Here is a test for those who believe it is the economic data – the fundamentals – that drive share prices. On Friday, the latest US jobs data for April was released. This is one of the most closely watched data points on the calendar and when released, they can move markets.
Just before release, the Dow was rising and trading near ATHs in the expectation that about a million new jobs would show up as the pandemic recovery was strongly talking hold with vaccination rates rocketing. With that background, all those furloughed and bored with Netflix would rush back into jobs where employers were desperate to hire (signing-on bonuses were common even for menial jobs).
In fact, the data showed only 288k jobs added – the biggest miss since 1998 and the second worst in history.
My test is this: If you secretly were told this data just before release,, would you conclude:
- Fewer jobs created means a weaker recovery and weaker outlook for shares which expected much better. The dollar would rise in anticipation of a fall-off in the Fed support. Would you SELL shares in anticipation of a sell-off on this big economic disappointment, or
- Fewer jobs means less pressure on the Fed to reduce its stimulus programme leading to a likely continuation of its low interest rate policy (‘lower for longer’), more dollar-printing and an unexpected boost for shares and a fall in the dollar. Would BUY in anticipation of a share boost on the miss as a 1 million jobs print would have put pressure on the established rally?
Both scenarios are valid and make conventional economic sense but of course, we now know how the markets took that data – they rallied hard, the dollar fell and T-Bonds spiked.
The big problem with using the normal cause-and-effect mechanism to forecast price moves as outlined above is that there are always two opposing ways of looking at data. Most people have an in-built unconscious bias when judging economic matters and will have favoured either outcome 1 or 2. The job of a professional is to ignore your biases as much as possible and go with the technicals.
I don’t have to tell you that the vast majority of MSM financial coverage is post facto and adhere to the cause-and-effect model.
But there is a better way! Markets are irrational in the sense they do not follow the cause-and-effect model we all learn in short pants in school – as illustrated by Newton’s Laws of Motion. That is a bias most of us have when we start trading. But it is wrong.
Last week in my Trade Alerts to members of my VIP Traders Club I suggested that the Dow had one more push up to complete a wave pattern I was following. And that is what happened on Friday. In a sense, it did not matter what the data actually showed, the wave patterns were dominating.
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Cryptos on the march!
The crypto-du-jour is now Ethereum which is flying. But for practical purposes, we are trading Litecoin. But as one wag had it last week, every Doge has its day!
One way to interpret this fascinating chart is to call the advances and dips as 1-2s. But the crucial observation is that the 2 dips are all in threes, which are always counter-trend. The main trend remains up.
The Dollar heads for new lows
Previously, my best guess this year for the path of the dollar was that the low on 6 January was the final wave 5 low of a large bear pattern leading to a sustained rally over many months. Well, I got that totally right – until early April when it became clear to me last week that the final low was not on 6 January, but will very likely arrive later this year. That January low I am now labeling wave 3 (not wave 5) and here is my updated wave count
My new wave 3 has a very satisfactory lovely five-wave count. The January-March 31 rally is a clear three which fits a wave 4 label nicely and with Friday’s plunge, I am looking at a fifth wave in progress that should take it to the 89 area (latest 90). The euro should travel in the opposite direction – up.
Of course, this action has aided commodities with gold and silver jumping. Gold reached one of my upper targets at $1820 and is close to my next target at $1850.
And this brings up a crucial point for all traders. I always advise trading several markets especially those that have a negative correlation to each other. That reduces your overall risk. For instance, we were long the dollar going into Friday’s report and were stopped out for a small loss (and at break even on some positions). But we were also long gold, which moved strongly in our direction gaining us a very positive outcome. While we lost on the dollar (cutting losses short with use of stops), we gained n the gold (letting profits run).
This is a vivid illustration in how to obey the age-old trading rule – Cut losses short and let profits run.
Inflation Alert – Commodities are still booming
When I first alerted VIP Traders Club members last Spring of the potential life-changing gains I saw ahead for ag commodities (Wheat, Corn, Soy), as well as Coffee, Sugar and Cocoa – little did I know they would fulfill my expectations so fully. This is the Corn weekly chart I posted last March when virtually no-one was interested in trading it
But alert Elliott Wavers would have spotted the set-up right away. I had a clear five down to the 2014 low, a huge consolidation in a narrow 4-year range and a dip in wave ‘b’ into the major long-term support at the $3 region – but crucially on a huge mom div. I reckoned that with the lack of interest in buying this market (after all. it had done nothing for four years), the downside risk was very low but given the vagaries of weather to come, the upside was very much worth exploring. And that is when we started putting on long positions around the $3 – $3.50 region.
Here is the updated monthly chart
In one year, the market has gained 150% and has blasted past all of my initial targets. The ATH at $8.40 is within reach but of course, the rally is highly stretched so dips could be quite deep. But with the dollar in decline again, it is a tail-wind for all commodity prices.