-- Published: Tuesday, 14 October 2014 | Print | Disqus
By David Nichols
Years ago when I set out to study huge growth patterns in markets -- more commonly known as "bubbles" -- I discovered a remarkable timing signature common to every single one of these patterns:
They all last exactly 64 or 65 months.
All the "name-brand" market bubbles in history have lasted 64 or 65 months from initial growth to blow-off top.
This includes the 3 biggest bubbles in modern market history:
- the Dow into the 1929 peak
- the Nikkei into the 1989 peak
- the Nasdaq 100 into the 2000 peak
This also includes more recent bubbles, such as home-builders into 2005, and crude oil into 2007, and for a more recent example, the stock of Priceline (PCLN).
Statistically the chance that these pattern alignments can be explained by random chance is essentially zero.
And the correlation gets even more compelling when we zoom in and look at the way these 64 month patterns develop, as there are calibration points along the way to let us know whether it is tracking as expected. The most significant characteristic of these bubble patterns is the huge vertical move that starts after a Month 45 low. You can see this clearly on just about every previous bubble pattern -- prices go ballistic during the late stages, from Month 45 to Month 64 or 65.
And sure enough, this is exactly what has happened on the current pattern.
The evidence gets even more overwhelming when we see that this current pattern is the third 64-month pattern in a row.
Is this time different? Is this relentlessly linear drive into the upper right quadrant of the chart the "new normal"?
That is the battle cry of every bubble naysayer and Fed defender. But market history tells us that the most dangerous words in financial markets are "this time it's different". No matter how you feel about the Fed and the unprecedented flood of central bank supplied liquidity, the simple fact is this thesis can only levitate markets as long as people believe it is having an effect. The Fed cannot prevent money from exiting stocks if the collective psyche of investors switches from complacency to a sudden fear of loss.
This switch in market psyche can happen quickly in a sudden rush of recognition, or it can develop more slowly, infecting groups of individuals at different times. In equities it typically develops slowly, and the early returns on this pattern indicate that this current top is likely to develop as just such a slow-roller.
The time to exit this pattern at Month 65 has already come and gone, in late July 2014. The markets have now entered an unstable period that is designed to make you confused and anxious about your positioning -- no matter what it is. Everybody will be under attack.
Right now (September 2014) bullish investors are getting a reprieve with a "tail whip" back to the upside. This is when a market whips back on all those who are too quick to jump on the weakness in an obviously overvalued market -- which this one certainly is -- so the market clears the decks of positions on both sides before the full correction can occur.
There was similar lingering bullishness at the most recent tops, in April and July of 2011, as well as October 2007.
This brings up a philosophical question about when a market pattern actually tops out. I would argue that this topping point is the first high -- when the market stops going up, but doesn't necessarily start going down in earnest. The risk of holding long positions goes up significantly from this initial topping point, in spite of any marginal new highs in subsequent trading.
I think we're at a similar point now. Avoiding the confusion of this unstable post-bubble high will serve you very well in the long run, as you will be in the correct mind-set to jump on opportunities on the long side after the correction has played out, or even during it, if you can be more nimble.
Month 69
The next important timing point on this growth pattern is Month 69, which arrives in November. Most of the time Month 69 is a very important destination after Month 64/65.
Back during the late 90s internet bubble, which topped out in Month 64 in April 2000, Month 69 turned out to be the double top that started the bear market in earnest.
The two most important energy points after Month 65 are Month 69 -- in November -- and then Month 72, in February 2015. Both of these timing points should be critical, and at this point it looks likely that both will be significant lows. I will discuss these upcoming points in great detail in my daily reports as I try to calibrate the data in real-time.
38.2% retracements
One of the foundations of market movement is the golden spiral, built on the familiar fibonacci relationships of 61.8% and 38.2%. Natural systems develop along these fibonacci ratios for the simple reason that they are infinitely scalable in both directions -- they can get smaller and larger in identical ratios, which is a defining characteristic of fractal systems like markets. They have to have these scaling factors built in.
The figure above shows a golden spiral, which is a special version of a logarithmic spiral. The key thing to notice on this golden spiral is that the curving spiral line reaches the end of its rectangular segment and then curves back precisely 38.2%. It then does this again on a smaller scale -- or on a larger scale -- depending on which direction it is going.
After a trend that has reached its conclusion, as a market shifts to seek equilibrium, it moves inward along this same golden spiral path, which invariably leads to a 38.2% retracement of the preceding trend.
The energy for this 38.2% retracement is built-in to every market trend. It is not something separate that exists on its own -- instead it is part of normal market movement, as it is the counter-energy that releases after the primary trending energy has reached its maximum point.
Right now the monthly chart of the S&P 500 Index (SPX) is crying out -- screaming, even -- for a 38.2% retracement.
Never in modern market history has a pattern extended like this. There have been plenty of extensive, multi-year rallies, but they have all ended with a hard retracement, or an outright bear market. This pattern will finish with a 38.2% retracement as well, as the counter-energy for this move down is already embedded within the pattern.
The most pertinent historical example is 1987.
Right now SPX 1740 is the likely target for a hard retracement. This 1740 area seems like a long way down now that the SPX is creeping around the 2000 level. It also seems inconceivable that a market pattern showing such consistent, grinding gains -- with such low volatility -- could drop 250 points or more in such a short time.
But it's easy to forget that SPX 1740 was the low only 7 months ago.
There is major precedent for a market pattern to "up-chuck" the last 8 months of gains during a hard retracement. In fact, we saw just this phenomenon at the Aug 2011 top.
This was also the case during the 1987 crash. It seemed like a huge move -- it was a huge move -- but it was mainly just a reaction to the outsized and unstable uptrend that directly preceded it.
I bring this up because a window is blowing wide open for this same thing to happen from late September to early November 2014. There has even been a similar run-up right now to the pre-crash period in August 2011, with a 119 trading day rally setting the stage for the instability to follow.
There are a couple of things to notice about the pattern from 2011. The unstable period that followed this 119 day rally included some fierce upside blow-off moves, very similar to what we're seeing now. This is the "clear-the-decks" phenomenon where both sides of the market's order book get blown out.
So even though 1740 is directly in the picture over the next few months, it doesn’t preclude the market from going higher during one last paroxysm of buying. This would be every last short getting taken out before the drop.
The bottom line is it looks extremely likely the SPX will be dropping to 1740 at some point in the near future, but there is still an unanswered question about how high the shorts will get squeezed prior to that drop.
Again, in my daily reports I will be calibrating all the incoming data in real-time to figure out the likeliest path for equity markets into Month 69 in November, and Month 72 in February.
GOLD
The long gold bull market started in September 1999, and has been unfolding with its own unique timing signature -- which is not along the same unsustainable 64-month pattern that we're seeing in equities. I believe this means gold's bull market is not finished, but is instead on the verge of launching into a startling climactic period into late 2016, or early 2017.
Gold is showing a 72 month timing signature.
It is hard to make out details on the full chart of the bull market, so let's zero in and look at how the 72 month patterns have been developing.
After the top in Month 144, gold entered a major corrective mode, which took prices back down for a full 38.2% retracement of the entire bull market.
Since the energy for this retracement is always part of the trend up, it is not anything unusual, or even bearish, to see this type of corrective move. It's just how a market pattern re-energizes for the next uptrend. In the case of gold, this 38.2% retracement has played out over a vast time-frame, which has made the last 3 years seem like an interminable bearish slog -- which is exactly what it is designed to accomplish.
Month 36 for this correction just arrived, in August 2014. This is half of the Month 72 timing signature. If we look back at what happened around Month 36 in the previous 72 month phases, something interesting emerges. The first half of the 72 month pattern has played out over 38 or 39 months, with a new phase -- up, in both cases -- emerging right after that timing point.
Month 38 for this current move is coming right up, in October, with Month 39 arriving in November. If this pattern holds up a 36 month bull market in gold should be emerging by December 2014.
This bull market will announce itself very loudly, and very clearly, with a breakout above the long consolidation triangle that has been developing over the past year, and which is now stretching towards the "still point" or the apex of the triangle. This is the precise point where all of the energy from the move up has leaked out of the market, setting the stage for a burst of fresh energy.
This consolidation process is exactly equivalent to dropping a tennis ball on a hard floor. The first bounce will be strong, but subsequent bounces will lose energy until the ball finds equilibrium, resting on the floor. All of the energy during these bounces was imparted at the top, and the subsequent bounces represent a dissipation of this energy.
Again, it's important to remember that these monthly patterns take shape on a time-frame that is not natural to us as market participants. So please keep in mind that gold will continue to frustrate the bulls, and appear to be in terrible shape, up until the start of the next phase of the bull market in December. You will continue to doubt gold's future right up until the time when it breaks out.
It's also important to know that you will also doubt the viability of the breakout, as during the early stages gold will do everything it can to "shake off" the maximum number of people. Typically this involves a very sudden and large rally to throw off the bears, and then an equally energetic dump to throw off the early bulls. So it's not going to be an easy ride into the top in 2016 or 2017, except during the late stages, when you will be nervous about protecting your profits. It's never easy.
At this point I can hear what you're thinking: what happens if gold breaks to the downside, and drops below the big retracement level at $1,225?
The easy answer to that is it would be quite disastrous. That would likely mean a 72 month correction is in the works, and the gold bull market is really and truly over.
However, there is a very strong -- super strong, even -- argument that the gold bull market is not only not over, but destined for bigger things. This is the 36 year cycle of monetary crises, which has hit like clockwork, right on schedule, over the course of history, including the entire history of the United States.
I have discussed this big cycle in detail in previous reports, but it's worth a quick re-cap now.
-- 36 years prior to 2016, in 1980, gold hit its massive bubble peak, coincident with rampant inflation.
-- 36 years before that, in 1944, the world gathered in Bretton Woods and anointed the US dollar as the global reserve currency.
-- In 1907 there was the "Panic of 1907" as a liquidity crisis swept the country.
-- Prior to that was the "Panic of 1873"
-- And yup, you guessed it, 36 years before that was the "Panic of 1837"
-- Almost unbelievably, the first banking/liquidity crisis hit the US right on schedule around 1801, as early speculation in real estate during the first years of the new republic eventually came down for a correction.
This flawless historical record points to 2016 -- or possibly 2017 -- as the time when this current monetary crisis will come to a head.
Gold will be a major beneficiary of this coming monetary crisis. But there is a different, newer market that has a chance to be THE major beneficiary during the upcoming crisis period.
That market is bitcoin.
BITCOIN
A sensationalist narrative has developed around Bitcoin over the past 12 months, which has caused a negative bias in public opinion, and has also kept even astute financial professionals from digging deeper into what is actually going on with this breakthrough network protocol.
At its core, Bitcoin is an elegant solution to a 30+ year problem in computer science, known as the "Byzantine General's Problem", where the goal is to achieve consensus among unknown parties without the need for a central authority. In other words, how do you get people to agree to something without knowing each other or communicating with each other directly, and without going through "headquarters"?
This is a tricky problem. The founding designer of Bitcoin solved this thought experiment back in 2008, and launched Bitcoin in January 2009 as a working prototype. It turns out it worked, and for his genius-level synthesis of existing technologies and ideas this founding designer -- known as "Satoshi"-- has a great chance to become the wealthiest person in the history of the planet (he's got 1,000,000 bitcoin, currently worth about $400 million), although that never seemed to be the motivating factor.
Without going into technical detail, Bitcoin already works as a decentralized medium of exchange, and it has already achieved the critical network mass that can allow its growth to accelerate exponentially. This is due to the well-known network effect, which holds that the value of a network increases exponentially with the number of active nodes on that network.
There has never been a network effect like the one seen in Bitcoin. For the first time the value of the network is not metaphorical or implied -- there is actual numerical price discovery through the 24-hour a day bitcoin market.
Bitcoin is also the first pure play on breakthrough network design in the modern computer era. That is, for the first time you can "buy stock" in an entire emerging ecosystem simply by owning bitcoin. There was never a way to "buy SMTP" (email) or "buy HTTP" (web) or "buy WiFi".
If this network effect is valid we should expect to find exponential, or logarithmic, growth in the price chart of bitcoin.
And sure enough, it's there.
I had to draw out this monthly price chart by hand, because it is still very much "early days" and I could not find this specific chart anywhere else. Keep in mind that the scale of this chart is 1 to 10 to 100 to 1000, so on this chart each surge in price is essentially the price of a bitcoin increasing by 10x.
Even though the bitcoin market launched in early 2009, in my opinion the network achieved critical mass in April 2011, which was when the market price experienced its first exponential surge. The peak in November 2013, at a seemingly incredible $1,165 per bitcoin, came precisely at Month 32 -- the half-way point of a 64 month growth pattern.
If I have identified the start of this growth phase accurately, then bitcoin is just over half way to the major peak in late 2016. Typically the upside accelerates from Month 45 to Month 64 in a spectacular blow-off move. In the case of bitcoin the potential of such a move is staggering, as so far this has been a true logarithmic growth pattern.
This will create a class of extremely asset-rich early adopters of bitcoin. Any individual or entity that embraces bitcoin during these early stages will be on board for the exponential ride.
Although a bubble pattern doesn't need an ostensible reason to catalyze the growth spurts, there are a few readily-available narratives to could drive the speculative fever in bitcoin. The main themetic driver is capital controls (FATCA, China, etc) from increasingly oppressive governments, along with expanding taxation and regulation.
The next phase for misguided government financial schemes -- already undertaken in Cyprus and the subject of current working papers from the IMF -- is likely to be outright confiscation of bank accounts, known infamously as a "wealth tax." This wealth tax, of course, is just theft of private accounts by governments, no different than somebody with a gun holding you up for the contents of your wallet. It is conceivable that one day in the near future people will wake up and find their bank accounts lighter by 30%. Europe is ground zero for this.
So if you have your doubts about bitcoin jumping from $400 to $4000 in just a few months of trading, ask yourself if this confiscation scenario is plausible. This is precisely how it happens.
Of course this is just a best guess on a potential catalyst. The 64-month pattern itself is telling us to expect such events over the next 18 to 24 months. But it is not necessary for such a wealth levy to happen to drive this story. Every single person who adopts bitcoin, and every transaction away from fiat dollars into bitcoin, helps to fuel the price gains for this emerging network of money.
This also means that bitcoin has a huge advantage for entrepreneurs, especially over the next few years:
There are no true competitors in the emerging bitcoin economy, as every adopter, every recruit, every new business venture increases the value of the network for those already participating.
This is going to lead to an economy of decentralization and cooperation vs. the traditional economy of centralization and competition.
Instead the competition is going to develop between the bitcoin/digital/decentralized economy versus the fiat/centralized hierarchy of the current banking and financial system.
The innovation possible in the bitcoin sector is unprecedented, as there has never before been a way for entrepreneurs to develop new and agile businesses in financial services. An entire sector of the economy -- lying there bloated, despised, and inefficient -- is now ripe for creative destruction.
If you believe in the thematic story for gold over the next 2 or 3 years, then you should believe even more fervently in bitcoin. I recommend taking some portion of your gold position, even if it's small, and transferring it to bitcoin, well ahead of the run up to the Month 64 peak.
The time to do this is right now. Hesitating is likely to be expensive.
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-- Published: Tuesday, 14 October 2014 | E-Mail | Print | Source: GoldSeek.com
