A pause on the bumpy road

This is one crazy world -financial and otherwise – we are living through. We have had ‘bad news is good’, ‘good news is bad, and then ‘bad news is bad’ and ‘good news is good’. For those trading on the economic data and their conventional bullish/bearish interpretations, they must have been whipsawed to death in recent years.

We saw this effect in spades last year when both bonds and stocks trended sharply lower together. That blind-sided conventional investors who believed in the 60/40 rule which works only in periods when stocks and bonds move contra (ie ‘normal’ times). But last year, they both lost value. Ouch!

Now, many hedge funds who were burned on bonds last year decided that this year, they would load up on the ‘cheap’ bonds to try to recoup their losses – only to see them plummet since April.

The most recent example of this perverse behaviour occurred on Friday when Powell of the Fed gave a much-anticipated speech. Some believed he would renew his ‘hawkish’ pledge to keep hiking until inflation came down towards the 2% Fed target.

In the event, he offered few if any crumbs to the bulls. So did the stock market fall on the news? Of course not! That would be too easy to have predicted.

So anyone trying to figure out the market on the news would surely have little hair left.

But I do believe anyone using the Elliott wave theory would stand a much better chance. Since April, I have drawn a lovely tramline pair on the Dow chart that the market has been following. I have also drawn an up-sloping trendline that the market has been toying with for a few days:

The action on Friday was hugely volatile with an initial push down on Powell’s hawkish tone to a new low and then a rapid surge into the close. And Friday’s new low at 34,040 could well qualify as the termination of a small scale fifth wave on a good mom div.

That is one valid way to ‘explain’ the volatile swings. And this interpretation implies a further rally phase to at least the wave 4 high at 34,700 and probably higher lasting more than a few days. That is one option.

But the market is some way off the lower tramline around the 33,800 area. And since this is a solid reliable tramline pair of four months duration, the decline would look best of it did move below my tentative wave 5 low and move down to the 33,800 target area.

For these reasons, I am sitting on the fence for the coming week and taking profits on shorts taken much higher up. We took part profit earlier and now we are flat stock indexes simply because I am not confident of the next decent move.

One straw in the wind is the Star of the Nasdaq NVIDIA which surged on Wednesday following yet another set of blockbuster results and forecasts. But it has drifted lower since for a 13.5% decline in just two days. That is noteworthy.

If NVIDIA is the Field Marshall leading the Nasdaq army of tech, then will the troops retreat with him?

As always, there are plenty of cross-currents – some potentially supportive and some negative. And that is what makes a market, folks. Can anyone seriously think they can choose the correct one every time without some help from technical analysis – and a dollop of luck?

So here we are near the end of the summer and here are some interesting stats. Since early May – about four months ago – this is how some important markets have moved:

Dow +2%

EUR/USD +2%

Gold -3.5%

Crude Oil +12%

Wheat -2%

Bitcoin -2.5%

NY Sugar no change

Basically, they have gone nowhere except for Crude Oil. Stock indexes have churned as has the dollar.

This was a very tough environment to make profits. But September approaches and this is traditionally the time for trends to become established. The normal trend is for declines in shares in September and October.

Some of the biggest stock crashes have occurred in these months, especially October.

Watch this space!