FOMO – has it reached its zenith?

The latest US macro data prints are swinging stock indexes around like they are on rubber bands. Last week we had the FOMC with 600 pip Dow down/up swings that day. Then a few days later, Mr Powell gave a speech where he basically made no change to the Fed stance to ‘fight inflation’ and the ‘hot’ US economy (rates would go higher for longer). That also produced a 600 pip up/down Dow swing.

So on Tuesday we will have the January US CPI print. Will that too produce a 600 pip Dow up/down swing? Watch on your trading platform!

If so, it would be a miracle of the markets – unless it has been carefully staged managed, of course. But let’s throw conspiracy theories out right here. Although some conspiracies may in fact be proved accurate, ruminating on them is no help in forecasting price movements in markets.

For that I will keep to my Tramline methods that have proved so useful and mostly accurate in the past. My forecasts do not always pan out as I expect of course, they do at the very least offer fail-safe levels where stops can be placed if a forecast turns out to be wrong.

In the uncertain arena of price forecasting, having such a price level which negates a particular forecast is extremely useful. It means that you can abandon your previous analysis and stand back and take a fresh look at the charts.

I have had to do that extensively when I was tracking the US dollar since early January. Bearish sentiment had been building since declining off the September highs of 115 on the Dollar Index to the recent 100 lows. Hedge funds had amassed an extreme bearish position in this period as traders fought the Fed. The consensus view was that the Fed would moderate its rate hikes and later in the year would start pivoting them down.

Last week I showed the textbook 4-hr chart pointing to the hit on my lower tramline on a strong mom div. Although this is not a 100% accurate reversal signal, it did come after a lengthy decline when bullish sentiment was on the floor. Here is that chart updated

And confirming the reversal, the market edged higher last week as forecast and is at or near my pink target zone. I have added the RSI Indicator and that shows an oversold reading at the reversal – another clue I used to take a it as a buy signal.

But the RSI also showed an oversold readings at several other points on the way down from at least January. These were false dawns of course but they did encourage me to believe the low was likely in at most of them. But they were not to be. And that my friends was one reason I took some losses on the way down.

Some would say I was ‘fishing for a bottom’ since January. This is considered a sacrilege against sound trading rules by conventional analysts. But what was a more ‘proper’ way to play it?

To wait for a more definite signal that the turn was in progress? OK, say we decide to wait for a possible break up from my pink target area and then enter long. Because the short term indicators would then be very overbought, such a policy carried a lot more risk and stops would have to be much wider to allow to a likely pull-back from overbought.

So my way – to enter as close to the lower tramline bounce as possible – actually carries less risk because my stop was much tighter and for the same risk I could trade a bigger position. this is a crucial point.

The bottom line is this: Picking bottoms with tight stops can involve being stopped out frequently and taking a series of small losses (that can add up of course!). And waiting for a more definite reversal signal involves trading small bets using wide stops. On balance, they about wash out in terms of results.

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The Nasdaq is once again much weaker than the Dow

The US indexes have been trendless with the Nasdaq trendless since August trading in a 2,300 pt range. No wonder many traders are tearing their heir out (if they have any). When it all looked bleak in October with widespread forecasts of a wipe-out, US shares staged a come-back and now retail investors are piling into shares at a time of extreme FOMO.

In fact, the turnaround in sentiment last week has been astonishing – here is a revealing chart showing just that:

For most of last year and into this, retail investors have been clearly very bearish (blue bars under the red zero line) but suddenly last week they turned massively bullish – in fact, the most bullish since January 2022 at the ATHs. I believe this is a significant development and will herald the star if the major third wave down I have been expecting for some time.

Note that retail traders are notorious for poor timing. As shown above, they remained very bearish even during the substantial relief rally in the Dow of at least 6,000 pts (22%). Now with most on board for a stock rally, they have taken the plunge and reversed from selling to buying.

If this is a huge bull trap as I believe, they will slowly realise that going long was a poor idea but they will hang on ‘for the long pull’. Only when shares are near a major low will most decide to throw in the towel. And just as in October will that be a buy signal. This works like clockwork.

Last week I noted the bounce in Meta shares that we managed to capture. It had achieved my $200 target area and now is in decline with latest $174 print.

On Tuesday, the all-important US CPI data for January will be released. What if US inflation is proving a lot more sticky than the FOMO guys hope? We shall see an almighty crash and if so it will verify my wave 3 down thesis – and point the way to much lower levels.

Gold is wobbling, as forecast

Last week I covered my outlook for Gold and Silver and showed a revealing chart of gold purchases by the world’s central banks.

Many gold bugs believe large central bank purchases means higher prices. They figure that the banks know a lot more about gold that anyone else. But I showed that the banks display terrible timing of purchases over the years. In fact, torrid bank purchases usually is a sell signal. This was the chart I showed last week

And true to form, Bloomberg picked up on this fact last week:

Prices have now started to stabilize though as the chart below shows. And strong demand from central banks may provide a floor. The ultimate path will remain closely tied to China and the US currency.

I noted last week that gold has plunged by $90 in two days – here is the action updated

I have pretty tramlines and a break of the lower tramline last week. This should kick off a large wave 3 down. And if so assets of all stripes will be hammered – except the energies. Look out below!