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MARKET RADAR: Strong Stocks, Oil Below $140 Target, Gold to Rise

Tuesday, May 3, 2011

By Bill Sarubbi

New York- (PanOrient News) The current technical strength of the market will likely carry through in May. The period from May 6th to the 13th will bring the next short-term correction. After this date, June 3rd will likely be the next peak of any significance. Here is the technical evidence:

• The indices are likely to rise in the next week as we enter the end-of-the-month period, which has a bias to the upside.
• The MSCI World index below presents a constructive picture for equities in general. The index has broken through a downtrend line. And, there are higher lows in momentum.
• The DJIA has hit a new high, and still shows higher lows in momentum.
• The S&P 500 has broken a downtrend line and also shows higher lows in momentum.
• The NASDAQ gapped up.
• The daily NYSE breadth line also shows higher lows.

Sentiment adds a degree of confirmation. The weekly AAII sentiment poll shows a 10% drop in bulls in the last week, resulting in the lowest percentage of bulls since the March 18 low.

OIL

The intermediate oil cycle bottoms late in this week and rises into June 2nd. Oil has already been stronger than the cycle, as has been the case with gold. Looking out a bit longer-term, the cycle does not top until mid-November. The weekly graph shows a breakout from an ascending triangle that projects a $140 high. There appears to be little holding oil back from that target.

GOLD

The intermediate-term gold price cycle turned up on July 7th of 2010vand topped on November 10th, 2010. During that period gold rose at an annualized rate of 52.5%. From November 9th to April 12th, the cycle fell and gold rose at an annualized rate of only 3.2%. Thus, the decline in the cycle did not cause gold to fall in price, but it did bring a slowdown in the rate of growth.

On April 12th, the composite gold cycle turned up, so gold is due to accelerate. In that same week, the US President finalized the budget. So the cycle bottomed as the budget was revealed. The budget reveals no spending restraint, and gold took note and began to move up. Standard and Poor’s also got the right message and announced that the USA’s outlook has been cut to negative. The graph of the growth in the monetary base is depicted below. Gold and S&P both know that the budget is unsustainable and that more money will have to be created.

The intermediate-term cycle peaks on May 12th and bottoms on May 20th. The cycle then trends up to a higher high on June 6th. There is a separate cycle that tops on 10th and bottoms on the 17th, coinciding with or confirming the intermediate-term cycle. My conclusion is that gold will rise into June 6th, but there will be a short correction between the 10th and 20th.

There are Fibonacci projections that point to $1550-$1560 as a high. However, a breakout from an ascending triangle implies the $1650 area. In addition, gold has already risen farther than expected. With the price this high, and the cycle peak a month away, it seems that the metal has to rise further than $1550. In blow-offs, gold has risen about 30% over its 200-day moving average, but it is only 13% above it presently.

Bill Sarubbi, a strategist and portfolio manager currently operates his own business from Europe. He spends most of his time in Vienna, London, Tokyo, and Abu Dhabi.

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