Weekly Wrap

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What a damp squib!  At Jackson Hole yesterday, Yellen and Draghi told us nothing we didn’t already know.  The Fed are intent on continuing their tapering (and hence ‘tightening’ the pace of  liquidity pumping into the US markets), while Draghi is worried about eurozone deflation and continued high unemployment and wants to stimulate.  But what he didn’t mention was the QE word.  Even a mere mention of ECB discussing it would have frightened the horses, so he naturally steered clear.

All Draghi mentioned was an idea to give individual states a little more freedom to increase government spending as a percent of their GDPs.  Big deal. More debt on the way – and more funny euros! The end result? Markets were virtually unchanged yesterday afternoon into the close.

Those expecting a bombshell were sadly disappointed, but under the surface, the charts are looking decidedly interesting.

For instance, junk bonds – my favourite plunge-ometer – have rallied back to their previous highs, but this is setting up the possibility of a double top, if stocks resume their declines soon, as I expect.

But note the volume pattern – trading volumes have shrunk on this rally, which is a very bearish sign.

S&P500

This is showing a lovely set of tramlines:

I have two sets working.  The green pair had its lower tramline broken and last week’s rally has taken it up to the underside of the lower tramline in a traditional kiss.  The decline stopped on the lower tramline of my black pair.

The market is now trading in no man’s land between the support of the black tramline and the resistance of the green one.  Breaking out of this zone will be a tradeable event.

But yesterday, the market made a kiss.  This is the moment of truth.

Now compare the S&P with the Dow, which I showed in yesterday’s MW Trader email:

The Dow is some way away from making a kiss.

Now the kiss is one of five of my favourite trade setups that I cover in my book Tramline Trading. What are the other four?

On this vigorous rally, the S&P momentum is now very overbought.  This is setting up a high probability short trade at low risk.

I am pleased I took profits on my shorts near the low and now I am lining up a new entry.

GOLD

Last week, gold declined to test the critical $1280 area:

The July 2013 low at $1180 is my wave 3 and for over a year, the market has been trading in a large triangle – I call it the Golden Triangle (not to be confused with an opium-producing area in South-East Asia).

In a triangle, it is customary to see five ever-decreasing waves A, B, C, D and E.  The question I have is this:  has wave E been put in?  If so, I can label wave 4 at the E wave high. As a consequence, we are in wave 5 down which should take gold to below the critical $1180 level and to $1000 – and beyond.

But to give me confidence in this forecast, I need to see the market break below the lower triangle line in a big way.  The $1280 level lies on this line.  That is my line in the sand – and we are testing it already.

If this support holds and the market rallies, we could see a move back up to the upper green line at the $1330 area.  After that, higher targets appear possible.

But the specs remain very long and the possibility of a big rally appears unlikely at this stage.

I remain short but scanning for evidence the $1280 level will hold.

SILVER

Has been declining with gold but along a superb tramline pair:

But note the pos mom div here on the hourly.  A break above the upper tramline could herald a more substantial rally – and a sympathy rally in gold (that is why I am nervously eyeing the $1280 level!).

There may be an excellent long trade if upper tramline gives way.

US DOLLAR

The US dollar continues its rampant ways.  I have been bullish the dollar for many months – and this has been a definite minority opinion.  I have lost count of the number of US-based blogs that call for the destruction of the dollar.  With ballooning Federal debt (there is a clock that counts it), Americans conclude that inflation will let rip and the dollar will collapse.  Not to mention all of the $4 Trillion QE dollars sloshing around the system.  Dollar debasement all sounds so obvious, doesn’t it?

What they don’t understand is that a currency value is relative to another currency (or gold, which is falling in dollar terms anyway).  Deflation is stalking the eurozone as is their weakening economies and this is pressuring the euro.  While in the US, the economy is growing – and the Federal budget deficit is narrowing.  This is dollar-supportive.

But the main factor at play is the need for creditors to come up with dollars to service loans (most of which globally are denominated in dollars) – and these loans are gargantuan with yields set to rise across the board, making rolling them over more and more costly.   As deflation spreads around the globe, creditors will be scrambling for ever-appreciating dollars to make interest payments. And when defaults rise, as they inevitably will, the rush into the dollar will be historic.  We are just beginning this process.

The Dollar Index trades at around the 82 area, having made its low in 2008 in the 70 area.  I expect to see it trade well over 100 in coming months.

The USD/JPY has surprised me recently, but I shouldn’t have been.  The thrust out of the triangle is a classic move:

And note the lovely kiss on the line and scalded cat bounce up.  This is classic chart action.  But does it have legs to make a new high?

The rally is certainly confirming the strong dollar story, but I had the December top as my final wave 5 of the big bull move with the move down as wave 1.  The recent rally could be wave 2 up, leading to a decline in a wave 3.  But this scenario is looking less likely now.

I may need to reconsider my EW count.  The December high may be wave 3 (not wave 5), the July low wave 4 and wave 5 lies ahead – perhaps in the 110 area.

In any case, any dip near-term should be contained and the best swing trades will be from the long side.  I shall look out for suitable tramlines to guide me.

Have a great weekend!