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Last week, several of my markets made strong advances that I had been waiting for (see last week’s and previous posts). The standouts were the precious metals. Recall I have been flagging these reversals for a little while and noted the continued extreme bearish stance of the hedge funds. That is a key input for my analysis. – but is a bit of a blunt tool and must be used with caution. So the current short squeeze was entirely predictable – it was just a question of when, not if.
And finding the low was not an easy task. In the summer, we had a few false starts. On 9 July, gold traded at $1260 as bullish sentiment was plummeting and hedge funds were amassing large short positions. I felt then that a low could be near. But it was not quite to be and the market kept falling along with bullish sentiment into August.
Last week, I posted the chart of the gold/silver ratio that showed the 80 area one of very strong resistance. It had climbed into that zone last week – and smack into the brick wall at 80.
So at the spike low of 16 August at $1160 – a decline of $100 from 9 July – DSI bulls dropped even further well into single figures (a record low) and COT data also showed record hedge fund net short futures and options positions as well.
Remember, hedge funds are almost always at an extreme wrong positions at or near major turns – and I felt the approaching reversal would be swift.
On 16 August, I reported to VIP Traders Club members that I believed the low was finally in and to prepare for a strong upward surge. Yesterday’s $20 advance is supporting that claim:
The point is that I was entirely correct in the summer to prepare for a major reversal partly based on extreme bearish sentiment, but I was way too early. And that highlights the common experience that extreme sentiment readings do not help to accurately pinpoint a major turn – the trend can continue farther than you expected. But they do set the alarm.
There is no dis-honour in being wrong on the timing of a trend change, but there is in losing a major portion of your account in the process. That is why we in the VIP Traders Club use close stops to protect us if wrong.
Of course in the weekend press, the MSM will ascribe the gold’s $20 advance yesterday to Mr Powell of the Fed’s speech at Jackson Hole. But that is wrong (but it makes a great story that amateurs who avidly follow the MSM can readily absorb). When he started talking, gold had already advanced by well over $10 on the day and silver was up well over 20 cents.
As forecast, the dollar is reversing strongly and against consensus
Also last week, I posted the EUR/USD chart with my forecast for a rapid advance (dollar decline). This was the chart
I laid out my case for an immediate contrary advance at least to my pink zone. And here is the chart updated
Pink zone attained – in short order. This is the usual apex-of-the-wedge target.
Recall, sentiment had been extremely bearish the euro for a variety of ‘reasons’ which were based on a fundamental macro analysis. Seekingalpha.com was full of erudite analysis that laid out the case the dollar would continue to advance as US interest rates were on the move (up) and euro rates were static (with many Euro bonds at negative yields). Who wanted to lose money with German bunds when you can get well over 2% with US 10-yrs?
Being long the dollar was a no-brainer, surely? Well, as with all markets, it was a no-brainer until it wasn’t. And last week, it wasn’t.
One of the most interesting crosses is the Aussie dollar. There is well-publicized political turmoil down under with the Prime Minister’s post looking like a game of pass the parcel. Who will it be next week? The MSM in the shape of Bloomberg posted a piece late last week that stated that because of the ‘uncertain’ state of politics, the Aussie dollar was doomed to fall to the 70 cents level (they also pointed to the slowdown in China as a supporting factor).
I love it when a prominent MSM article actually has the guts to print a definite target – one that continues the trend already in place. But my job is to examine that bearish prediction and see if it aligns with my Tramline analysis. My conclusion? It doesn’t. here’s why:
On the long range chart, I have a complete five down to the 2016 low just under 70 cents. That was when the dollar was rampant – and well teed up for a major turn as hedge funds had accumulated a large net long US dollar positions (sound familiar?).
And since then, the market has struggled to recover in a series of overlapping waves (which are a nightmare to trade, of course). I have a very decent 2.5 year tramline pair working where the market has broken beneath the lower line. Looks pretty bearish, no? And I am sure hedge funds have spotted that and is one reason they are extremely bearish the Aussie. Here is latest COT
Note the extreme positioning of all three categories. The most important sector is the ‘commercials’. These are regarded as the ‘smart money’ and are usually on the right side of major market turns with hedge funds being the ‘suckers’. This picture has all the trappings of a major reversal. Here is the wave 2 down on the daily
I have an A-B-C three down with a strong momentum divergence. The pink trendline represents solid resistance with the four highly accurate touch points and breaking hard above that would help confirm the major trend is now up.
So maybe Bloomberg’s 70 target will fail.
The Dow still defies me as it pushes up to a major high
The one sector that is defying my Tramline analysis (so far) is the Dow, but especially the Nasdaq and S&P. The latter two indexes have pushed up into new highs while the Dow is still trading under its January high (as well as last Tuesday’s spike high), so we should still be in wave 2 up. Only a push above the January high would alter my view – and we are 800 points or so from that.
Second waves – much like fourth waves – are corrective and can be unusually tricky to analyse and trade – as I am finding out! But with the Fed’s assurances on Friday for a ‘don’t frighten the horses’ approach to interest rates, bullish sentiment must surely be at or very close to a max.
Many say the Dow has had its day as an accurate measure of stock trends. Of the dominant FAANG Gang, only Apple appears in the DJIA. So with tech in the driving seat, surely the Nasdaq should be the index to follow as it contains all of them.
But that disregards two hundred years of history when the Dow has provided the best signals for trend changes, even though it contains only 30 shares.
The Dow has rallied to a meeting of the Fibonacci 76% retrace and my upper tramline on a strong momentum divergence.
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