Many markets lack conviction this summer

With many markets well into the summer doldrums, I thought I would update my thoughts on a few key markets.

T-Bonds

A couple of weeks ago, I had pinpointed a highly likely top in the Treasuries and the market then sold off by seven big points to the July low where we took partial profits based on my Split Bet Strategy.

But there was also one possible fly in the ointment with an immediate sell-off – and that was the ongoing deflationary impulse in the US (and global) economies.  I have covered this deflation effect many times and pointed out that the US PPI data has been trending down for some time.

And the latest PPI data released yesterday shows the rate of decline in producer prices is getting steeper.  Naturally, this is not bearish to bonds prices.

Also in recent weeks, I have noted a large COT swing by hedge funds away from massively bullish at the top to a much less bullish position – and that made me take a much more cautious attitude to my immediately bearish stance.

With these forces in play, the market has produced a zig-zag wave pattern.  Note that the upward corrective phase was flagged by the large momentum divergence at the fifth wave low. Here is the 4-hr chart:

Yesterday, the market rallied hard on the PPI data right to my upper blue trendline, which could be the upper resistance line of a wave 2 wedge.

I will know more when the market breaks clear of the ‘wedge’.  But for now, all protective stops have been moved to the break-even level.

Silver

On August 8 I suggested that silver was in a fourth wave wedge pattern and this was the chart I showed:

In the near-term, I expected the market to rally to the upper blue resistance line and then a dip to the lower line.  After that, I expect a rally to new highs in the final wave 5 of C.  Here is that chart updated:

In fact, the market did rally and then declined yesterday to fulfill my near-term forecast. But as I said on Aug 8, the ‘easy’ money has already been made (in purple wave 3, of course!).  But now, the market has options and I will feel more comfortable if/when the market rallies above my upper blue resistance wedge line.  I will then start looking for a good entry for a new shorting campaign.

US Crude oil

We have been long for many months from the $28 area and rode the huge waves up and took some profits off the table at the $52 area.  The market has since declined to the $40 level – and that is where we picked up where we left off and went long again.

As the market declined off the June $53 high on record bullish sentiment, the drop attracted more to the bearish side  and at this month’s $40 low, hedge funds were decidedly bearish as they saw the stockpile build-up to huge levels – just the scenario to tee up a massive short squeeze on a ‘surprise’ development.

And that ‘surprise’ occurred last week as the Saudi oil minister uttered a relatively throw-away remark that they would try to ‘stabilise’ prices.  Up to then, OPEC had been written off as a spent force as US frackers have spoiled their party.  But that was all that was needed to induce another round of short covering – and sent the market up by $2.  The chart is starting to look very interesting:

The dip to the $40 level was an exact Fibonacci 50% retrace of the entire wave up off the April lows and I was keenly waiting for signs of a reversal (which arrived). I have a lovely blue tramine pair working (slightly amended from my original placement) and the market is rapidly approaching my initial target at the meeting of the upper tramline and the Fibonacci 50% resistance level at around $46.

Nasdaq (Tech 100)

This is a market I cover infrequently, but with some selected tech shares in the stratosphere, it appears we are very near the end of the line if my EW labels are correct

A lovely five down to the February low on a huge positive momentum divergence to herald a sharp rally.  The pattern looks best off that low as an A-B-C correction with wave B in a traditional three-wave affair.  And wave C is looking like a classic five up with the market now in the final wave 5 (and with a looming momentum divergence).

But the near-vertical C wave rally is truly remarkable. There have been only five down days in the forty of wave C!  It has been virtually straight up – and we know how there usually end – straight down again.

I am not sure if the next decline will be the start of the deflationary collapse, or merely a dip to shake the tree before new highs are achieved, but it should be worth trading as a swing trade.

US Dollar

Most currencies are really in the doldrums except GBP/USD which continues its major down trend.  I expect they will start trending again next month and I am lining up a big trade in EUR/USD.