Why the Markets Are Headed for a Surprising Fall

Larry Edelson

If it turns out I’m wrong about the coming moves in the markets, so be it. I’ll make tons of money anyway, and so will those following my forecasts.

Reason: I’m not a perennial bear, like a stopped clock that’s right twice a day. I’m actually very bullish long term on everything from precious metals to stocks — the only exceptions being U.S. Treasury bonds and the dollar.

So when the real bull emerges for gold, silver, oil, and other commodities and stocks, I’ll be riding it — planning to make more money in the next two to three years than most people make in a lifetime.

And those gains I plan to make will be amplified by what’s about to happen in the short term, where giant traps are about to slam shut on many investors and traders who are getting caught up in the recent, premature rallies.

Let me review the major markets for you, and why I believe they are headed for a surprising fall.

First, I’ll start with the fundamental backdrop to all the markets. Europe’s nightmare is not over.

Yes, the European Central Bank seems to be moving closer and closer to a full-scale assault on the euro-zone’s crisis by printing money.

But the deal’s still not done, and yet nearly all markets are acting like it is.

Germany stands in the way. This past week, its Bundesbank apparently made some remarks that if the ECB is to print more money, the Bundesbank wants to be in control of it AND the ECB.

So ECB money-printing is not a done deal. But here’s the catch: Even if the ECB starts printing endless amounts of euros, what’s that going to do to the euro?

It’s going to slam it to the mat, and send the U.S. dollar soaring.

A soaring dollar will, in turn, add to the disinflationary forces already impacting the U.S. economy. That will send stock markets lower, gold lower, silver into a tailspin, copper down the tubes, and more.

A plunge in the euro and rally in the dollar won’t help Europe’s economy, either.

Most of Europe is now not in a recession, but rather, a depression. And as the euro plunges, capital flight out of the healthier European economies such as France and Germany will escalate, hollowing out the rest of the euro zone.

Meanwhile, while the U.S. economy is indeed in better shape than Europe’s, our self-centered leaders in Washington are doing nothing about the deficit … nothing about the interest on the debt … and nothing about the upcoming fiscal cliff.

All they care about is the elections. Yes, they will solve the fiscal-cliff dilemma of spending cuts and tax hikes — reaching some sort of compromise. But it won’t happen until the 11th hour, in late December.

Meanwhile, the uncertainty and the growing recognition that our leaders are full of you-know-what is soon going to destroy confidence in the markets, and this won’t be bullish. It will be bearish, leading to nervous selling and liquidation.

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At the same time, China is showing additional signs of slowing.

Let me be perfectly clear: China and Asia in general remain in very good shape, and in long-term bull markets.

But short term, there’s no question that neither Europe nor the U.S. can rely on China stoking up the global economy.

(That’s ironic isn’t it? It used to be that the world looked toward the U.S. to support the global economy. Now the world looks to China!)

Additionally, I see no technical evidence that the recent rallies in metals and stocks are anything but a giant trap.

Consider gold, for instance: As this weekly gold chart clearly shows, gold’s recent rally is weak, at best, and nothing but a corrective relief rally.

First, notice the downtrend line from the 2011 record high. It’s still very much intact and is now providing major overhead resistance at the $1,650 to $1,670 level.

Second, notice the downward-sloped red line higher up, labeled as a cyclical trendline. This is the TRUE breakout point for gold.

Gold needs to close above that line, more specifically above my system buy signal at $1,727.70, to confirm a breakout and a new bull leg higher.

Given all the resistance before that comes into play, I doubt very much that gold can pull off a breakout now, especially since the short-term cycles will soon be pointing down, into September.

Also notice the rounded formation of gold’s recent sideways-to-higher trading action. That’s corrective trading action, meaning this is the kind of trading action that is indicative of a correction to a bear market, and not the start of a new bull leg higher.

What about the fundamentals for gold? Yes, the long-term fundamentals are bullish. Europe and the United States are facing a monetary and sovereign-debt crisis. One that will eventually send gold to well over $5,000 an ounce.

Which is precisely why I recommend that long-term investors hold their gold. But in the short term, Europe’s crisis — which is not over — is bearish for gold.

In addition, gold demand in India and China is actually falling.

Now let’s look at …

The U.S. Dollar: I’m the original bear on the U.S. dollar, and I pegged its bear market starting way back in the year 2000.

The dollar remains in a long-term bear market. But short term, it’s about to turn much higher.

Fundamentally, as Europe begins to print more money (and it will eventually), the euro will fall and the dollar will rally, by default.

System-wise, the Dollar Index also remains short- and intermediate-term bullish. Only a Friday close below 80.65 on the index would negate that.

Meanwhile, a move above the 84.60 level will point to a massive rally in the Dollar Index up to near the 92.00 level.

The chart of the Dollar Index is also bullish. Support is scaled in at the current level of 81.80-81.90, followed by 80.65 and 79.00.

Silver: If you think silver is now headed back to $50 and higher, think again. Just look at this weekly chart of silver.

All silver has done is try to rally to test overhead resistance, which remains formidable at the $30-$31 level.

Silver should soon turn back down, and quite violently, with a break of the $26 level still in the cards, and a slide to the low $20 level highly likely.

Fundamentally silver is an industrial metal, not a monetary metal, and should move lower as Europe’s economy continues to contract.

Also consider crude oil: About the only thing holding oil up right now is fear of an Israeli attack on Iran’s nuclear facilities.

That attack will happen. But I doubt it’s going to take place as soon as most are expecting, in the next few weeks to couple of months, and I doubt it will do much for the price of oil.

Oil is already pressing extreme resistance levels.

It may yet test the $100 mark, but overall, oil’s chart action is bearish and my systems remain bearish on an intermediate-term basis.

As you can see from the chart, oil is now pressing into a major resistance level. I expect it to soon turn back down. And quite sharply.

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Now, the Dow Industrials: Long term, the Dow and the S&P 500 stocks are headed MUCH higher.

And the recent strength in the broad U.S. stock markets is showing you its potential.

The simple fact of the matter is that our stock markets — and many of our great companies — are the beneficiaries of capital flight from Europe.

As that crisis worsens, and Washington gets hit with its own sovereign debt crisis, both European and American capital will be attracted to the stock market. Money will flow out of U.S. bonds and into stocks. Regardless of the economy.

Few people understand this, but the U.S. stock markets can become a safe haven for capital. Just like bonds have been, or gold. When that happens, and it will happen, U.S. stock markets will soar.

But we’re not yet fully into that phase. Right now, it’s mostly European-flight capital that’s holding up our markets.

That will continue, but in the short term, there are also forces weighing on U.S. stocks — namely the uncertainty of the looming U.S. fiscal cliff of spending cuts and tax hikes.

That’s partly why I believe the Dow Industrials — and the S&P 500 Index — are now forming a massive double-top, as you can see on that chart.

Odds still favor a move back to the downside, one that could be very sudden and very sharp.

Additional evidence comes from my system models, which show a move lower heading into September, a move that could find the Dow sliding back to at least the 12,500 level and possibly lower.

Also important: Something very few are talking about. The Dow Transportation Index is not confirming the move higher in the Dow Industrials.

You can see it on this chart, which shows the Dow Transports on the bottom half. While the Dow has moved very close to a double-top. The Dow Transports remain well-below their highs of earlier this summer.

That’s called a Dow Theory non-confirmation, and it is largely bearish.

Reason: If the transportation sector is not confirming the action in the Dow, it’s telling you something, and in this case, it’s likely telling you that the real economy, so to speak, is not supportive of the current Dow Industrials pricing.

My bottom line: Don’t get caught up in the recent rallies. They’re hazardous to your financial health!

Instead, stay the course. I suggest you keep the bulk of your money safe and secure in U.S. Treasury bills or related money-market funds.

Consider keeping your gold holdings hedged. I also recommend you don’t buy more gold yet. Don’t buy silver yet. And if you’re a speculator, speculate on the short side of these markets (except for the dollar).

Until next time …

Best wishes,

Larry

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Your thoughts on “Why the Markets Are Headed for a Surprising Fall”

  1. Larry will, IMO, never go all in. Like most traders, by the time he realizes he has missed the boat, it’s too late. Credit awarded for not chasing, though.

    >Gold needs to close above that line, more specifically above my system buy signal at $1,727.70,

    Well, here we are at $1784 and it appears the bar has been moved higher. Larry, you are, IMO, the most dangerous permabear of the Weiss Bear Collection because you pretend NOT to be and talk such a good bull game—but the rally is always off in the future somewhere…..and right now, all your indicators are saying, “CAUTION! Decline just ahead!”. And, like the stopped clock, you do get it right once in a while.

  2. Am thinking last weeks market action negated all the bearish calls for the dow, gold and silver and the dollar rally as predicted in this weeks letter. Also looks like the euro is rallying big time on the possibility of more printing by the ECB, rather than selling off as predicted. Larry are you going all in now?

  3. Jim Rogers said that the Feds balance sheet shows that they are probably printing money, and apparently decided not to mention an embarassing QE3.

    This would seem like the time to go long on silver and gold?

  4. I don’t know why but I have the feeling that Larry will still write the same thing in 2013 about the markets and gold / silver / oil what he has written since 2011 .
    Interesting to read his stuff back to 2011 .
    All of his low estimates have NOT come in at all while the markets / gold / silver moved up instead .

  5. He has spent the last year telling people the market was going to drop significantly, and even raised his forcast from DOW 9,000 to now only DOW 12,500. Somehow by doing this, people continue to be supportive of his work.
    I can’t believe he is basing his analysis partly on Dow Theory since the divergence can persist much longer before the actual reversal. Surely 33 years of work could be a bit more insightul and much less elementary at that.

  6. Ummm….gold just blew away your overhead resistence…..

    let me guess…it needs to close above said level for 3 months straight??…

    Pick a random number, Larry….even a chimp with a sharpened pencil is doing better than you over the last 3 years…

  7. Been holding cash for a long time. The market pulls back & it looks like this could be it… then rallies the next day. Big pullback, big rally. Small pullback, small rally.

    I’ve been sticking with you Larry for years now. Only wish we bought world dominating blue-chip stocks after the market bottomed in 2009. Even if your forecast is right & the DOW pulls back to 12,500, we still won’t get the bargain prices like we could have back then.

    After reading the January 2012 issue of RWR I was finally excited about the markets again thinking this is our year. Here we are (almost) into Sept & we’re still on the sidelines. Of course, the worst may be just around the corner & I’ll be grateful for following your advice and holding cash.

    Naturally, every investor wishes they bought at the bottom. I still respect your forecast, although the timing may not be pinpoint the larger picture is what to focus on.

    Looking forward the the next RWR subscribers-only video update (should be a doozy).

  8. It is an amazing skill to make money in the markets whether you are right or wrong. Hopefully your subscribers will do as well taking your advice but I am a little skeptical after all your past calls to short using reverse etfs. Anyone who did that must have lost a lot of money.

  9. Oh, I get it. It’s a play on words. ‘ Fall’ is ‘autumn’. That way it’s going to be surprising during the autumn and whether it moves up or down, you are safe. Clever. Not helpful. But clever.

  10. Larry- Ben Bernanke and the Federal Reserve have been very carefully watching the velocity of M1 money. They are tracking the wrong indicator. Ben and the FOMC should be tracking the velocity of F1 money. What is F1 money? Food Stamp money! You see, the economy has switched from the Federal Reserve greenback to the Food Stamp coupon. If you chart M1 velocity to F1 velocity they are inversely related with a correlation of 99. F1 is the indicator to watch! The real U.S. economy has switched currencies.

  11. Larry…I think you will find that the gold demand in China is growing enormously and has doubled over last year. Agreed that India imports are down this year….somewhat.

  12. Larry, why do you say you are now wrong about the markets? Is it to get readers attention or what?
    Most I all I want to know your most salient advice to a very moderate investor.
    Are you really going to let your readers know when to buy gold when it drops to the price you recommend buying? What email should I be looking for?

  13. Hello Larry,

    Thank you for your weekly videos and analysis !

    Could you please explain the correlation of the Dow Transport and the Dow Jones; I am unsure how the Transports would influence the direction of the Dow or for that matter why ?

    Thanks in advance.
    Rita

  14. Following a 20 year bear market, gold went from $250 in 2001 to $1000 in 2008 – without QE1, QE2, or QE3. Oil did not do that. Stocks certainly did not do that. Something else is at play here. That something has not gone away. That something has never been seen by modern pundits, thus they use outdated models. Trying to nail down gold this far into its one-year correction is exposing oneself to unecessary risk since one way or another we all agree gold is on its way up.

  15. Stephen,

    All those assets are priced in dollars. When the value of the dollar goes up, it takes fewer dollars to buy them. Hence asset prices fall. You can prove this to yourself by looking at the price charts for GLD, SPY, and UUP. GLD and SPY move together, and both move opposite to UUP (even relatively minor changes in the dollar’s value impact assets markedly).

  16. Larry, Why do you not factor in that the market turmoil in Europe has also generated higher gold prices in terms of the USD as well as the Euro? Surely you remember that happening. Your assumptions are only ok if based on the premise that the USD and gold are always inversely related… which is simply not true, unless you’re simply looking at . QE globally in its many forms is one upwards push on gold globally; but fear, financial instability and flight to debt-free assets are also fundamental and emotional drivers. Another unproven assumption you’re making is that market silver prices are primarily driven by industrial uses. Was that industrial demand that made silver go to almost $50 in the last couple years? Of course not. So I rest my case. I personally see silver as trading in a channel between 26 adn 44 USD. Technically it doesn’t have to be either bear or bull, from this perspective. Also technically, XAU/USD FOREX appears to have broken out of a wedged downtrend line on the daily chart to the upside. People who follow your advice will still make money eventually. And I appreciate that you’re now being more transparent in explaining your reasonings and logic than in some recent publications.

  17. I am making a major prediction that the markets, gold, silver, and commodities will move up, down, or sideways in the very near future, possibly falling dramatically, moving sideways, or moving up in the interval.

    How many of you will pay me for more predictions like that?

  18. Thanks for this timely update. I am new to your service BUT I get the message to stay the course.

    Your partner, Tony, seems in love with options. It seems like you do not have “a focus” on options. Can you please give your perspective on options.

  19. Pretty interesting to hear your views and projections on the overall markets and main indexes. Weiss’ columns talk about how the fiscal cliff is going to be worse than the 2007-2009 recession and how prices could fall drastically lower. Whatever happened to the Dewey projections where 2012 would experience new market lows that didn’t happen? Thoughts?

  20. there’s panic in your writing Larry…panic…

    So??…you are promising your subscribers they will make tons of money…if they follow your forecasts… regardless if you are right or wrong??>.

  21. Why will a soaring dollar add to the disinflationary forces already impacting the U.S. economy. That will send stock markets lower, gold lower, silver into a tailspin, copper down the tubes, and more. Please explain? Thanks, Stephen

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