Blue skies are here again – or are they?
Stocks, commodities, precious metals and even Treasuries enjoyed super rallies last week. Stocks were buoyed by generally good Q2 ‘surprise’ earnings results of the likes of Amazon and Apple among others. So the gloom and doom atmosphere of last month was misplaced, as usual. And the clue to the resurgence was the very high pessimism among both pro and retail investors recently.
US fund managers had sold down to their lowest equity exposure in a long time and retail investors, as measured by the AAII survey, were unusually bearish as they took at face value the Fed’s hawkish stance towards interest rates. Indeed, they hiked another 75 bps last week to the 2.25% – 2.5% zone (up from 0%).
Investors also noted that US mortgage rates had zoomed up from the sub-2% region to the recent 5% area which is hitting the housing market hard with sales volumes falling off a cliff and prices starting to drop especially in the most over-priced markets such as San Francisco. And with inflation raging, the knee-jerk reaction of most investors was to sell equities into this scary scenario.
But the stock market is not the economy! The one Golden Rule that I follow is this: When sentiment is at an extreme, look for trend reversals. And that is being displayed in spades right now – shares are climbing rapidly off a low sentiment extreme.
In Elliott wave terms, we are in a strong second wave up in an overall bear market. Here is the S&P picture
Note that the current wave 2 bear market rally has a precedent – the previous wave 2 up in March was also strong.
Last week’s rally was a combination of huge short covering and new buying as fund managers and retail investors like poured billions into the market in a complete reversal of their former activities. Sentiment has been turned around with force.
And from the fear that the Fed would keep hiking rates, the notion that they will stoop hiking (‘pivot’) at some point and start cutting has taken the ascendant and has given the market all the excuse needed to keep on advancing until all of the previous pessimism has been forced out.
I admit the rally off the 16 June lows has been stronger than I had originally thought and I am certainly pleased we took some profits on our shorts there.
My line in the sand is at the 4200 area in the S&P (equivalent 33,300 area in the Dow).
If we see more bullish headlines next week then I will be looking to reinstate shorts (but see below). But we are in the summer months where trading volumes are lower. But that certainly doesn’t stop Mr Market carving out superb opportunities!
Gold/Silver rocket higher as forecast
Last week I explained how the PMs were poised for big things. Financial coverage was almost non-existent and the wave patterns suggested a very strong reversal out of the lengthy bear markets. Last week was vindication of my thesis with Gold up about $90 and Silver up over $2 from their lows a week ago. The timing couldn’t have been better.
And that throws up a vital factor in trading – the issue of timing. Some pundits may issue forecasts that prove correct but when in the cycle do they appear?
If you are too early, you will see a big loss mounting up before the turn. We speculators cannot live with these because losing 20%/30%/50% of your equity even on ‘paper’ could turn into even larger losses if your forecast is wrong. Being wiped out means you are out of the game.
But most pundits are too late in issuing their forecasts usually after a decent rally. But that is when they can top out and suffer a large correction before resuming the rally. And that results in another ‘paper’ loss and all of a sudden, you are being faced with a margin call.
No, correct timing is critical in trading. You must enter a trade at or very close to the major trend change to ensure profits are possible. So even if you get in at a good level just as the market is going your way, you must manage it well – and that can be a problem for some. Many traders seeing a profit will be quick to grab it usually when they feel like doing so with no objective plan in mind.
And that is why having well thought-out targets can help prevent premature exits.
After years of observing the unchanging market behaviour, I understand that trading has a huge psychological aspect. Successful traders have developed strategies that help them overcome their harmful biases such as letting a knee-jerk response to fear to dictate their actions.
While no system on earth can be 100% successful, my Tramline methods have offered up many superb mainly contrarian opportunities – and the current Gold/Silver campaigns is just one of them.
The growing mom div into the lows were a sure sign to expect a sharp reversal – and that is occurring right on cue with the sharp move up from the 18.15 low to 20.40 a week later.
One other clue I had was the tell-tale chart pattern at the lows:
This is an absolute textbook reversal signal when the market broke up out of the five-wave ending diagonal on the 4-hr. But you had to be there in anticipation at that moment to capture the perfect moment to trade. Another way to look at the pattern is to call it a Head & Shoulders reversal pattern – can you spot it?
So now both Gold and Silver are in small scale third waves up that should lead to much higher prices with the trend reversing after a few weeks/months have elapsed.
HUGE PROFIT OPPORTUNITIES LIE DIRECTLY AHEAD – WILL YOU TAKE THEM?
Huge profits await nimble and canny traders in the upcoming major bull trend in gold/silver and other commodities. But navigating the inevitable sharp swings will require expertise. Even in a strong trend, it is possible to lose money even if your overall view is correct! As in most of life, timing is (almost) everything.
Come join us as a member of the VIP Traders Club as we navigate the treacherous waters of the major markets. You will receive my daily Trade Alerts Monday-Friday where I cover most of the main markets from stock indexes to currencies to metals and commodities. We have taken major profits during the bull runs and are starting our next campaigns.
Soybeans are steaming!
It is a curious fact that Soybeans and Silver often trade in the same overall direction. Check out their long term charts. And the recent reversal in Silver has been matched by that in the beans. To me, that is no shock.
The US grains have been battered off their February highs by the expectation that the coming deep recession will severely reduce demand especially for animal feed (corn and soybeans) as everyone is going vegetarian (supposedly). There is little doubt that the highs were unstainable as traders had become super-bullish with visions of stocks running out and a possible poor Northern Hemisphere crop.
But, as is true always and everywhere, the very low bullish sentiment has produced a stunning reversal
The decline was turned at the lower tramline on that strong mom div. That mirrors the action in silver.
In terms of targets, I see the yawning gap above that could act as a magnet.
I see some great action coming in August as the US plantings will be closely watched for progress (or not) with US weather forecasts now being front and centre in the market.
Glencore resumes rally
As one of the leading commodity producer and traders, Glencore has been on a strong bull run since the Corona Crash lows of March 2020. But it has fallen off its June high as investors have fretted about the looming recession and rising interest rates that normally hit demand for commodities hard.
They have fallen from the 550 high to the recent low of 396 – a loss of 28%. But this decline has traced out a very rare (not quite textbook) 9-wave pattern of overlapping sub-waves. With the mom div at the wave 9 low, the upward break of the downtrend line pointed to a more sustained rally which is occurring.
As in most commodity charts, the advance looks like a small scale third wave that hsould carry at least to my pink target area. We are long for Pro Shares members.
Some almost random market observations
The US stock indexes made their lows on 16 June – about six weeks ago. The decline to that low off their January highs took 23 weeks. Thus, the current rally is lasting only a quarter of the time of the decline. I estimate that if we are in a wave 2 rally, it should last at least 1/3 of the time – a matter of 8 weeks. Thus, on this broad brush scale, the rally should last at least another 2 weeks. It could last another 5 – 6 weeks if a 50% relationship pertains.
Most second waves top out with a final spike flourish of panic FOMO buying which should easily be recognisable at the time. I want to be there for that (if it occurs) as it should kick off the delayed third of a third crash.
This top should be accompanied by much bullish commentary that claims the bear market has been stopped in its tracks and that blue skies lie ahead as the Fed is poised to lower interest rates. And the US economy is coming out of its shallow recession with economic data now positive.
But that will coincide with T-Bonds topping (yields bottoming) and starting a major bear phase. All of that is for a few weeks later.
But the overall consumer sentiment picture remains pessimistic with the latest confidence reading plumbing new depths. Shares cannot perform well in the medium term while that exists. But for now, they are bucking the trend and when they align, we shall be in that third of a third with a vengeance.