Weekly Wrap

ANNOUNCEMENT

I shall be giving a two-hour workshop at the London Money Show Conference on Saturday 8 November.  The workshop is being sponsored by MoneyWeek and I will analyse current market opportunities using my tramline method.

This is always a  great event with many excellent speakers.

You can register here.

Alibaba and the Forty Thieves

When I was young, my family would look forward excitedly to the annual pantomime – myself included.  My favourite was Alibaba and the Forty Thieves because we were all encouraged to yell “Open Sesame!” when Alibaba knocked on the cave door – the cave containing the stolen goodies, of course.

Yesterday, investors/gamblers in the Alibaba IPO must have felt just as euphoric as the share price just flew away (on the magic carpet, perhaps?).

There are many variations on the fairy tale, but Alibaba remained the only one to know the secret of the cave’s treasure and the magic words that open it.  The comparison with Jack Ma is pretty obvious.

I wonder if the Chinese Alibaba will have the traditional happy ending that all pantos have.

Last week, I believed that the week would be pivotal in the markets.  In my latest MW Trader email, I maintained that since the Dow (highest cap) and the Russell 2000 (smallest cap) were going their separate ways, we are dealing with a highly fractured market which is characterized by a switch to a risk-off behaviour.

Because the rallies off the 2009 lows have been fueled by mammoth bucketloads of QE – and a ZIRP policy – risk has been enthusiastically embraced, to say the least.  That is why we are getting insane valuations of assets from London real estate, art works, classic cars, stamps, and many individual shares.

But most financial markets have already topped.  From gold/silver to Treasuries to commodities (including crude oil) to grains to many equities – tops are already in.  The one and only hold-out is some stock indexes.

Did you know that with each new high in the Dow, fewer NYSE issues are making new highs?  The index highs are now being made by a handful of issues.

Here is a very illuminating chart:

chart courtesy elliottwave.com

There is a huge divergence forming between the leaders and the laggards – and this is unhealthy for the bull market continuation.  The generals are way ahead of the troops and are soon to be cut off.

With just about every long-term bear having been converted to a bull, we have the ideal setup for a very important top in equities – probably the top.  Could the Alibaba IPO be the last hurrah for extreme bullish enthusiasm?

With the US dollar still rampant (and heading towards a major long-term target of mine of 100), how much longer can US stocks remain  buoyant?

Also to note – the autumn equinox falls next Tuesday – and there is often a trend change of some significance around the equinoxes.

Scotland wins – more devolution!

The trend for more global self-determination took another step with the Scotland referendum result. As I have mentioned, this is a background  bearish phenomenon from a market standpoint.  It shows that weaknesses in society are opening up – and that is never a simple process. Already, the UK government has boxed itself into a corner with its lavish bribes and now England will be pressing for some of what the Scots have been promised.

I foresee much more anger and conflict up ahead, as next year’s UK elections loom – a bearish sign.

Ebola – will it become a pandemic?

Latest reports from West Africa  that there are 5,000 cases and projections for an exponential increase to 1/2 million by end year. Maybe they are scare-mongering, but it does have the potential to get a lot worse.  Already, there has been a three-day shut down in Sierra Leone.

If ebola becomes a pandemic, it will reflect the more negative social mood sweeping the globe – and a huge negative for the markets.

RUSSELL 2000

This small cap index has almost certainly been the first to top (high made early March – six months ago).  Here is the weekly showing great tramlines:

The lower tramline has been broken (first major trend change sign) and then a rally to kiss it – and making a weekly key reversal (text, pp 40-43) into the bargain.  A weekly key reversal is a significant event and is often a major trend change indicator at the end of a big run (that is another clue).

Next move should be a scalded cat bounce down (text, pp 83-84, 143).

Here is hourly:

Five down from the early July high and a weird three up (elongated C wave) to the Fibonacci 78% level and now the downturn is following my tramlines.

 Short-term, my line in the sand is my upper tramline. But it appears the early August low is the next target.  Breaking that would put the market in a third of a third down (text, pp 118-120) – and an explosive move.

DOW

I have a pretty decent tramline pair on the hourly with a complete EW count:

The rally high last week was 17,365 on Friday but that couldn’t hold and the close was near the upper tramline.

I expect the lower tramline will be broken next week and that will be my trade signal.

EURO

Is edging ever closer to my long-standing target at sub-128:

Wave 3 is about to end with perhaps one more decline into my pink Fibonacci support, but then we shall see a vigorous rally in wave 4 as the lopsided bearish sentiment is worked off.

But long-term, the euro is headed for another long-term target  of mine at 1.20 – and even lower.

I have taken profits on shorts and looking for the wave 4 rally.

TREASURIES

On Friday, we saw the first signs of the big counter-trend rally I have been expecting:

Wave 3 ended last week on a pos mom div and hige rally on Friday is part of wave 4 up.  Not sure where it will end – likely on the Fibonacci 50%/62% – but if stocks start falling hard next week, the flight to safety will gather steam.

I am now long T-Bonds on the break of the minor trend line with a very close stop.  This trade enabled me to place only a 20 pip risk on this trade – one of the lowest risk trades I have taken for a long time.  I love those.

Have a good weekend!