The OJ shorts are being sqeeezed

Last time, I hope I convinced you that most of the conventional ideas on how markets work are simply wrong. For instance, I had the example last time that the gold price is not correlated with the dollar, except by accident. Most take on board the explanation that if the dollar rises, the dollar gold price must fall to adjust to the more expensive dollar.

What happens of course is that the euro gold price rises (as does gold priced in the weaker currencies). But this takes no account of the variations in valuation placed on gold. The theory assumes gold has a fixed valuation, which we all know is wrong. As I said last time, it is amazing what erroneous beliefs become standard in finance.

And today, I came across another supreme example of how wrong are the commonly-accepted relationships in the stock market:

I can agree wholeheartedly with his first point. But I disagree strongly with his second – there is never a ‘catalyst’ from outside the market that puts fear into traders/investors. Such fear is already there and when the bearish sentiment overwhelms the bullish mood, that is when tops are formed.

This mood swing is not generated by events – it is self-generated by each individual. So looking for a recognisable catalyst is a fool’s errand. I happen to believe we saw a major top in the Dow/S&P/Nasdaq yesterday at 4 pm (I will explain why later), At that time, I was not aware of any earth-shattering news item that conventional analysts could point to.

In fact, the whole day was very so-so in terms of data and news. But that won’t stop MSM journalists digging up some semi-plausible explanation in hindsight. That’s what they get paid for – not for providing insightful technical analysis that is actually useful!

But I will reserve my maximum condemnation for the third point. I have spent the years since starting this blog proving it is most certainly not the fundamentals that move markets. I will not rehearse the reasons here except to say that if it were true, and everyone interested has access to the same fundamental data today (company data is freely available), everyone should be rich!

That patently is not true and anyway, what is a market? It is a trade is between a buyer and a seller. One thinks the price will go up and the other believes the price will go down. If the ‘fundamentals’ are freely available to both, as they are, why the difference of opinion? That should not logically happen.

Of course, it is the difference in interpretation of the data that drives them. And this applies to technical traders such as your truly also. One can look at a chart and derive a bullish forecast, while another can reach the opposite conclusion from the same chart.

In finance, we are dealing with almost total uncertainty. And that’s what makes it exciting!

Before I leave this subject, here is another stand-out on gold from seelingalpha.com (this site has particularly good examples of wrong thinking)

What has recession got to do with the price of gold? Nothing. You can look at it in at least two ways. For one, a recession means people have less money so gold demand would fall. Or, in a recession, stocks lose value so investors will buy gold to compensate and diversify. You can go around in circles with this kind of thinking (as many do).

Lower interest rates = gold rally? There is no correlation in history of this. And anyway, in a recession will rates decline? That also is not assured.

You see, when enough people believe in these unproven relationships, they have positioned for them – and usually just at the wrong time. That is when we can jump in and exploit the setup.

For instance, I have been watching the Orange Juice market for a while and noted hedge funds are 5:1 short according to COT data. The hedge funds have been relentless sellers who drove the price down as they accumulated more and more short positions. With such an imbalance, they were laying themselves open to a mighty short squeeze. And this is how that is playing out

I have a terrific five down to a strong momentum divergence – a sure signal to expect a sharp counter-trend rally – and so we have one. Note the lovely tramlines with excellent touch points and a PPP on the lower line – and the sharp break up.

Provided this is the start of a major rally phase, i expect to see hedge funds net long by its end.

So you see that bullish sentiment was at rock bottom at the 115 low and that spelled the end of the downtrend. It wasn’t a surprise news item that made the market turn (I failed to see a headline about orange juice in the papers). At the 115 low, the sellers had simply run out of steam and that allowed a few bulls to take charge.

Crude oil reaches my first target

As crude was breaking up from a steep bear trend last month, I noted a potential Head & Shoulders reversal pattern.

and sure enough, that is what it turned out to be. I had my confirmation on 20 February when the market broke up above it. That is when I could set upper price targets – and the first one was the Fibonacci 50% retrace of the bear trend off the 4 October high (the same date as the Dow made its ATH) at the $59 region. The market hit that level this week.

So the question is this: I have a H&S measured target above it at the $65- $68 area. Will it reach it? Well, the blue lines trace out a wedge pattern and as I write, the market is testing the upper line around $60. But with COT data showing hedge funds net long by a massive 5:1, are we setting up for a swoon?

As you know, I dislike trading with the hedge funds especially when they are herded into one side of the boat. One time-tested way to handle this situation is to use the ‘moving stop’ method where you raise your protective stop as the market advances to a new high.

Vernal Equinox, full moon and the Fed – all today

I have prepared you for what I believe would be an historic turning point for stocks. Here is the Dow chart I showed a while ago marking the positions of the equinoxes since 2016