that today's NASDAQ has assumed that role, and that it's the more accurate representation of today's overall economy. If that's so, when the NASDAQ finally ends its current powerful rally, we may very well see a series of corrections and rallies such as those that took place in the DJIA between 1975 and 1982, when a new secular bull market was born.

Indeed, a strong case can be made that the true high of our markets was put in with NASDAQ 2000 bubble high, and the first of the crash and rally intervals took place beginning with the crash of 2000-02. The roller coaster sequence of 2000-02 crash, 2002-07 rally, 2007-09 crash, and the current rally of 2009, may indeed be the proof that we're in such a period. Six more years of crashes and rallies doesn't bode well for those investors still faithful to the philosophy of "buy and hold."

The Ugly

When we compare the chart of our current market to that of the 1929 crash, we'll see that they're strikingly similar. The 1929 rapid 48% collapse of the DJIA in 1929, although much briefer in duration, produced a similar price pattern to that of the slow-motion crash in 2008. The total collapse of 53% from the October 2007 closing high to the March 2009 low was much worse than the 1929 crash. Our recent rally of 47.5% since March in the DJIA has been virtually identical to the five-month, 48% rally which followed the 1929 crash.

What happened after the 1929 rally was simply horrific. The DJIA quickly tanked 26%, and by July of 1932, ultimately collapsed by a total of 86%. If our current market continues to follow the 1929-32 pattern, the DJIA should move quickly back to 7200 and finally to a low of 1400 in early 2012. Should this scenario play out, "buy and hold" investors will simply be destroyed. Following the Great Depression, the DJIA didn't return to its 1929 highs until 1954. Using history as a guide, today's “buy and hold” investors who bought in 2007, can look forward to breaking even some time in 2032.

The Outlook Based On History

Ironically, today's DJIA seems to be repeating the DJIA 1929-1932 collapse, as the NASDAQ appears to be repeating the movement of the DJIA 1973-82 roller-coaster period. The conclusion to be drawn here is that we're in a bear market similar to both 1930s and 1970s; one that will be both "bad" and "ugly."

I encourage "buy and hold" investors to take full advantage of this bear market rally and protect the gains that have been achieved since the lows of March. I believe that this current rally should be considered a "gift from ALLAH," sold in order to raise cash, especially in front of October.

Imagine how investors in 1932 must have felt; having held their stock all the way down, they must certainly have looked back at the 1929-30 rally as a great opportunity lost. Simply stated, for at least several years, it's time to move away from buy-and-hold investing by buying low and selling high. Whether you're a trader or an investor, in light of the magnitude of this current rally, you need to be prepared for a potential downside reversal as we enter October -- historically the most famous month for market crashes.

The bottom line is this: The easy money has been made in this rally. I believe that we're nearing the time to "sell high," as this current rally begins to roll over into a downward move of considerable magnitude.

The caveat is this: Once you're off a galloping horse, it's very difficult to get mounted again. So be disciplined in how you begin to take profits and ultimately get short this market.

Think fast... get out now!

The Looming Trade War.

US stock markets have had a very wobbly opening last Monday as fear spreads that the Obama administration has fired the first salvo in a trade war with China.

President Barack Obama made a long-awaited decision on previous Friday about imposing sanctions on China over alleged"dumping"of low-cost tires on the American market. Obama sided with trade unions and imposed stiff duties on $1.8 billion worth of Chinese tire imports.

The United Steelworkers brought the case against China back in April, claiming that more than 5,000 tire workers had lost their jobs since 2004 because of cheap Chinese tires flooding the US market.

Obama's order raises tariffs on Chinese tires for three years -- by 35% in the first year, 30% the second, and 25% the third.

The Chinese government hit back fast, and on many fronts.

On Sunday, Beijing announced it would investigate complaints that American auto and chicken products are being dumped in China or that they benefit from subsidies. China says the US imports have "dealt a blow to domestic industries" and you can be sure Beijing won't have much trouble arguing that US farmers and automakers are heavily subsidized.

On Monday, Beijing escalated its action with a complaint to the World Trade Organization (WTO). The Chinese complaint in Geneva triggers a 60-day process in which the two sides will try to resolve the dispute through negotiations. If that fails, China can request a WTO panel to investigate and rule on the case.

With unusually swift and coordinated action, the official Xinhua new agency quoted the government as saying, "China believes that the action by the US, which runs counter to elevant WTO rules, is a wrong practice abusing trade remedies."

So far, it's a trade spat, not a war. But it's an irritant as Washington and Beijing prepare for a summit of the Group Of 20 leading economies in Pittsburgh on Sept. 24. Obama is set to visit Beijing in November, and his reception could be very frosty.

Amazingly, American tire companies had begged the president not to go ahead with sanctions against China. "By taking this unprecedented action, the Obama administration is now at odds with its own public statements about refraining from increasing tariffs" said Vic DeIorio, executive vice president of GITI Tire in the US. "This decision will cost many more American jobs than it will create." GITI Tire is the largest Chinese tire maker, and a US retailer of low-cost imports.

Although investors are not yet facing World War III between the two economic superpowers, it's enough to make the markets very nervous. The Chinese ADR Index tumbled heavily at the markets' opening, but recovered swiftly as cooler heads prevailed.

Alarmists are worried that China, which holds about a trillion dollars worth of US financial instruments, could declare a real economic war. The tools Beijing could use are worrisome. China could: -

1. Sell dollars it holds faster than it already is

2. Not buy at the treasury auctions in the near future

It's a little too early for China to exercise the nuclear option in this trade dispute, but the events have spread fear in otherwise buoyant markets. Investors in US stocks should exercise caution and consider diversification as worries about the US dollar's devaluation, inflation, and trade wars continue to loom.

Holders of Chinese ADRs should ride out this rough period if they're confident that the shares they hold are from companies which continue to grow profits by double digits.

And, more importantly, they shouldn't be invested in companies dependent on foreign exports.

Is The S&P Finally Burning Out?

If you look at a chart of the last decade as shown above, there were two tops toward 1600 S&P that were toppled -- quickly.

At the highs, few were looking for the things to change so abruptly. Few identified the lows. Much of the Street is now convinced that it's 2003 all over again while you could hardly find a bull in March of 2003.

The bullishness is so ripe that you'd think we'd captured at least 50% of the decline. In fact the popular averages haven't even revisited the scene of the crime from one year ago. Rather they're exactly where they were eight years ago after the bounce, après le deluge, on the close of September 2001, 1040.

The market has a memory. The bears are haunted by the specter that it may be 2003 all over again. If it is, the bulls may be ahead of themselves. Why?

Well the first leg up off the March 2003 low was 374 points. A similar 374 points added to the March 2009 low gives 1040. As you know from the Square of Nine Chart shown on 11/9/09, 1044/1045 "vibrates" off the date of the March 6 low and opposite the current time period

Usually new high recovery weeks end with the indices closing on the high of the week. It they don't close at/near the highs of the week, it may be indicative that the market is burned out. But the S&P needs to break and close below its 20-day moving average and follow through to confirm the significance of 1044 .

The market has a memory. The S&P could still kiss the 1050 level, but as the monthly chart shows, risk is high with 1056 equating to a Fibonacci 38.2% retrace from the 1987 crash low.

Many of you familiar with these reports know that the Thursday the week before options expiration is what I call Misdirection Day. The Thursday the week before options expiration is when the new SP futures are rolled out (in this case December) and often the arbitrageurs want to catch the Street long and wrong. The bottom line is that if the market is up nicely the Thursday before options expiration, it often indicates a strong downside bias into expiration on Friday of the following week. Consequently, selling pressure that breaks above mentioned support levels should be respected.

In addition, drawing a Live Angle from the high in 2000 and the test high in September 2000 through the Low before the High going into the July 2007 high comes in at current levels as well in the S&P.

I suspected that a test of the 950 level is in the cards.

Wats Affecting Your Trading ?

Have you thought about your friends lately? Who do you closely associate with? It's understandable that we find connections with those who resonate with our belief structure, reiterate our passions, and enhance our strengths. Having a badminton-buddy or a health-club partner who likes what you like is a good way to spend time.

So, how do our chosen associations help with our outlook toward the markets? I wanted to talk about this very important factor that seriously affects trading but ironically is often relegated to the recesses -- behind fundamental and technical analysis, entry and exit techniques, stop losses, and so forth. It's far easier to share a chart of some index or discuss a stock. So why spend any time and effort on talking about the company you keep?

Well, how about the fact that it affects your macro biases toward the market, shapes your view about the trades you make, and has more lasting influence on your portfolio than one stock or index chart?

These subtle yet powerful associations are so because human beings are vulnerable to other people's emotions. And that vulnerability is especially important if their beliefs resonate with us. This is summed up eloquently in a quote from an article called Emotional Rescue: “Although human emotions don't spread like colds, they are contagious.”

If our bias is bullish, we'll keep flicking through channels until we find someone who tells us what we want to hear -- that the market is going much higher and it's advisable to put all your money in it. If we have a bearish bent, we'll scout through websites and bookmark those that enforce our already bearish beliefs, and back them with evidence we like. Even if dissenting thoughts crop up, we let them gather dust and take solace in the factual data that supports our original thesis.

Bertrand Russell said: “If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.”

The irony is that in this age of information, the thing most abundantly available is (you guessed it!) information. There are numerous blogs backing your personal thesis. No matter what we believe in, we'll find evidence to back it. And in the markets, staunchly holding on to any one thing can lead to calamity.

For this reason, I often suggest investors stroll out of their comfort zones and add a few dissenters to their trusted friends via websites that offer opposing views, keeping in mind that you don't have to swing the pendulum all the way. Even if the opposing views are aggravating to listen to and can turn out to be wrong, they often add depth to our perspective since we have to defend our original views.

Dissenters can give us the greatest gift of all: an open mind. This is the prerequisite for a flexible approach toward investing. As Thomas Dewar stated: “Minds are like parachutes. They only function when they are open.”

Kalama Sutra - Angutarra Nikaya 3.65

Teaching given by the Boot-der given to the Kalama people:

Do not go by revelation;

Do not go by tradition;

Do not go by hearsay;

Do not go on the authority of sacred texts;

Do not go on the grounds of pure logic;

Do not go by a view that seems rational;

Do not go by reflecting on mere appearances;

Do not go along with a considered view because you agree with it;

Do not go along on the grounds that the person is competent;

Do not go along because [thinking] 'the recluse is our teacher'.

Kalamas, when you yourselves know: 'These things are unwholesome, these things are blameworthy; these things are censured by the wise; and when undertaken and observed, these things lead to harm and ill, abandon them...Kalamas, when you know for yourselves: These are wholesome; these things are not blameworthy; these things are praised by the wise; undertaken and observed, these things lead to benefit and happiness, having undertaken them, abide in them.

Do You Remember.. The Twenty-First Night Of September..?

It was a blockbuster summer for the bulls on Wall Street. But September is historically the market's worst-performing month, and already we've begun to see some sharp pullbacks. Interestingly enough, on the flip side of the coin, September is historically the best month for gold.

I mentioned buying precious metals mining stocks two weeks ago. If you did, you'd have made about 14% profit so far if you diversified in many stocks (HUI Index), and about 19% if you put your money in the top 3 stocks that my leverage calculator suggests as a speculative proxy for gold.

The price of gold has risen in 16 of the 20 Septembers since 1989. And since this September began, we've already seen some tangible proof as the yellow metal makes new forays toward quadruple digits.

At the moment, gold is on course for its biggest weekly gain since late April.

While September is a good month for gold, it's historically a great month for gold stocks as measured by the NYSE Arca Gold Miners Index. After the typically weak summer months, the gold miners start to perk. Since 1993 when it was created, the GDM has been up 11 times in September and down just five times.

September is also historically a miserable month for the US Dollar -- a bullish sign for gold since gold trades at an inverse relationship to the dollar (more on that later). Looking back 39 Septembers going back to 1970, the dollar has seen negative performance 26 times -- more than any other month of the year.

So what's behind this predictable September pattern as far as gold goes? Several gold-demand drivers converge all at the same time this month.

-The post-monsoon wedding season begins in India.
-The Indian festival season begins.
-American jewelers begin restocking in advance of Christmas.
-Ramadan ends in late September in the Muslim world with a period of celebration and gift-

giving.
-And, in China, the week-long National Day celebration starts October 1. Already in China, gold jewelry demand increased 6% in the second quarter.

While just about everyone in the world is getting ready to celebrate, the price of gold (charts courtesy of stockcharts.com) is getting ready to perform its own celebration dance.

We've just seen a significant breakout from the gold triangle pattern to which I'd referred in the past. The move took place on a very strong volume. This is exactly the type of confirmation I like to see in a breakout.

The RSI Indicator -- proven to be a very valuable tool in timing the gold market local tops -- suggests that gold may need to take a breather before moving higher. Should that be the case, the most probable scenario is a test of the upper border of the triangle pattern.

Still, in the short term, prices may rise a little higher before correcting.

Analysis of the short-term chart suggests that although prices have risen high and fast, this may not be the end of this rally. First of all, the volume isn't low. It was lower on Friday than during the previous two days, but it's still considerably higher than the average during the past few months. Low volume would indicate that the buying power has dried up and price is ready to plunge. I don't see this yet.

Also, when we take a closer look at what happened at the end of May. The RSI was very close to the 70 level in the fourth week of the month, but the price pulled back only for two days and then rallied further. While I can't say for sure that this will happen here, I can say that there are no clear signs of a top yet.

Moreover, taking into account the 1.618 ratio that's also very useful in predicting the range of future price moves, we might expect the GLD ETF to reach levels marked with a red rectangle. This would correspond to gold breaking above $1,000. Should this move materialize, I'd expect it to be volatile.

Gold and gold stocks move together most of the time (what's confirmed by high correlation coefficient values between gold and HUI in the correlations table), so we can say something about gold by analyzing the performance of gold stocks -- here, via the Gold Miners Bullish Percent Index (a market breadth/momentum indicator that's calculated by dividing two numbers: the amount of gold stocks on the buy signal (according to the point and figure chart) and the amount of all the gold stocks in the sector).

The GMBPI itself is currently trading at the overbought levels that in the past, sometimes meant that a top is in. However, that's only part of the story.

Please remember that if during the second half of May 2009 an investor hastily acted solely on the popular use of the RSI that says to sell once it gets above the 70 level, he'd have missed a $50 move in the HUI Index.

It's usually a good idea to put every indicator/tool into the proper perspective before acting on it. Keep in mind that the people who design an indicator want it to work in many markets and usually don't fine-tune it for a particular market. Investors need to make the appropriate adjustments themselves.

Here, when you consider the local tops that materialized when both the RSI and William's %R indicators were in the overbought territory, it becomes clear that these tops didn't form immediately after the overbought levels were reached. Conversely, the HUI's value usually moved higher for several days/weeks before topping. I've marked with vertical, dashed lines each time gold stocks took their time before reacting to the “overbought-sell-now signal."

So, even though the probability of a correction increases, it doesn't mean that it will take place very soon.

Summing up, your approach should depend on your investment perspective and risk preferences. The trend is up for the PMs, but there are a few signs that some kind of breather is likely. This doesn't need to take place instantly, so the question is whether or not to hold your positions in this market.

The fundamentals haven't changed, so I don’t think that selling one’s long-term PM investments is a good idea right now, however the short-term speculative capital is another matter. If you're risk-averse, I'd suggest exiting at least a part of your speculative positions right now, and re-entering during a consolidation. Those of you who accept high risk in order to reap the biggest gains may want to wait for PMs to move a little higher (to levels mentioned above) before closing your speculative positions.

" Ba-de-ya.., dancing in September..

Ba-de-ya.., never was a cloudy day.."

Staying LONG On SPDR Gold Trust ETF (GLD).

While I keep GLD (or SPDR Gold Trust ETF) on my radar at all times, it became actionable on September 2, when it broke out of the triangle formulation.

As you noticed, it's close to an important resistance level, so I would expect some pullback. As long as it's on minor volume and contained at the recent breakout level, it should be considered as a welcomed pullback.

The current stops are at a close below $92.5 (the bottom of the triangle, just below the confluence of 10-, 20-, and 50-day moving averages)

However, I wouldn't short it, expecting such a pullback -- although I have trimmed some of my position in an effort to add to it if it comes lower.

The reason is that gold's coming out of a tight volatility squeeze and the Bollinger Bands have just begun expanding and might signify higher prices ahead. Here's the chart (all my attempts to simplify it have been somewhat limited). That's a different picture from the moves in February and April of this year.

So, recapping, as long as it doesn't violate important technical levels on the downside on heavy volume, I'll continue to play this on the long side. As per the technical targets, let's visit them if it actually breaks out beyond the 2009 highs.

When Shanghai Cracks.

The Chinese Shanghai Composite Index has now recorded four consecutive down-weeks. The Index witnessed another massive sell-off on Monday, declining by a further 6.7% to take its total loss since the peak of August 4 to 23.2%.

The losses happened on concerns of large Chinese share issuance and slowing bank lending. The banking regulator has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year -- up from 134.8% at the end of June -- and the central bank has increased money-market rates to drain liquidity.

China, could be the catalyst for triggering a reversal of fortune in global stock markets.

Of the global stock markets I monitor, the Shanghai Composite (2,667) is the only one to have breached its 50-day moving average (3,125) and now has the key 200-day line (2,476) firmly in its sight.

Interestingly, emerging markets have now seen two back-to-back weeks of declines and have been underperforming developed markets for four weeks running, as shown by the declining trend of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Could this be a sign of a broad retrenchment in risk appetite?

A global stock market correction could take the form of either a pullback or a consolidation (i.e. ranging). I suspect we may see at least some degree of reversion to the 200-day moving averages in a number of instances, but I'll be watching closely to ascertain whether we're dealing with a normal short-term correction or a more significant move threatening the primary trend. In the meantime, sit tight and be cautious as markets hopefully realign with the reality on the ground.

Short-covering of the Dollar.

I'm a little stunned by the amount of dollar bullishness that's built up over 3 whole days of upside in the dollar index that haven't even managed to put the index back above its 50 dma or above its most recent peak on July 29. A sentiment shift of that magnitude without equally bullish price action is generally a very bearish setup.

Equally stunning is the amount of bearish sentiment on gold and commodities because of this 3-day rally in the dollar, which likewise hasn't generated equally bearish price action. Consider that, despite the dollar index's rally back up to over 79 (a level last seen on July 30), commodity prices remain well above the levels that they were at on July 30th. See the chart below of the dollar index, gold, the CCI equal-weighted commodity index, WTI Crude oil, and silver.

In other words, commodities (especially silver) aren't giving up the gains that were won on the dollar's decline below 79 in proportion to the ground that the dollar index has recovered. And that sort of stickiness in the face of what “should be” bearish is actually quite bullish. Now compare that “stickiness” in gold and commodity prices to the action last July/August when the dollar first began to rally and how commodities (ex-gold to some degree) absolutely collapsed at the first hint of dollar strength.

I have no doubt that many dollar bulls/dollar deflationists are hoping for/looking for a repeat of last year's dollar rally and the ensuing collapse in commodity prices, but thus far the action doesn't support that outcome.

On the contrary, the action would seem to support the idea that the recent rally in the dollar is more than likely just another big bounce based on short covering ahead of the FOMC. And the trends that prevailed before the FOMC (i.e. - a weak dollar and rising gold and commodity prices) will likely continue post-FOMC.

Those trends may even accelerate if the Fed follows the BOE's surprise move last week and increases the size of its monetization facilities, which wouldn't surprise me in the least given the Treasury's “default or debase” dilemma. It would be a big surprise to the market though, just as it was back in March when the program was first announced.

GOLD AND S&P.

GOLD appeared to be breaking down early last week, the metal reversed offsetting the stab down and recaptured its 50 day moving average. Last week left an outside up week in gold and any extension this week looks as if it will trigger a move out of a bullish Cup & Handle pattern.

This pattern exists within the pattern of a short-term inverse head and shoulders pattern as well as a larger inverse head and shoulders pattern. Last week’s turnaround in gold sets up a potential move over resistance in the way of a long declining 3 point trendline. A breakout over triple tops will trigger a Rule of 4 Breakout which has a strong likelihood of follow through. As many of you know panicky moves often times culminate at/near the 49th period of a move.

The crashes of 1929 and 1987 being good examples as the crash in both instances occurred 49 to 55 days from the high day. Looking at the weekly chart of gold, I see how the two most important peaks on the chart occurred 49 weeks apart. October will mark 49 weeks from the last important swing low. Will it be a spike high if gold breaks out?

While gold is poised to break out, the stock market is coming off the July Jolt. Despite the seeming bullishness of the outside up month of the S&P, the market has entered into the time period where a reversal could occur.

I don’t know what the catalyst for a reversal would be anymore than I knew what the catalyst would be at the March low. I still don’t think anyone can point to anything other than hope in a heavily oversold market that turned stocks around in the spring. The reason why any downside reversal must be respected is that it could be larger than most participants expect: bull and bear trends often play out in three’s---I don’t see 3 drives to a low on the monthly chart of the S&P which raises risk on any turndown in the Monthly Swing Chart in August.

Because of many cycles and patterns including 1979, 1929, 1990, and 1999 (the DJIA topped in August and double topped in January the next year) which I will flesh out further later, I believe that the July Jolt will lead to August and a September Surprise... to the downside

How China Dumping U$D For Hard Assets.

If you have massive coal reserves, an oil project in Kurdistan, or a boatload of gold bullion, China wants to talk to you.

The Chinese government holds over $2 trillion in reserves. The dollar is an asset that has lost 33% of its purchasing power since 2002. And with the U.S. government creating boatloads of easy credit with low interest rates, the long-term picture is even grimmer.

Those reserves are a liability, and the Chinese want out. Here's how they're fleeing the dollar...

China's coal imports are 2.8 times what they were last year. As of May, oil imports were up 14%. Imports of iron ore and copper are reaching record highs. And it's not just raw materials...

In February, China Development Bank loaned $10 billion to Petrobras (the Brazilian national oil company), $15 billion to OAO Rosneft (a Russian national oil company), and $10 billion to Transneft (Russia's national pipeline company).

So far this summer, Aluminum Corp of China invested $19.5 billion in giant base-metal miner Rio Tinto. China's national oil company Sinopec paid out over $8 billion for Addax Petroleum's oil fields in Iraq and offshore Africa. And the state-owned China Investment Corp just bought a $1.5 billion stake in metals producer Teck Resources.

China is dumping dollars for all kinds of hard assets and commodity infrastructure. It's also dumping those dollars for gold.

From 2003 to April 2009, China secretly increased its gold reserves by more than 75%. Today, it's the fifth-largest sovereign gold holder at nearly 34 million ounces. That's over 30 times the amount of gold the Chinese government held in 1990.

Right now, that much gold is worth about $32.6 billion – just 2% of China's total dollar reserves. China's frantic to exchange more of its trillions of dollars for gold. But only about $150 billion in gold bullion trades in a given year. The government can't put all its dollars to work in the bullion market without driving gold prices to the stratosphere.

That's why China is pouring resources into its domestic mining industry.

The Chinese central bank buys all the gold Chinese mines produce at a fixed price. In 2007, China produced about 9.7 million ounces of gold – making it the world's largest producer ahead of South Africa, which produced about 9 million ounces.

China's the world's third-largest country, covering about 3.7 million square miles. That land is incredibly rich in mineral wealth – it potentially holds over 320 million ounces of gold.

Only a handful of public companies are working with the Chinese government to expand the country's production. Those companies will reap huge rewards as China dumps its dollars into its domestic gold industry.

Sino Gold (SGX on the Australian Exchange), for example, is a $1.2 billion China-focused gold miner. It owns two operating mines with two more under construction. The company's remarkable ascent began in 2001, when it acquired a small project called Jinfeng. In just six years, Jinfeng went from a rough one million-ounce resource to the country's second-largest gold mine.

It would be difficult just to permit a U.S. mine in six years, let alone bring it into production.

China's government is so eager to get its hands on more hard assets, it's willing to go to almost any lengths to kickstart its mining industry. That kind of support can yield tremendous returns for smart investors.