Gann Global Financial

In recapping this last week, the trade was overall perfect in terms of how things have been progressing. In terms of our positions on short positions in the S&P 500, we broke to new lows. We’re short from 917.20 with stops at 929.80, but I do anticipate lowering those stops.

One hundred and fifty percent long crude oil positions, those options have just about doubled in price and that market has, in seven days, declined 20%. Seven trading days. The velocity of the move has been quite astounding.

The August beans, now half of our positions are short, half are short the August meal, and the expectation is the meal should be the weaker of the two in that it is in the most overbought position. In shorts from 11.28 in the August soybeans, we closed on Friday at 10.44, and the August meal on shorts from 340 we continue to hold those positions as well.

We should be in great shape as far as the overall cycle in the soybeans being short. Now, in this chart, what I have is the crude oil nearest futures contract and the bull market that led to the 2008 high. I’ve shown this chart before, but I’m going to give you some projections here.

The bull market in the 2008 high is obviously one of the great inflation rate bull markets in history and was led by the energy complex, the crude oil advancing over 1,000% in price. We know from history that every bull market that has experienced that type of a percentage advance has always been followed by a bear market on the order of what we experienced.

It was no mystery, this bear market unfolding to the downside like this, down 78% in five months, nine days. By the law of action and reaction, the bigger the bull, the bigger the bear. We of course saw that in the tech sector into the blow off advance into the 2000 high in the Nasdaq. The greatest bull market in stock market history being followed by a 78% decline in the Nasdaq.

This is what happens when markets become extremely overbought. Once the low wasn’t in the crude oil, we looked at the other great inflationary bull markets and wipeout bust cycles in history. The cotton market in 1964 was the leading commodity in terms of the advance into the Civil War inflationary bull market.

Once that market established the final top, experienced a crash in price as we did, there was a huge advance. It was a bear market rally in the cotton into what would have been the equivalent of about $55 in the crude oil, so we are looking at the rallies that took place after these great bulls followed by historic bear markets to get a read.

Trade Action in Crude Oil and What it Means

We’d had this in advance of this rally in the crude oil, so it’s no mystery why we would experience this rally of the magnitude that we have in the crude oil. The silver, this was the advance. The cotton in 1920, this was the advance. The sugar in 1974 led the agricultural markets higher, this was the advance.

Very significant percentage moves to the upside. This overall advance in the crude oil, 136%, is an incredible move in a relatively short period of time as what would be expected based upon history. We have these four historic precedents. These were the markets basically that led the previous great bull market advances.

The cotton in 1864 was the leader in the Civil War bull market into the 1920 high. Sugar was the leader in the great agricultural boom in the early seventies and the 1974 high. Many of you know that the silver market was the leader into the blow off top in 1980. The crude oil is in very good company as far as great historic inflationary boom, blow-offs, and bear markets that followed.

Okay, now moving to the next step. Based upon the June 30th high in the crude oil, the question is what will we expect next? Three of these markets, the sugar in ’74, silver ’80, and cotton in 1864, these were bear market rallies. Actually, the bear market rallies were followed by next legs down in overall bears.

The red represents legs down in bear markets. By contrast, the cotton market in 1920, this was a first leg up in a bull market. That’s why it’s in green. Once the top was in place, we experienced a correction in a bull market and this was followed by the resumption of the bull market.

Forecasting Overall Commodities

What we’ve been telling subscribers is that what we believe is that a final low is in place in commodities. This bust cycle is going to be akin to the 1920 and 1948 bust cycles and not akin to the 1980 and 1864 bust cycles, which were long-term deflationary bear markets.

The 1920 and 1948 were relatively short-lived once all of the deflationary pressure and the panic selling was done, final low culminations took place and then the long-term bull market started from there. I believe that that’s what our market is going to do.

In terms of these precedents, that would place us most closely akin to the 1920 cotton market. Let’s look at this. After the high was established, you can see that the angle of descent in the sugar market in the 1974 was this, cotton in 1864, silver in 1980. Protracted legs down in what were overall bear markets, and none of these markets established final lows, even at this point.

These were lows prior to bear market rallies, then other legs to the downside. Now, the cotton, on the other hand, the correction in the cotton – and it was very significant – bottomed out in what would be basically December first in our market. The top on June 30th, then there was about a five-month correction in the cotton in 1920 before the resumption of the bull market.

However, after the top, this angle here shows the first sell off in the cotton in 1920. It was like this violent sell off, and then there was basically zig-zag trade and ultimately we went to an incremental new low beneath what would be the equivalent of about 55 dollars in the crude oil.

Pretty severe angle of descent here after the final top was in place, and you can see that our crude oil, I mean, seven days of trade, we’ve clipped off 20% of the decline, so we’re definitely oversold on a short-term basis.

Now, in terms of the observation going into Monday, relative to our historic precedents’ prices running ahead of time. On this basis once this emotional sell off is complete, the market would need to experience a rally from the oversold condition, or experience consolidation before the resumption of the decline.

Given this windfall situation in our long put options, it is prudent to look for a point to take at least partial profits. That’s what we’re doing at this point in time for subscribers since we’re extremely oversold. Once this selling pressure is off there should be some backing and filling at minimum and possibly a snapback rally.

Gann Global Proprietary Commodity Index

In terms of this chart, this is the Gann Global Commodity Index (see video) during the Great Depression. This is a daily index that we compiled after accumulating the historic data. The decline that we experienced in our commodity bear market followed this angle of descent. We declined 66% in seven months and seven days after establishing the July or ’08 tie.

During the Great Depression, it was a much more protracted decline. It was more severe in percentage terms, but it took longer. The velocity of our decline is much greater than occurred in commodities during the Great Depression. This is an interesting thing to consider.

Now, one of the reasons I’m showing this chart is that our decline in the stock market, our bear market was the second greatest in history after the Great Depression. Our bear market in commodities was the second greatest in history after the Great Depression. We certainly have to be looking at that precedent for clues as to what can take place in our market.

One of the things I wanted to point out in this chart relates to that. First of all, we’ve already dismissed that we are following the DNA of a Great Depression in our market. We have a severe recession, but our projections show a final low is in place in the stock market and likely in the commodities.

However, notice that once the stock market put in a final low in August of 1932. This is actually a commodity chart, but stocks put out their final lows with the Great Depression in August of 1932. Commodities established this intermediate low about two months before the final stock market bottom. We experienced this pretty sharp rally, the sharpest that we had seen since the bear market started, and then we went to a new low into February of ’33.

That decline coincided with a bull market correction in stocks. It’d be great if I had the stock market side by side. In other words, the commodities made a new low, whereas stocks were making a higher bottom. There was bullish divergence in commodities.

The reason I show this is that we do have to appreciate that at a potential final low in the stock markets. Commodities still struggled in 1932, and obviously we are bearish over the short and intermediate term in commodities, although we’ve already seen a very significant decline. The 1932 precedent does lend itself to adding additional credence to our expectation to lower prices and commodities.

Goldman Sachs Analysis

Now, looking at the Goldman Sachs index, this market has come down very quickly. One of the things I did was in setting up the shorts in these markets, particularly in the crude oil, was kind of to lambast the popular opinion. These are comments that I’ve made previously with regard to coming out and talking about $85 crude oil when it’s at $70 a barrel. In a sense, lambasting the media for beating the drumbeat, I said here. This was back on July 3rd, right up towards the highs here.

This was on June 20th, just after the top, I said, “This is at a time when prognosticators, economists, the media, and the public are talking about the perpetuation of the current advance. Yes, I’m bullish, but short term and intermediate term, not in your life!”

So in the aftermath of that, we’ve seen this dramatic sell off. Not a surprise.  This is by virtue of the markets conforming to my expectations. The odds continue to favor more downside, and selling by those on the wrong side of the markets fuels additional selling.

The decline on the Goldman Sachs is one day shy of being one month long. My expectation is for this projected correction to consume more than that. Typically, corrections do. However, on a short-term basis we are oversold.3

August Crude Oil Analysis and Forecast

Now, moving out to the August crude, you can see here’s the seven day decline that we’ve experienced into Friday’s lows at 58.72 basis the August. This was on July 8th, I said “Anyone betting on the economy by holding either long positions in the stock market or long positions in commodities is receiving a rude awakening.”

They can be assured there are investors and speculators who have a commitment to long positions in both and are getting hurt in both simultaneously. This increases the probability the declines will be sharp, potentially short-lived, as these ill-fated longs exposing people to greater risks than they could have intended will likely be unwound at the same time due to panic margin call selling.

This is providing an ideal playing field for our current short positions and increases the odds the projected higher bottoms in the S&P 500 and crude oil will be completed at approximately the same time.

So we have the stock market put on its top on June 11th, the crude oil put on its top on June 11th, the soybeans put on their top on June 11th, so we are seeing the commodities continue to move, the board move together. This deflationary move is a negative omen for the stock market, and any weakness in the stock market is a negative omen for the commodities.

They should be moving hand-in-hand to the downside. Now, the comment that we had in the aftermath of Friday’s trade, we have declined 20% in seven days. Given the velocity of the decline, it is reasonable to expect the market to run stops beneath the minor low at 57.52.

Here is this minor low, which was followed by the final surge to the upside. We’re coming down at great velocity as well, and so we can be assured that there are some sale stops beneath that low. If this takes place in short order, and that appears likely, it would make sense to take partial profits. At this point, if we can see the market break below this 57.52, obviously we’re going to be watching to see what the stock market is doing as well.

If we can break that 57.52 in a relatively short period of time, based upon the oversold condition it’s likely it’ll be prudent to take at least partial profits. Then if we see consolidation over rally, we would look to re-enter put positions and likely buy some further out of the money option since we do expect that definitely this April low would be broken at approximately $51, and a very good possibility that the 43 low will be broken.

The contract low went through in one of our previous videos, the huge carrying charge premium annualized at 30% suggests that this market, once it comes down, could take this 43 out, but would still be well above the nearest futures low, which was at approximately $32 a barrel.

If you understand carrying charge premiums, sometimes they can be excessive, in other words, distant contracts trading way above the front month contracts. That’s the case in the crude oil, and usually in those situations, it means the market does need to experience a basing pattern and that sets the stage for, in this case, what would be a second leg up in a bull market.

This correction, believe it or not, could carry and even break contract lows, establish a higher bottom basis the nearest futures, and then we would be off to another leg up in an overall bull market. In looking at the cash, the comment that I made and related to the both overbought and high carrying charge situation, my expectation is the cash comes down, it could break this 45.88.

If that were to happen in the cash, then our futures contracts would be very close to breaking contract lows. You can see that the cash low for the bear market was all the way down at 31.81, so a decline to 45.88, while it would take out potentially contract lows in the futures, it’s still way above the lows basis the cash.

The comment here “Relative to the 136% advance, the current decline has been relatively modest having retraced as much as 31% of the overall advance.” That’s where we’ve come to so far as of Friday. “Probabilities are greatly in favor of this correction being more severe and more complex than what we’ve experienced thus far.”

Analyzing the Greatest Bear Market Declines in Stock Market History

Drafting down to the S&P 500, in the aftermath of first legs up in the great bear markets in history, the greatest bear market declines in history. The first legs up were uniformly quite violent, snapback rallies from extreme oversold conditions, and then the secondary corrections took place in the S&P 500.

Our projections ideally would be to see the S&P 500 drop down to the 835, 840 level, minimum basis the cash. That would replicate the 1938 decline. The 1932 decline was much more extensive in terms of time consumed and percentage retracement of the first leg up. You can see that these corrections were at times very short-lived, very violent.

On that basis, if we have completed a first leg up in a long term bull market in the stocks, then there is no expectation that the correction would be this shallow to 869.32, which is our low so far. We should see more downside here. Obviously, with the crude oil dropping 20%, that should be a negative reflection on the stock market that there should be a sell off of a higher order than what we’ve seen so far.

In looking at the September S&P 500, which is the trading contract this last week, we did break below all of this consolidation area since the May 15th low. That was 873.10, we dropped to 865½, so a little less than eight points into new lows. A lot of sell stops hit down there, no follow through to the downside, but if we break this low decisively by approximately 400 points, the likelihood that we’d get confirmation that the down trend is still in effect.

However, keep in mind that what we have here in terms of our shorts, this is a countertrend play in our estimation. We are short the market. Generally we want to be on the long side of the market in favor of the trend, once a bull market is in force which we believe is the case here. But all of our work showed us that this correction should be violent and therefore playable on the short side.

It’s going to be very interesting to see how it plays out. My expectation is that we have shorts, expecting to see lower prices here. We shorted right at this 917 level so I’ll have a huge breakaway the day that we got short with some follow through here. It’s just going to be interesting to see how things play out. This is a moving target from the standpoint of how the trade is playing out day to day. Crude oil is extremely oversold here. Obviously that plays into the equation as well since all these markets are moving in tandem basically. So we’ll be updating you as far as the returns and additional trade comes in. Have a good day and profitable trading.