Weekly Wrap

Weekly Wrap

 

 

ANNOUNCEMENT

A heads up – I am taking a break from 6 March to 13 March.  There will be no Weekly Wrap next week and my last post before I leave will be on Wednesday.  I will resume after 14 March.

 

Is this a new Crimean War (the Russians are moving in) – one hundred and sixty years after the last one?  Then, if you remember, the Russians lost.  Today, the outcome would be different.  But a shooting war is most unlikely this time.  Modern-day Florence Nightingales need not start packing their bags.

But the same divisions based on religious differences that existed in the 1850s are at the root of the present conflict, exacerbated by the dire economic position of the Ukraine.

But this is not a history blog!  The Ukraine is another country undergoing deep divisions which are being exposed by high levels of unemployment and the massive wealth deficits between the haves and haves-not, not to mention the towering public debt mountains. This is a pattern that is growing in importance around the globe.

And as QE continues its work of rewarding capital and denying labour, these divisions will become even more exposed until a crisis point is reached, and then – poof!  Much wealth will be destroyed.

But not yet -as the stock markets are forcefully telling us. Many are making new highs.  But when the $%/* hits the fan, stocks will be among the first assets to flag it up.

Most major stock market tops are broad affairs, and this one is no different.  But here is an interesting pattern I note in the Dow:

The credit crunch plunge low was made 6 March 2009.  That was the start of the A wave up.  Then, the sharp drop to the B wave low took exactly 30 months.  And 30 months from that date brings us to – next week (Thursday, in fact)!

Interestingly, market cycles come in and out of fashion and right now, they are distinctly out of fashion.  I haven’t read a single article (especially on seekingalpha.com) that even mentions cycles operating in the current market.  That makes they very relevant today.

When cycles become all the rage, they stop working.  It is when very few people are looking for cyclic behaviour they are at their most effective and kick in.  Think about it – it is easily shown that stock market cycles have operated in the past (there is a whole array of books on the subject).  But when everyone expects a cycle turn, it rarely occurs because traders have already positioned for it.

With bullish enthusiasm at major peaks and internals showing severe weakness  (a shrinking group of hot shares is pushing indexes to new highs), my candidate for a major top is during this month.

China is stalling

Continued weakness persists in the Chinese economy as PMI hovers just above 50.  I am quite sure that the slowdown is even greater in reality, as the statisticians have been ordered to keep the figure above 50 – or else back to the rural paddy fields you go.  A print much under 50 would set the world economies ablaze – and this should be one of the catalysts for marking the tops.

The Shanghai stock market continues its relentless decline with the market dropping a massive 3% last week and the yuan is also being allowed to fall.  This could out of hand real fast.  Confidence is fragile and just a flap of a butterfly’s wings could do it.

VIX is signalling a top soon

The Fear Index hovers around support at the 14 level even as markets move higher.  This is significantly above the complacency level of 12-13 in January, and is a noteworty divergence:

If this is a near-term low, it could be w2 prior to a massive rally in a third wave.  Watch this space.

China sneezes, Aussie 200 catches cold

While the S&P and Nasdaq roars into the stratosphere, the Aussie stock market has only made a Fibonacci 62% retrace of the 2007 – 2009 plunge:

The Oz economy is heavily reliant on commodity sales to China, which is slowing down sharply.  So can the stock market be far behind?

The latest rally has a neg mom div and has hit the Fibonacci 62% level again.  Interestingly, the Aussie dollar has seen its huge decline already last year to reflect slowing exports, while the stock market roars ever upwards.  What a mismatch!

This could be one of the biggest shorting setups for years.

DOW

Very volatile day yesterday which I believe is an omen for an imminent top and decline:

I have another lovely wedge (remember the 2 January wedge I pointed out resulting in a tasty 1000-pip profit?).  But this time, the weakness of the rally is showing up in the pair of neg mom divs – and the stunning Friday overshoot (!) of the upper wedge line.  I have found that overshoots are expressions of buying exhaustion and herald a reversal more often than not.

It’s all taking shape, isn’t it?  The 6 March anniversary and my technical evidence together with off-the-scale bullish sentiment (COT shows another big swing to bull’s camp last week) presents a compelling picture of a market ready to turn at any time.

If the market can break the lower wedge line into the pink zone, it will be curtains for the bulls.

EURO

Made a sudden lurch up yesterday in a big short squeeze:

And these are my new EW labels. I make the rally back to 1.28 yesterday the two C wave tops, meaning the next move will be down.  The decline should start early next week.

GOLD

We have had a great run since early January, capturing over $100 of the rally, but now the long trade is very crowded:

(chart courtesy www.elliottwave.com)

This chart has me very concerned.  The DSI has now suddenly reached a level that previously has signalled a major top.

Yesterday’s COT data certainly confirms this bullish swing with hedgies now well over 2-to-1 bullish.

That is why I have taken profit on my long positions, looking for a decent dip before looking to go long again.  In my opinion, the bullish froth must be eliminated by a $40 – $50 dip before further upward progress can gear up.

Have a great weekend!

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