Despite being on the brink during Fed week, stocks have roared back from the edge amid much bearish MSM comment, such as this one: How to prepare your portfolio for a crash. And another: The market crash is coming – here’s what to do about it. So, with a ‘crash’ in the headlines, odds are that it won’t happen – at least not yet.  Dire warnings in the MSM are usually a great buy signal (as this one has proved).

But the yawning chasm between Joe Public where consumer confidence levels are low and dropping, and investment pros where bullish sentiment knows no bounds is stark.  Last week, the infamous Banksy self-destroyed artwork fetched a record $16 million at auction.  And now Bitcoin is roaring back to its ATH above $60k last seen in April from the summer lows of $30k – a remarkable turnaround considering China has banned its use.  That’s what I call supreme confidence.

The wealth gap keeps on growing and growing.  While consumers are very fearful about their immediate future, investment pros are enthusiastically climbing those Walls of Worry as if they didn’t exist.  What a contrast.  And that division is mirrored within society with the political landscape equally divided – and sometimes violently so.

Given last week’s surge off the Wednesday low – in which the Dow has gained about 1,800 points – how do the waves now look?  Here is the Dow chart I took at noon Friday

If it did make its ATH on 16 August, the above wave labels are one of the valid options – the most bearish (but there are others).  But the move off its ATH to the 1 October low can be looked on as a three down – and these are always corrective to the main trend (up in this case).  But since the market is at the powerful resistance area surrounding the Fib 76% retrace and major chart resistance across recent highs, a move lower now would likely kick off the wave 3 down.

This means we are at another crossroads that is well-defined in price.  If the Friday close can take it well above the 35,000 area, all bearish bets are off and new ATHs are very possible.

Of course, most gurus will be discussing last week’s Fed ‘taper’ implications as well las the Evergrande affair in China and a host of other ‘fundamentals’ that most believe affect share prices.  As I have explained many times before, the big problem with using these to guess where the market is going is that it is not this data that drives the market, it is the interpretation of them by investors that affects their thinking.  And groupthink plays a very large part in that. 

There is precious little independent analysis of the data – most rely on the ‘experts’ to interpret the data for them.  And in any case, there is so much data out there it is perfectly possible to build a case for being over-the-top bullish as it is for being a doom-and-gloom merchant.  You pays your money and you takes your choice.

But with technical analysis, you have a set of rules and guidelines that have proved their worth over the years.  I have tried to distil the most reliable indicators into my Tramline methods that is a simple way to analyse q chart.  Of course, even these simple rules require interpretation – and that is where the uncertainty lies.  And with a little experience, it is possible to ‘read’ a chart.

For short term trading, I have found the Fibonacci relationships to be usually highly accurate in projecting turns beforehand, or at least areas of support/resistance where corrections often begin.   That allows for a low risk trade to ne placed with small risk.  That certainly beats wildly guessing where and when to enter.

The current Dow (see above) position is a great case in point. The line in the Fib sand is the 35,000 mark (give or take).  If you wanted to take a bearish view there, you would enter a short trade with a close stop.  If stopped out, the trade was a valid one and you lost a small amount.

But if you took a bullish view, any surge above the resistance line would turn it into a line of support and your trade would be in the money.  You could then raise your stop to break even in case it flopped (always a hazard).

I assume all traders want to make money, not lose it. Then, a better attitude would be not that you are ‘bullish’ or ‘bearish’, but that if the market does this then I’ll buy, and if it does that I’ll sell.

STOP PRESS Late on Friday, the Dow surged above resistance and closed at 35,300 – 300 pips above that line which now becomes support.

 

What about inflation?

I have no view on whether rising prices for raw materials is good or bad for stock indexes.  You can argue both ways.  But with base metal prices such as copper. aluminium, zinc all surging, and food prices also on the rise, inflation is here.  Booming energy prices remain on the front pages of the MSM.  And as it has started, it rarely dies down in a hurry.  I am looking for even greater pricing pressure in industry and on consumers heading into the winter.

Of course, this rising price inflation is putting upwards pressure on bond yields and will inevitably bring forward a jump in short rates.  It seems the days of cheap mortgages are coming to an end.  So will that Wall of Worry stop the juggernaut of rising asset prices?

The Fed are caught in a mammoth trap.  Delaying raising the policy rate would stoke up even higher price inflation, while going large would likely kill off rallies in assets stone dead.  They have gotten away with it so far, but how much longer can their luck run?

We are getting mixed inflation messages from the PMs with Gold up and down sharply last week, although Gold is not a reliable indicator of inflation. 

Long bond yields are starting to rise again and these are a better indicator of inflation expectations. And High Yield (HYG) yields are widening against Treasuries as risk is slowing being taken off the credit space.  This shows up also in the comparison of the slightly weaker Nasdaq (very interest rate sensitive) and the stronger Dow.

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The Yen has been very weak – this is how I am playing it

Since 2017 until last year, the USD/JPY cross has been tough to trade with no long term trends.  Here is the chart

See what I mean?  I had abandoned all hope of making any decent money on it until I spotted the terrific (lower) trendline joining the major lows and with a nice PPP.I spotted that early this year and when I applied my usual Fibs, discovered that at the then current 103 level, it has made an accurate hit on the Fib 76% retrace of the rally off the 2016 low to the January 2017 high.  There were also some impressive mom divs along the length of the correction (the highly overlapping waves is a clue that the decline off the 2017 high was corrective)

And that was when I embarked on my Yen campaign.  And right from the off, the market surged in waves that looked very impulsive – a clue that the trend had really turned up.  A few months later, it has risen to test the upper trendline around 111.  That was when I took some profits as I was unsure if the momentum remained to push it higher.

But higher it went and with my half position I am seeing it surge higher still to the current 114 mark.  That represents a gain of 11 big points (handles) – a significant move and very hard to achieve while it was trading in the lengthy correction since 2007!

But compare this with another dollar cross – USD/CAD.  While the yen has been hit from strong selling in part because of its reliance on imported oil which is priced in dollars.   Japan oil importers are being forced to buy a lot more dollars and sell a lot more yen.  In effect, the booming oil markets are weakening the yen and aiding the loonie.

An interesting chart! For many years it has traded between the pink bars and is very close to the lower line of support. Currently, it is testing the Fib 62% of the rally off the latest move off the lower bar.  Will that provide a springboard for a reversal up? While oil remains firmly heading north, the odds are not that great.

Glancing at both charts, it is clear that the oil price is a major driver of trends of both currencies.  When oil is cheap, JPY/CAD improves and vice versa.  I have never done it, but trading that cross appears to be a valid play on crude (see below).

And if my price targets for US crude – first $90 – $95 and then $110 – $120 – are met, then the Canadian should continue in rally mode.  But of course, few major targets are hit without some kind of hiccough along the way.  One thought – if my upper targets for crude are met, I can see USD/CAD trade below the lower pink bar at 1.20 – and that may well be a golden opportunity to buy it.  But that may come later.

 

Oil is driving the JPY/CAD cross

Here is the CAD/JPY cross on the weekly. 

And from the March 2020 Corona Crash low (where oil producers paid to have the temporary glut hauled away), it has risen  in what appears to be a clear incomplete five wave impulse pattern.  And it has pushed just above the pink resistance zone and I can now start to look for a reversal that can occur at any time.  A decent correction in crude soon would very likely put a top to the cross – at least for the time being.

And note the budding mom div here despite the almost vertical climb off my wave 4 low. 

But commodity-based markets such as this often put in extended fifth waves.  If a dip does appear it is more likely to be one to buy that to sell.

When a commodity based market is in such a powerful bull trend, it rarely pays to trade against it, although tops are often  made on price spikes.  Tactically for a trader, a good policy might be to take some profit on a big surge up, then watch how the correction plays out, and if a clear three down is evident then reinstate longs.  If the correction is deeper, then stand aside.  It’s a tough game, alright.  And it requires constant vigilance.

Or, at the other end of the spectrum, a trader could just sit on a position and hope his/her exit is a good one (not my style!).

 

Have Soybeans hit a major low?

We have been trading the US ags for months and rode the great bull move since last year.  In that time, Soybeans doubled in price – a very rare event.  Poor weather was a major factor combined with low US and Brazil sowings. But from the multi-year highs set in May, the higher prices did what they always do and encourage more plantings expected for the next season (we have two major seasons a year one in each of the hemispheres).

The decline by a Fib 50% retrace off the high at $16.60 to the current £12 area has been partly a result of heavy hedging of the current Brazil crop and also of the Autumn 2022 US crop (not planted yet!).  As ever, weather will play a huge part in the market ahead.  We had poor weather last year – will we see good weather this time?

We will have to wait and see – but the chart looks very constructive here and odds are we shall see at least a decent bounce from at or near current levels.  And that applies to Wheat and Corn.  With global economies recovering from the effects of the  pandemic the growing world population demands more food.

But there are many cross-currents.  For instance, demand for meat (and animal feed in the shape of soy and corn) is being impacted by the growing trend to eat less meat, at least in the West.  Hmm.

 

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