Weekly Wrap

The dust is settling over the markets with the Fed tapering plans now out of the way,  and I believe last week will go down as a turning point for many markets.  In particular, I believe precious metals are finding a major bottom and we will see a spectacular bull move next year.

My featured chart shows the spread between emerging market debt and US junk, which does not auger well for asset markets.

US stock indexes are at or very close to their tops and the worry I had (see last week’s WR) over the Nasdaq has eased as it made a new fifth wave high to conform to the Dow and S&P’s EW counts.  After the Santa Rally has run its course, we should see the reversal I have been waiting for.  We are in the final fifth waves of all indexes.

Bullish enthusiasm is at fever pitch and the latest COT data confirm this with big swings by the specs to the bull side.  The ship is in mortal danger of capsizing!  For instance, the hedge funds have reduced their short positions in the e-mini S&P by a whopping 10% last week.  Not to be out-done, all specs in the Nasdaq also swung heavily to the bullish cause.

Of course, all of this investor belief that the Fed has given them the green light to pile into equities contrasts sharply with the real world where sentiment remains a tad less positive.  And now there is a real prospect that the Christmas buying season will disappoint retailers, as it did for Thanksgiving.

I sense that with the incomes of consumers remaining under pressure, and the Christmas sales already under way early in the UK, the already tough retail trading environment will worsen in 2014.  That is when share prices of the retailers, which have been flying, will come under severe pressure.  And no more so than the luxury retailers who will be hit hard next year.

Now even US retail investors are piling in

One more sign the end is nigh for the  bull market is the latest AAII survey showing a big 6% jump in bulls to 48% (bears 25%).  Considering the anger out there that QE has wiped out bank deposit rates and kept salaries flat, this is about as good as it will get and a remarkable demonstration of the old rule that the public always jump into equities with both feet at the end of big rallies.  This is a sure-thing bet every time.

Previously, the AAII survey had shown a tepid attitude to stocks and this survey, taken on the day of the Fed taper news, will be about as good as it gets.  This should mark the top in sentiment.  The stock market tops will follow.

NASDAQ

Finally, it has come into line with the other indexes and made a new high post-taper in a final fifth wave:

This final lunge in w5 could stand another down-up sequence towards my upper tramline to make another five-up in the fifth wave.  That would be my preferred scenario.  If it did touch the tramline, I would take that as a major sell signal, especially if I see a neg mom div at the top.

GOLD

The latest DSI advisor reading is…… wait for it…..  3% bulls.  Just take a moment to understand the implications here.  There are 97% bears, meaning for every bull, there are about 30 bears. So, it would take only one bear to double the entire buying power of the bulls.  Then why has the price not collapsed to zero?  Of course, this is nonsense, but I hope you get my point that the market is setting up for one almighty rally.

All it would take is just one of the bears to switch sides and the buying power would double!  And that jump could be provoked by just one bear looking up and noticing the trade is extremely crowded indeed – and decides to take profits.

Also, at Thursday’s low at $1188, it is only $8 above the late June low, which sets up the intriguing probability for a double bottom here.  Remember my EWs where I had the plunge to the June low as my w3, then the rally to the August high was my w4.  If we have seen the low and the $1188 level is not breached, this would put in a rare truncated w5 on Thursday. And if so, the rally would be enormously strong out of it.   Watch this space.

EURO

Had a key reversal on Thursday at the super-resistive 1.38 level:

We had a tramline break and a kiss on Friday and with wC in five waves and the key reversal, odds are very high we have started the next big leg down.

Yesterday’s COT shows a big swing by the specs to the bull side – right at the 1.38 area.  This will provide the fuel for the decline.  My main first target remains the November 1.33 low.

So shall we see a double top in the euro and a double bottom in gold?  What a prospect!

AUSSIE

I have been searching for a low and I believe I have found it:

I have a clear five-down and within w5, a sub-set of five down, and with the large pos mom div, the market is set for a vigorous rally.  Of course, this would fit hand in glove with a gold rally as they have been in synch with each other recently.

Look for a break of the upper tramline for a big bullish signal.

Also, compare the position of the Euro with the Aussie: euro is finalising a big five up and Aussie finishing a five down.  A long AUS/EUR trade should work out spectacularly.

My Bottom Line

Five waves are completing in stocks indexes, gold and the US dollar, which are my three main trading area.  2014 is shaping up to be an epic year.

Next Saturday, I will give my Trade for 2014 – do check in!

Have a great pre-Christmas weekend!