Weekly Wrap

ANNOUNCEMENT

I am delighted , or should I say overjoyed, that Robert Prechter has highly recommended my new book Tramline Trading in his monthly newsletter Elliott Wave Theorist:

To order your copy, see here.

The cracks are starting to appear in the whole house of cards that is the global financial system.  And the deflation that I have long forecast is now edging into the driver’s seat.  Commodity prices are plunging (from  gold to crude oil to iron ore to grains to coffee…) and this is driving the commodity currencies (Aussie and Canadian) lower vs the US dollar.  My long-held forecast for a massively appreciating US dollar is coming to pass in no uncertain terms.

Another of my long-held beliefs is that the wave of deflation will start in Europe and spread to the USA  (taking in the emerging markets) and we are seeing EZ consumer prices edge towards the zero mark.  I have no doubt that it is the drying up of liquidity in the banking (and shadow banking) system that will get deflation into high gear – and that is to come.

But the financial madness in Europe continues – at least for now.  I heard that Lufthansa, the German airline, which is ranked way below investment grade, has just sold over $1 Billion of junk bonds at a coupon of under 2%.  What are these investors/gamblers smoking?  Do they really believe their investment/gamble is safe with a company that is almost guaranteed to lose money?

But the barrage balloon of liquidity is fast deflating – see AEP’s latest article.  Credit has reached the outer reaches as percent of nation’s GDP for China (250%!), and for UK (and eurozone).  Interest rates are now ratcheting up (T-Bond prices are falling hard – see later) and the world stands on a debt precipice.  It will blow up in spectacular fashion – already my Plunge-ometer is working lower:

The 50-day MA has been broken and when the 200-day MA gives way, that will be a sight to behold.  Remember, junk bonds act like equities (the first to take a hit) and are the canary in the debt mine. They are not called junk bonds for nothing.

Now, even safe-haven Treasury yields are working higher as they are sold in order to raise rapidly-appreciating dollars.

But positive sentiment towards stocks remains off the scale (see last WW).

As an indication, here in the UK I have noticed a sharp increase in the number of new white cars on the roads.  Actually, there is a connection between popular car colours and the stock market! White is the colour of hope for the future, positive feelings, a propensity to spend money.  Its opposite black, is the colour of depression, conservation of resources, belt-tightening, negative feelings.  You see more new black cars when the stock market is depressed.  It won’t be long before the darker colours will prevail again.

NASDAQ

This index has been the speculator’s playground in recent months, but the fun will not last too much longer:

I have good tramlines and a decent EW count.  Market has broken lower tramline, rallied and kissed it (text, pp 104 – 114).  It is now testing the pink support zone.  When it does break, we will be in a third wave down  in a scalded cat bounce (text, pp 83 – 94, 143) and that could carry far and fast.  

First stop is the 50%/62% retrace of the big wave up.

I have my rifle cocked and ready to fire.

T-BONDS

Huge rally in yields, as I predicted, but I believe there will be a hiatus very soon:

I have excellent tramlines and major target on the lower tramline (text, pp 60 – 61).  There should be a temporary ‘safe haven’ flight to Treasuries in the next two weeks as stocks crumble.  I am gradually taking profits on my shorts in anticipation.

CANADIAN DOLLAR

What a star performer this is!  Here is the weekly:

I took a long position on the basis of the Fibonacci retrace to the major tramline in July (text, pp 116 – 118).  The decline off the March high was an A-B-C and momentum got oversold.  This was a classic setup.

Now, with plenty of clear blue sky above my next target at 112, I am setting my sights on the upper tramline as major target.

With commodities in freefall, the Canadian dollar has little support now and with upward pressure on the US$, the one-two combination will knock out CAN$.  I expect this trade to be a home run.

AUSSIE DOLLAR

The other commodity currency is also getting hammered:

Its major export of iron ore is seeing reduced demand from China which has produced a 5% decline last week alone.

But it is approaching the Fibonacci 62% level (text, pp 114 – 116), where I expect some kind of bounce.  But the downtrend is intact and I will await a rally to position short.

GOLD

I now have my A-B-C-D-E pattern complete with the B-D line broken

We are now firmly in wave 5 down (text, pp 87 – 89) which will not end until market has broken the $1000 level.

But in the meantime, I believe a strong bounce will develop in the next few days, which could reach the B-D line in the $1300 area.  Bullish sentiment is plumbing new depths with last week’s losses.  It will take a flight to safety (as in T-Bonds) to reverse this – and this is what I expect.

In the next two weeks (probably sooner), stocks will tumble as markets realise what interest rates are doing (on the back of liquidity tightening) and gold/silver and T-Bonds will rally.  That is my best guess scenario.

Have a great weekend!