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Richard Russell:  “One question I am frequently asked is, “How do we know when a bull market is topping out?”  First, we must determine which sentiment phase the market is in.  This is particularly difficult now because this market is being manipulated by the Federal Reserve.  Normally, the stock market will only top out when it is in the speculative or third sentiment phase.

However, the best gauge as to which phase a bull market is in is the matter of values and sentiment.  At this time I judge sentiment to be excited and optimistic.  Nobody I read or hear is talking or writing about a bear market.  On the matter of values, the S&P 500 is now selling at a rich 19.29 times earnings while the dividend yield is at a micro 2.10%.  These statistics compare closely with values at previous bull market tops.

So much for the current sentiment and values for a possible bull market top.  Next we must address the matter of the formation in the stock averages.  The secret of a market top lies in the secondary correction, and what occurs after the secondary correction.When the Averages turn down from a high, there is no way of knowing, at the time, what that downturn means.  It is what happens after the initial correction that is critical.

After the initial decline, there will be a rebound.  If, on the rebound, one Average or the other (the Dow or the Transports) fails to rally to a new high, we must watch the progression carefully.  The Averages will then turn down.  If the two Averages (Industrials and Transports) both break below the lows of the secondary reaction, such action will signal that a primary bear market is in force and that the tide has turned bearish.

So that's the story.  We must remember that when the Averages turn down from peaks, there is no way of knowing whether we face a mild decline or a primary bear market.  But the fact that this market is on thin ice, from a standpoint of sentiment and values, makes any downturn in the Averages a move to be taken seriously and a hint of potential danger. 

This is probably why big money, knowledgeable money, is so careful and “spooked” by the market at this time.  Big money knows that a primary bear market could materialize at any time, and big money knows that it often takes considerable time to withdraw one's assets from the market.  In other words, big money does not want to be left out of any decent rally, but at the same time big money does not trust this manipulated overvalued market.

Turning to gold, the P&F chart below is extremely interesting.  Gold rallied to the 1340 box and then backed off for three boxes to 1310.  Following gold's rally to the 1340 box, gold formed a little consolidation pattern.  Normally, the consolidation formation will break out in the direction that existed prior to the consolidation, which means that gold should break out to the upside.

If gold breaks down out of the little consolidation formation to 1300, that would be bearish.  However, if gold breaks out to the upside from the consolidation pattern to 1350, that would be very bullish and would suggest higher prices for gold.  Russell opinion -- Gold will break out to the upside.”

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