Trading Cycles Trader Interview
Stock-Markets / Financial Markets 2014 Oct 06, 2014 - 03:42 PM GMTBy: Submissions
Deric O. Cadora writes: Gary Savage is an expert cycle trader and publisher of a successful market newsletter. His writings strongly influenced my own shift toward cycle methodology many years ago, and although our approaches now differ to a degree, the core techniques of cycle methodology remain constant. And so as a fellow cycle trader and publisher, I find myself in a unique position to interview Gary from a cycle trader's perspective, and Gary has been gracious enough to agree.
DOC: How long have you been studying cycles, and are there any other techniques you overlay onto your analysis?
Gary: I started studying cycles analysis seriously about eight years ago. I do like to confirm cycles analysis with sentiment, COT reports, and a bit of technical analysis.
DOC: As no technique is predictive, only probabilistic, cycle analysis will provide poor guidance from time to time. Can you give us an example of when cycles delivered a particularly painful trade?
Gary: I think the most painful experience for most gold bugs was in early 2013 when the intermediate cycle in gold rolled over very quickly into a left translated cycle. That one caught me by surprise as it was pretty clear that a new C-wave advance had begun in the summer of 2012. I gave it the benefit of the doubt for several weeks under the assumption that we were just seeing a stretched intermediate cycle. By January 24 it became clear to me that gold was not in a stretched cycle and it was not going to recover. That's the point at which I made the call to exit metal positions. In hindsight I probably should have seen this coming earlier when gold was driven back below $1700 immediately after the announcement of QE 3. That was the bell ringing that a bear raid in the metals sector had begun.
DOC: How do you handle situations where a cycle decline is already extended, but price just keeps trending lower?
Gary: In those instances one can either choose not to play the game, or you can enter long positions on a swing low with a stop right below the previous intraday bottom. Obviously this isn't a perfect system and if the cycle continues to extend one could take multiple small losses trying to get into the position.
DOC: Related to the previous question, do you have any technique for anticipating when a cycle might extend so as to avoid the false bottom trap?
Gary: I haven't developed any consistently accurate system that can predict an extended cycle, although one can sometimes anticipate what might happen based on what one thinks the government, Fed, or banksters are trying to accomplish in the market. For example, I suspect Washington is going to want to keep the price of oil suppressed ahead of the elections, so it would not surprise me at all if the oil cycle continues to stretch for another month.
DOC: What do you make of the fact that cycle counts tend to extend more often these days than in the past?
Gary: I think a lot of this has to do with QE and market interventions by the Fed.
DOC: What do your cycle views have to say about the recent strength in the U.S. Dollar Index?
Gary: This was a bit perplexing to me. I was expecting a much harder decline into a three year cycle low sometime this fall for the dollar index, which as we now know did not develop. The rally in the dollar over the last several months has all the ear marks of a move out of a three year cycle low. But if I look at a long term chart the May bottom just does not look like a typical three year cycle low to me. I'm wondering if we aren't seeing the beginnings of a very stretched three year cycle that may last five or even six years before we get a true multiyear cycle bottom... something similar to the '88 to '93 cycle, although that was a cycle in decline rather than advancing cycle like we are witnessing now.
DOC: Stepping aside from cycles for a moment, do you believe that geopolitical turmoil may be beneficial to the dollar to the extent that turmoil could be an economic strategy of the U.S. government?
Gary: Well I don't really think the US is instigating geopolitical turmoil with the goal of supporting the dollar. I tend to think the dollar is rising simply because Japan and the ECB are aggressively debasing their currency during a period where the US is trying to end its QE program.
DOC: In your view, when will gold form its next multi-year cycle low?
Gary: As of right now, my expectation is that gold will form its next multiyear cycle low at next year's yearly cycle low which should occur in late spring or early summer, and correspond roughly with the CRB's three year cycle bottom. If gold could generate a higher intermediate high sometime between now and then I would change my mind, but as of right now that doesn't appear to be very likely.
DOC: How deep do you think gold's ongoing cyclical bear market could cut?
Gary: Since several of the big banks have placed price targets in the $1000-$1050 range I expect they are probably going to get their wish. Also a move back down to the previous C-wave top is not an unusual occurrence for a big D-wave decline. Four out of the last five D-waves in gold did retrace enough to test the previous C-wave top. As it pertains to gold right now, the previous C-wave top in 2008 occurred at $1034. I would not be surprised to see that level tested sometime between now and next summer.
DOC: In your view, is the commodity bull market finished or just sleeping?
Gary: In my view I believe it is just sleeping, and it will reawaken when the Fed is forced to begin the next round of QE when the parabolic structure in the stock market collapses. At that point I think liquidity will begin to flow out of the stock market and into the undervalued commodity markets. Before this process can begin though, the stock market has to top, and I don't see any real sign of that yet.
DOC: What do you make of the fact that stocks have not suffered a significant correction... which is to say the SPX has not challenged its 75WMA... in two and a half years?
Gary: I think when QE2 ended and the stock market rolled over into a 20% correction the Fed became deathly afraid of a another similar occurrence. It took them a long time to turn the market back around after the crash in 2011. At that point I think they decided to make sure that never happens again. Over the last two years I have noticed that no intermediate correction is allowed to run to completion. The cycle almost always terminates prematurely, especially if an important FOMC meeting, Humphrey Hawkins address, etc. is pending. It looks to me like the Fed is determined to prevent the market from ever generating any real downside momentum so they don't have to deal with another 2011 type scenario again. Unfortunately this strategy is probably going to ultimately result in extreme complacency in the stock market that will develop into a very large parabolic structure/bubble that when it collapses will pull the global economy down into the next recession/depression.
DOC: Do you think the Fed actually believes they can permanently eliminate bear markets, or are they just trying to prevent a bear market until the economy strengthens?
Gary: I think they have no choice. They decided in late 2012 to protect the market from another large correction like what happened in 2011 and now they've created a monster. There's no turning back at this point. They have to keep the market rising. When the parabolic structure/bubble finally collapses or bursts they will blame it on someone else rather than admit their policies caused the stock market bubble in the first place.
So I don't know if they think they can realistically abolish bear markets forever, but right now they are only interested in avoiding short term pain and they will deal with the fallout when it arrives at a later date.
DOC: Given the Fed's power and persistence, what cycle-based signal would you trust to tell you an equity bear market has begun?
Gary: That's a tough one. Normally a lower intermediate low would be the signal for a new bear, but in the manipulated world we live in the Fed could probably reverse that signal at least a couple of times before market forces finally overwhelm the manipulation. Case in point: the Nasdaq made a lower intermediate low back in April but it obviously didn't signal the end of the bull market.
DOC: Do any historical periods possess similarities or provide a model, cyclically-speaking, for present times?
Gary: Not really. This is the first time in history where every central bank in the world is printing money. This is one of those periods where traders have to adapt quickly or die. Tools that worked in the past may not work anymore. I've somewhat jokingly stated that the only tool that is likely to work in this environment is inside information on when and where the next intervention is going to occur. Unfortunately, none of us are going to get those memos, so this is going to remain a very tough market to trade.
DOC: You have pontificated on many occasion that the next great equity bull will be dominated by biotech. The biotech sector has certainly been a leader in the ongoing cyclical bull market. Does this leadership foreshadow a larger bull market for this sector?
Gary: Yes, I do believe the next great secular bull market will be led by the biotech industry. In order to solve our fiscal problems we need to eliminate Social Security, Medicare, and Medicaid. Those three programs are the biggest contributors to our massive debt problem. To eliminate that debt burden we need to cure, not manage, the diseases of old age so that people can stay active and productive for their whole life. If we can do that then people will have the choice as to whether or not they want to retire... ever. If a 70-year-old is just as healthy and active as a 30-year-old then they can remain in the workforce until they decide to retire. They won't be forced onto the government dole by the diseases of old age. If they need to keep working, then they will be physically able to do so. If they wish to retire, and have the financial means to do so, then they can retire without having to draw on the government's bank to do so.
We are starting to see some advances in this area already in the biotech industry. The next step is for price to decline so that these procedures are affordable by the masses, similarly to how the price of a smart phone is now affordable to the point where almost everyone in the world can purchase one. In the next 15-20 years I envision a world where you can walk into the Imed store and get a shot of nano robots and stem cells that will permanently repair an arthritic knee, or cure diabetes, or heart disease, etc.
DOC: How are you positioning your own money these days?
Gary: At the moment I am most heavily invested in the stock market with some minor positions in energy, although I don't really expect those to produce much until after the elections.
DOC: How can readers learn more about what you offer?
Gary: From time to time I post a chart of the day on my free blog: http://blog.smartmoneytrackerpremium.com.
However if one is interested in the nightly reports you can check out the premium website at: https://smartmoneytrackerpremium.com.
Thanks, Gary.
Deric O. Cadora is a professional trader and publisher of The DOCument.© 2014 Deric O. Cadora - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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