Why the Markets Are Headed for a Surprising Fall

Posted by Larry Edelson - Uncommon Wisdom

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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.

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.


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 Edelson has over 34 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Power Portfolio provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management.

For more information on Real Wealth Report, click here.
For more information on Power Portfolio, click here.