Weekly Wrap

My publishers have generously allowed readers of my blog to buy my book for a special introductory price of £15.00 + p&p (for the paperback) or £12.50 (for the ebook).

Please enter code TTPB2014 for the paperback or TTEB2014 for the ebook. The correct price will be adjusted at the payment stage.

You can buy it here.

BEARS 1 BULLS nil

With the Dow down almost 900 points since 24 July (and has given up all of the gains of the last four months), Round One goes to the bears. Suddenly, they have been roused out of their five-year hibernation – and boy, are they angry. If I can be allowed to mix metaphors, the rampaging bears have even woken the sleeping elephant in the room – the ballooning debt pile.

Not only have we got the ramped-up Mid-East tensions to content with (Gaza and now US strikes in Iraq again), but the ebola epidemic seems to be spreading. There is no doubt that social mood has taken a distinct turn down. Now Russia is getting in on the sanctions act with bans on food imports. All very bearish developments.

Bull markets sow the seeds of their own destruction – and these seeds are now germinating. To achieve the pathetic economic growth we have seen, mountains of QE funny money has been created and debt loads have mushroomed. It does not take rocket science to see this is another gigantic house of cards (just like the sub-prime fiasco of 2006-2008, but much much bigger). A mere puff of wind is all it would take.

We have all got used to this period of ZIRP with low yields on fixed interest (thus driving investors/gamblers into the only game in town: shares), but pinch yourself – we are in a dream where everybody believes zero rates are here forever. Why else would investors want to receive a negative yield on German bonds last week? They are paying the banks to hold their money. We’re not in Kansas anymore, Dorothy.

To me, we are at the start of a perfect storm of increasing global tensions, debt worries, nervous bulls and interest rate worries. Not to mention the weak ‘recoveries’ with even Germany experiencing a negative GDP growth.

The bulls have not started to panic yet. Most pundits are advising buying the dip (as they have since time immemorial). That buying should be enough to get a relief rally going and that will be my wave 2 up. I believe it started yesterday.

But my strategy will be to look upon stock market rallies as shorting opportunities. When wave 2 exhausts, wave 3 will be something to behold.

My favourite plunge-ometer is the junk bond index and that recovered from deeply oversold levels.

This action should herald a further slight Dow recovery. But we have started the Great Bear Market.

Bear markets can be very tough to live though – especially if you are short! This is an excellent article that takes you through the typical journey of a stock investor (not a swing trader!). Expect huge counter-trend rallies along the way.

DOW

Made a nice Fibonacci 50% retrace to the 16,250 area and then smartly bounced off it late yesterday:

But look at the last big decline back in February. Back then, the market became very oversold (arrow) and then rallied hard before a significant correction was found. Today, we have an identical set-up. Will the market make a similar strong recovery? If yesterday’s low is my wave 1 down, how high will wave 2 carry?

History suggests it could carry very far, because deep upward retracements have been the norm.

Another reason is the COT data:

During the plunge, hedgies jumped onto the short bandwagon with abandon. A massive swing to the bearish side – and that should fire up a big short squeeze.

I covered all shorts for big gains near the low and will look to go long, expecting a good bounce. My longer-term plan is to short near the wave 2 high.

GERMAN DAX

Just as news emerged that even powerful Germany’s GDP growth turned negative, the market found chart support:

Again, the market is oversold and I expect a very good bounce from here.

I will be looking to go long next week for a short-term trade.

EURO

Has been edging down recently in anticipation of a blast of QE coming from the ECB, but just as everyone becomes convinced something would happen, the game changes!

My best guess is this: the ECB has been jawboning the euro lower and this has worked so far. But if the euro rallies back to the 1.38 – 1.40 area, Draghi will be forced to unleash QE – and that news will cause the euro to plunge.

I have a pretty decent tramline pair working and yesterday, the market broke up out of the channel (text, pp 104 -114). That was a long signal.

Also last week, specs of both stripes loaded up with short contracts so that hedgies hold over three shorts to one long – a very unbalanced position. A massive short squeeze appears likely if the market can rally over the 1.3450 highs..

I covered all shorts for great gains yesterday and went long, looking for a decent bounce.

GOLD

Had a very interesting week (see my latest MoneyWeek Trader email) and on cue, rallied to the Fibonacci level where it made my wave 3 high at the $1320 level:

Next week, I expect an A-B-C decline (text, pp 89-90, 97-104) for my wave 4 and then a vigorous rally in wave 5 to complete my c wave. Of course, this five could be part of a larger structure.

I went long at the $1290 level and took profits at the $1320 area for a quickie trade.

ALCOA My Trade for 2013/2014

Still trading along the tramlines, having made a big overshoot last month:

I decided to take profits because a large overshoot usually precedes a big decline to the lower tramline and beyond. Note how the momentum has gone from massive overbought to massive oversold in just a few days!

The form of the rally appears to be an A-B-C – yet another reason to exit this trade with big profits.

USD/CAD

The Canadian dollar is still getting hammered: