Has the China Debt Bubble finally popped?

In the West, private, corporate and government debt is at record high levels. That is no secret.  All could be considered as bubbles.  But it is China that wins that race my a country mile.  I have lost track of the number of billions in debt in the Chinese system – estimates do vary, but it is undoubtedly very large.  And now, GDP growth in China is falling (using more reliable figures than that pushed out by the authorities who miraculously always keep hitting their targets on the nose).  This is a recipe for an avalanche of debt defaults to come.

And now, we have our first mammoth debt default of Wintime Energy, a coal producer that has just defaulted on 11.4 billion yuan (about $170 million) making it the biggest so far this year.  Up to now, the Chinese government would step in and perform a rescue, but not this time.  Already, the shadow banking sector is shrinking fast and it’s only a matter of time before the zombie companies kept on life support by low rates finally give up the ghost as metal prices remain weak.

Of course, bond defaults are deflation in action as it destroys wealth and hence the supply of cash and credit.  So has the great process of global deflation that I have been predicting got started?  If so, stock markets are doomed.

We have been riding the incredible vanishing yuan wave after spotting a big opportunity last Feb/March (this was when very few traders even knew what a yuan was!).  The chart pattern was highly encouraging – here is the record of my trade on the daily

By April, I could see that the market was trying to build a base.  I patiently waited for my buy signal and when the minor blue trendline was penetrated in early May, I pounced. The market then inched upwards and still there was no mention of it in the MSM (that was encouraging!).  It is when the move appears in headlines that I start to worry. In June, it exploded up in an obvious third wave performance.

And yesterday, it finally spiked up to the wave 5 high in a flurry of MSM coverage about the Chinese authorities ‘weaponising’ their currency in retaliation against Trump’s tariffs on their goods.  We took a cool five full cent out of that little campaign.  It was a delight to trade.  Of course, wave 5 may not have completed and the market may push higher near-term.

But I am willing to give up some potential profit for a sure thing (money in the bank)

Even with the yuan being a highly manipulated currency, its price patterns has been following the established Elliott wave configurations, proving that there is no entity so powerful that it can dictate the market (central banks, please note). So now, I am standing aside and even if the Chinese try to push the yuan down even further, they will run into a wall of dollar sellers as the 94% bulls rush to take profits.  Odds do not favour a strong extension of the rally near term.  But even as 100-1 nags do win some races against the favourite, that remains a possibility.

Note that the wave 5 high occurred on a welter of MSM coverage about the ‘strong dollar and weak yuan’ where DSI bulls are at close to record extreme high readings at 94%.  Yes, everyone loves the dollar now (where were they in April?).

This performance is a textbook case of why buying when it is hated and getting out when it is over-loved is the the most reliable trading strategy.  But you have to get your timing spot-on – and that is why I designed my Tramline Trading system for help identifying great low risk/high prob entries.

Also, this is a yet another stupendous example of my Headline Indicator at work.  When a market trend has been in existence for some time, the media finally notice and write garish headlines, especially if the trend goes parabolic, as it did here.  That usually marks its end – at least for a while.

Of course, that is precisely when amateur traders finally get the message and jump in – just in time for the big reversal to wipe them out.  This is normal herding behaviour that most avid readers of the MSM  are prone to. We are all subject to it as social animals.  The difference between amateurs and professionals is simply that the pros have learned to over-ride this basic need to join the party and actively seek a reason to remove themselves from the herd at an opportune time.

When is an opportune time?  When the size of the herd gets extreme! And how do you judge that?  I use my Headline Indicator as a kind of tea-leaf reading exercise (that works surprisingly well), and there are other more conventional means, such as the COT data and sentiment indicators such as the DSI Daily Sentiment Index (trade-futures.com).

But we need herding to continue – it gives us those great trading opportunities.

The DSI is especially useful as it surveys professional traders and money managers on a daily basis.  Often, the pros’ sentiments are at odds with that of the general public.  For some time, the public has been much more bearish and fearful on stocks than the pros who have been much more bullish.  So far, the pros are ahead.  After all, they have much more firepower than Mom ‘n Pop.

Beanz still meanz profits!

That was (almost) the title of my coverage on 7 July for the opportunities I see in soybeans. Then, I pointed out that the headline-grabbing tariffs the Chinese would be slapping on US beans had sent prices into a spin but that presented a good long-term buying opportunity.

As it happened, the day before I posted that, the tariffs on beans had been announced and I suggested this was a great example of a Sell the Rumour/Buy the News event. Beans staged a bounce then, but I was a little premature (a common thread in my work!) as the price resumed its downtrend over the following days into new lows.

But that set-back did not deter me from finding a lasting low as I was convinced the charts were telling me it was getting very close.

And my perseverance was rewarded on Monday when the slide was reversed and began a rally.  I could then count the five waves down as complete when the market pushed above my new blue trendline

This trendline is a much better fit as it connects waves 2 and 4 highs in true textbook fashion.  Adding to my confidence is the large momentum divergence between waves 3 and 5 and that usually signals a weakening of selling power into the low that allows the bulls to begin to take charge.

So now we are long after taking one small loss earlier.  That is the normal price of admission I pay to get on board what I believe will be a good trade.

Naturally, fundamentalists will ask why should beans rally when there is a 25% Chinese tariff in effect?  Surely, US farmers will have to let them rot in the fields as they have lost a major customer.

I well recall a situation in Corn some years ago.  It had been in a major downtrend for many months and stocks were building up to record high levels.  Then one day, the USDA reported that the huge US crop was set to be a record.  Surely, this very ‘bearish’ news (it made headlines in the Wall Street Journal) would ’cause’ the price to fall even further.

But no, it then began a major bull run straight after the news emerged which resulted in a doubling in its price.  That was a very early example of my Headline Indicator in action.  The price rose because many shorts considered there was little more downside left as all of the ‘bad’ news was now likely out, and the way was open for a few brave bulls to come out of the woodwork. And as the price rose, ‘bullish’ news emerged to verify the move.  The news really does follow the market.

Are we there yet?

US stock indexes have been toying with we very patient bears for several months now.  Both the Dow and S&P made their all-time highs in January and since then, have been in wild and violent swings in true second wave whipsaw fashion.

During this difficult period, I have been advising VIP members trading smaller than usual – until last week, that is.  Odds are now high we are poised for a major decline – and here is some of my evidence

For the last two weeks the S&P has been tracing out a classic five-wave ending diagonal pattern crucially on strong momentum divergences.  This push to wave 5 high at 2816 on Wednesday should be the end of wave 2 leading to a huge wave 3 down.

My fail-safe for this scenario is the 2816 high.

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