Bernie Mitchell’s Fib Commentary May 21, 2012

We were clearly too optimistic in our call for a maximum 6% decline in stocks.

The decline, as of Friday’s close has reached 8.8%. Blame excessive Dollar strength (see Dollar below). There is now the potential for SPY to touch 127.52, which would bring the decline to 10.3% from the 142.21 high. This would be a logical place for the decline to terminate, as it was about that time the ECB launched its money printing scheme, that started stocks roaring to the upside, to support the euro banking system, at the end of December. We expect a maximum SPY rally over several weeks to 135.26. Longer term, with the breakdown in the New Economy sector, stocks are vulnerable to a deeper decline — but only after the next strong rally.

Last week we wrote: “…(gold) is in a solid accumulation zone, just 3.6% above its 55 week moving average.” In fact early weakness in the metal took spot gold exactly to the 55 week moving average, before rocketing higher by Friday. to close at 1592. The shares were pummeled early in the week, but closed strong. A 9 week high in trading volume, with the close above the weeks mid-point, generated a “triggered” Bullish Weekly Squat. Stocks should now head higher with a potential for the XAU to reach 173.96, a 23% rally off the low. This may seem far too optimistic,

in light of the drubbing the stocks have taken, but the potential rally is clearly in line with precedent. Since 1/25/11 there have been 4 major rallies off significant lows in the XAU, averaging 21.2%, with the largest 26.6% from the 10/04/11 low (171.27) to the high (216.79).

A remarkable string of 11 up-days took the Dollar (UUP) within a few ticks of our projected exhaustion point (22.65). Actual high 22.61! before closing sharply lower on Friday (22.40). Expect the Dollar to weaken over the next few weeks, which is supportive of a stock rally, for a potential low (22.06). Initial support 22.18. To repeat from last week: “The Dollars danger spot is a sharp close under 22.03, which will open it up for a test of new historic lows.”

Five consecutive days of new lows in Treasury interest rates. The TBT needs to close over 18.55 to start an uptrend. We were clearly wrong in our forecast of higher rates, but when rates finally start higher the move will be staggering. The amount of excess money printing will eventually result in a hyperinflationary outcome, with the Fed impotent to stop it once it begins. This may coincide with a breakdown in the Dollar to new lows sometime this Summer – a logical time for QE4 to start – as the Fed supports the administration in power, before the election.