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Technician: Top-Heavy Stock Market Has "More Pain to Come"; Long-Term Picture Still Favorable

In a recent interview with Financial Sense Newshour, John Kosar at Asbury Research said the market has “more pain to come,” with the major averages likely to test their 200-day moving averages in the near-term, but notes the overall longer term trend remains favorable. He believes there are many factors across the globe that portend more strength into 2015, and perhaps beyond. John is also looking for a short-term gold rally between October and Thanksgiving.

Here is a partial transcript of his interview that aired on Saturday's podcast (click here for full audio):

John, after hitting new highs a couple weeks ago, the major indexes corrected down to their 50-day moving averages. Focusing on the Dow, do you expect it to correct further to the 200-day?

“I'm afraid we might. There's a big level to watch that's even more important than the 200-day on the Dow and maybe by the time we get there the two areas will almost be in sync with each other. But the level is 16588. It's the high form New Years Eve of last year. And we came up and tested it again back in the early part of April, fell back down a little bit. So I think from a price standpoint, that's the next formidable area to keep an eye out on the Dow. And the 200-day is just under that. And it's moving up a couple of points but again based on the series of events that I've been watching here, I'm afraid this is the tip of the iceberg and that there's going to be a little more pain to come here…″

What about the S&P 500? What levels are you watching there?

“The next level on the S&P 500 to really keep an eye on is down around 1900, which happens to be the 200-day also. That chart is very similar to the Dow...but basically it's 1902 to 1896. You've got several important old highs going back three to six months. And you've got the 200-day. So, I think that's the next formidable level on the downside and I think there's a good chance that we're going to at least get down there.”

Let's talk about the bigger picture—what’s your outlook for the market on a larger time frame?

“I think that whatever happens here, however deep we go, if we go to the 200-day I'm going to be looking for longer term opportunities to buy... there are reasons I can see across the globe that suggest however deep this pullback is going to be—I don't know if it's going to be a pullback or a correction—wherever it's going to go we have some targets and situations that portend more strength into 2015 and possibly through 2015.”

Do you think the market is in the process of forming a top?

“I don't...just to put what's happening today in context, I think I mentioned last time that we're doing a lot of work watching ETF asset flows and what we noticed is that the investor assets in these ETFs actually expanded by 7% since September 18. So we had a big spike up in assets...[since] investors have been basically trained by the Fed to buy the break and that's been a great strategy for the last several quarters. So it looks like there was a very aggressive buy, then we had a little pullback…and all of those 7% were underwater immediately. In layman terms, what that means is the market got top-heavy… I'm still going to be looking for an opportunity here to buy later, but for that to happen a bunch of things have to happen: we need to have a spike in volume; we need to see some of the investor sentiment metrics that are very frothy start to show a little fear—start to show a little apprehension. I'd like to see a spike in the VIX like we're having today and see it get up to levels that have coincided with bottoms in the market over the past couple of years. So I think we still have some work to do on the downside, but at this point I don't see any reason to think that this is any kind of a final top. I think all you're seeing is seven quarters of not really having a correction. Seven quarters of everyone buying the dip or buying the 50-day moving average and we knew that one day people were going to buy that dip and then we're going to have the second shoe to drop, which is what is going on now.”

What about the gold market and the dollar?

“Let me take your question this way. I don't know if we talked about this previously, but back in June I put out a piece that indicated the hedgers in the oil market, and they are using the futures market to hedge their holdings, were indicating to me that they thought oil prices were overvalued about 103 to 104 dollars a barrel. And we subsequently had a pretty steep drop...in a pretty relatively short period of time. I'm now seeing that same kind of hedger that is indicating to me that they think the dollar is overvalued...so what that tells me is...the smart money thinks the dollar has gone a little too far too fast and is actually putting in a hedge that is going to lock in their dollar gains up here. So what I think that means is probably between now and Thanksgiving we are going to have a move down here in the dollar and it's going to surprise a lot of people...if that happens it's going to support gold and we're going to get a gold rally because of the inverse correlation between gold and the dollar over the past 20 years or more. So I wouldn't touch gold right now. It may have a little bit further to fall but once we get a little movement in the dollar back down...then I'm going to start watching the asset flows in gold. Once those asset flows start to turn positive again, I think gold is going to be a nice place to be...for the next 2-3 months.”

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