Bernie Mitchell’s Fib Commentary May 14, 2012

Stocks traded 1% lower last week, approaching our maximum downside SPY target (133.27). Actual low 134.49. On April 23 we wrote: “… the market should continue to correct…taking SPY to…a (maximum) 6% giveback from the high.” To date the giveback has been 5.43%. With the Fitch and Standard & Poors downgrade of JPM debt late Friday, we expect stocks to trade lower, but no new downleg at this point. Our “weight of evidence” point to a temporary low, which will result in a decent rally lasting about 2 weeks. Improvement in market breadth, a 21 week low in our Call/Put ratio combined with persistently high Odd Lot short selling (14 week high) point to a “sentiment bounce” which when complete, will set up an ideal shorting opportunity near the end of May. The SPY has the potential to rally to 137.88 to a maximum 140.11 before resuming the downtrend.

Bullion fell 3.7% last week, largely due to Dollar strength, (see Dollar below) recording a 19 week low, and is in a solid accumulation zone, just 3.6% above the key 55 week moving average. Gold shares continued to make new lows, but was just fractionally lower relative to bullion. An 8 week high in share volume, within a narrow trading range, generated a Bullish Weekly Squat. However, it needs a weekly close over 152.37 to “trigger” the upmove. Once started, the potential rally in the XAU is 175.46 to a maximum 183.06 over several weeks, (a gain approaching 20%, all within the scope of its historical rallies) as the metal restarts its bull market.

In “knee jerk” (pavlovian) reaction, investors fled to the Dollar, instead of gold, as the eurozone crisis intensified. When the dust settles, this will prove to be the wrong move. The Dollar — despite its strong showing — is only 1% away from an important inflection point, which could take it dramatically lower in fairly short order. Weeks not months.

Overhead resistance 22.32 to a maximum exhaustion spike to 22.65. We need to remember, the Dollar is in a bear market, and has been narrowly range bound for 6 months. The Dollar’s danger spot is a sharp close under 22.03, which will open it up for a test of new historic lows.

More fantasy land as, once again, the greater fool theory is proven to be alive and well, as Treasuries registered an all-time weekly closing low (17.72). With the Fed in a strait jacket of “QE to infinity”, will someone explain to me how an eventual jaw dropping spike in interest rates is not baked in the cake. The TBT needs to close over 19.29 to spark a further rally to 20.72, and an eventual 21.96.