As we continue to look for a playbook going into the year's end, we're looking towards the legendary Larry Williams, a mythical in the world of technical analysis, who have written more than a dozen books, have multiple indicators named after him, and who correctly predicted many patterns in the past 2 years including the Covid crash. We hate to break the news to you, but the charts, as interpreted by Larry Williams, suggest that August will be a tough month for the S&P500.  

SP500 is approaching a very difficult historical, seasonal period

Looking at the S&P 500 in particular, Williams sees diminishing breadth when tallying the number of advancing stocks versus declining stocks. This is in addition to a difficult seasonal period (August) for the broad equity index, which is already up 16.8% year to date.

Just since the beginning of the summer, Williams can point to three moments when the S&P rallied to higher highs but the Advance/Decline line failed to make a higher reading, meaning the market went up on not-so-hot breadth. For Williams, that suggests lots of big money managers must be selling many of their positions. He says he’s seen this pattern before and it’s not healthy. Normally when stocks rally, the Advance/Decline line should be making new highs. But that’s not happening and it means this move could have feet of clay.

Williams himself has taken a small short position in the E-mini S&P 500 futures.

The technician also sees bearish signals in a momentum indicator known as on-balance volume, which is calculated by adding S&P 500 volume on positive days and subtracting it from negative days. The S&P makes new highs, but the On Balance Volume stays flat. That’s another negative. Remember, for technicians, volume is like a lie-detector. When it’s weak, that means a move is deceptive. 

The SP500, Nasdaq100 and Dow Jones are of the same fate

In addition to Larry Williams, we also look to Tom DeMark, a legendary technician who has done incredible work to give investors playbooks based on historical and technical information. In the past 2 years, DeMark has correctly predicted pullbacks whenever the SP500 hit his price targets (indicated by red lines). In addition to having price targets, DeMark also has another indicator called the 13 session countdown pattern. However, in these pullbacks, never got to 13 days, so we usually pulled back only mildly (<10%) and then rallied immediately after. 

DeMark says this time can be different, and bad. SPX (ticker for S&P500) blew thru his target price of 4426, and his day-countdown is on day 12. Day 13 is tomorrow, and if the following conditions happen, you should sell the S&P500 and hunker down: SPX opens above today's close of 4423, makes a higher high of above 4430 (last Thursday 29-Jul's high), then close higher than last Thursday 29-Jul's close of 4419. 

About the Nasdaq 100. Ticker QQQ blew through DeMark's price target last week, and is on 12th day of his 13-day sell countdown. If tomorrow, QQQ closes above 369, this would be the time to sell and run for the hills, according to DeMark.

If SPX and QQQ both give you sell signal at the same time, it will be very ugly. We've never had that since the bottom March of last year. Right now DeMark thinks a meaningful top is very likely going to happen.

How about the Dow Jones? The current pattern looks exactly like early 1929, called 7 megaphone pattern. After the final step, the Dow Jones collapsed in 1929. De Mark doesn't say we can drop like 1929, but a big drop is indeed very likely. We think given the current situation with Covid variants, this would not be hard to understand.

Bottom line, both legendaries Larry Williams and Tom DeMark, who have been right multiple times in the past 2 years, are predicting with high certainties that the SP500 and Nasdaq100 are near a significant top.

Where should investors hide? 

Luckily, Larry Williams are calling a very optimistic near-term outlook for Gold. Williams is long gold for precisely the same reason he’s worried about the S&P: the seasonal pattern.

We've tried to analyze this front a little bit, and we see that data from the Commodity Futures Trading Commission shows commercial hedgers have recently been buying gold futures in a robust fashion, which historically has led to a nice rally.

Gold’s value in comparison to Treasury bonds is another piece of information working in favor for Gold. 10 year Treasury Yield is very low right now, at about 1.1-1.2%, the levels of which nobody expected if you go back to the beginning of this year when 10 year treasury yield shot up to nearly 1.7% in a straight line. Low treasury yields make Gold more attractive.

Lastly, what we're facing politically could be a reason to short the stock indices and hedge using Gold. That is the debt ceiling crisis, which we also encountered earlier in the 2010s. During the original debt ceiling debacle a decade ago, the stock market broke down and gold did great. 

Bottom line, we think you should run for the hills in the stock market, and buy either physical gold or using the Gold ETF (ticker symbol GLD).