Cycle Lows Extending Further. New Trade!

Since just before the Thanksgiving holiday, the markets have been lackluster, to say the least. Light trading volume, and nothing to write home about.

Moreover, all open positions are doing fine, with the exception of the stock market, which continues to defy gravity (for now). More on the stock market in a minute.

Nevertheless, there have been two subtle, but important, developments. In gold and the euro.

Let’s talk gold first. As expected, gold has extended its move lower, past the original cycle target date of Nov. 25. More importantly, gold has also moved below key support at the $1,074 level and, thus far, has been unable to regain that level. You can see the action in this chart.

Let me be perfectly clear: Unless gold can close back above $1,073.90 (nearest futures, December 2015 contract) soon …

The cycles will extend further, and gold is at risk of another major crash lower, down to at least the $1,035 level, by the end of the year …

And likely lower, to the $989 level.

That leaves two scenarios. Either …

A. Gold collapses yet again heading into the end of the year. Or …

B. Gold soon rallies to close back above $1,073.90, and begins to confirm that a major cycle low has already been reached.

Which of the two above scenarios is likely to take hold? It’s simply too soon to say.

But we have clues we can go on, and those clues come from the action in the euro.

First, like gold (and silver) the euro has been patently unable to get back above even the least significant level of overhead resistance at the 1.06500 level. Notice how weak the euro is in this chart.

Second, the euro gave a weekly sell signal on Friday, Nov. 27, indicating extreme weakness, while conversely, the dollar index issued a weekly buy signal on my systems.

Third, in terms of fundamentals, TOMORROW, European Central Bank head, Mario Draghi, is expected to announce another round of euro printing, and it should be an aggressive one.

The euro economy is weakening, deflation is worsening, and Draghi himself recently warned that he will do “whatever it takes” to get the economy going again.

Therefore, it is likely he will take an aggressive stance tomorrow, printing more euros and also even pushing interest rates in the euro region further into negative territory.

This of course, would send the euro into a tailspin, the dollar soaring again, and send gold and silver reeling.

There is another important force taking shape that is also bearish for the euro: Monday’s decision by the International Monetary Fund (IMF) to admit the yuan as an official reserve currency.

Although it does not take effect until Oct. 1, 2016, and is largely a symbolic move at this time to recognize the growing importance of China …

The IMF will be re-allocating a huge chunk of the euro to the yuan, reducing the euro’s share of the IMF’s Special Drawing Rights (SDRs) from roughly 37% to 31% – a whopping 16% reduction …

While at the same time, leaving the U.S. dollar’s share of the SDR essentially the same at 42%. The difference – to give the yuan its roughly 11 percent share – will come, I repeat, mostly from the euro … with a tad bit of help from the British pound and the Japanese yen.

Again, this does not take effect until Oct. 1 of next year. But the negative psychological impact on the euro at this time cannot be ignored.

The message from the IMF is simply this: The euro is less fit to be a part of the world’s reserve currency system and more weight should be given to the yuan.

For those who have claimed that giving the yuan IMF reserve currency status would kill the dollar …

I hate to say it, but I told you so: There is simply no way any currency can dethrone the dollar when deflation is the major macroeconomic force smothering the global economy.

Overall, these subtle factors lead me to believe that the cycles are stretching and we will soon see yet another plunge in the euro, yet another surge in the dollar, and yet another crash in gold.

Silver, platinum and palladium should follow suit lower.

So what should we be doing now? The strategy is pretty simple:

FIRST, hold DZZ with a protective sell stop, good till canceled, at $6.53, but wait for my signals to either …

A. Add to a bearish gold and silver position.

B. Should gold manage to soon close above the $1,073.90 level, exit DZZ and start looking to go long the precious metals.

SECOND, it’s time to add a new bearish position to the euro. You profited nicely from the last bearish play on the euro. Based on the euro’s weak action and the potential that Draghi will act aggressively tomorrow, the euro should soon begin another leg down.

The volatility, however, will likely be extreme. So I am going to recommend, again, options as the preferred vehicle, with the underlying bearish ETF as the alternative. Details in a minute.

Let’s talk the stock market and oil. All of my signals continue to point to a stock market top. So I recommend holding UVXY with a protective sell stop, good till canceled, at $22.24.

Meanwhile, crude oil remains weak and we should soon see it plunge yet again, perhaps right along with gold.

Bottom line: Hold your shares in ProShares UltraShort Bloomberg Crude Oil ETF (SCO), or the preferred United States Oil Fund January 2016 put options, strike price $14 (USO160115P00014000).

NOTE: If you do not own any of the above positions, for whatever reason, please wait for my next signals.

Now, to the new trade in the euro:

Go ahead and act on the above recommendation as soon as possible!

Stay tuned and best wishes,

Larry