Weekly Wrap

Another week, another weekly stock market gain.  Ho hum.  Just about everybody is on board with Investors Intelligence (professional advisors) sentiment reading at a bullish extreme where previous tops were made (at least since the 1987 crash).  The VIX is approaching 12 which is at the bottom end of the complacency range , also where previous tops were made.

This is extreme herding that can only lead to one thing.  But so far, the momentum is still pointing up and my patience will need to be extended.

The latest AAII (small US retail stock investors) shows a dip in bullishness and a small increase in bearishness.  Maybe Mom and Pop are getting altitude sickness here, as they eye the more tempting yields available on Treasuries.

The latest COT data is interesting with little change in Nasdaq positions, with hedge funds still almost an incredible ten-to-one bullish.  But there has been a big swing in the e-mini S&P with hedgies massively swinging to the bearish side.  Interestingly, the small specs have gone the other way.

There is no doubt that when stock markets get the bit between their teeth, they just keep racing on.  It’s like a horse race.  The runners dont stop right at the finish line, even though they know the race is over.  It takes time to slow down as they move way past the finish line before turning around.

There is no doubt that the driving force behind the waves remains how the market views the Fed’s intentions re tapering.  This is hot on the agenda.  Some say next month.  Others say March.  Even a few say more QE to infinity (and beyond!).

The tapering idea has been on the agenda for several months (remember the swoon in May?) and to me it is clear that the Fed strongly desires to somehow withdraw from its bond-buying stimulus, and wants to find an appropriate excuse.  It is willing the US economy to produce some great results, but without much luck.  Recent noises from Fed members suggest they may fudge their unemployment threshold somewhat.  Quel surprise!

As I have mentioned before, when the stock markets turn, the catalyst will almost certainly come from left field and not from the Fed.  When all eyes are looking forward, surprises come from behind you!

DOW

Is making up for lost time.  It was lagging the risk-on Nasdaq for some time but now out-paced it last week into a new high.  Here are my tentative EWs on the last leg up:

One of my upside targets is the 16,120 level, where w5 would equal w1 – a common relationship.

I will give the odds to this scenario, since it would conform to a Santa rally – a seasonal tendency.

But we are getting perilously close to my line in the sand for the Nasdaq:

The red line is my five-year-old tramline which has successfully held rallies for this time.   As a time-tested line of resistance, it would be unwise to bet on it giving way this time.  The market would touch this line 10-20 handles above Friday close.  But with Thanksgiving week ahead, a dramatic move is not likely.

Naturally, a move in the Dow below my lower tramline would be a bearish signal.  That is my line in the sand.

GOLD

Has reached a really very interesting place.  Here is the daily chart:

I have a good tramline pair working and last week, the market fell to the crossing of the Fibonacci 78% retrace and the lower tramline.  This is especially strong support.

There is also a small pos mom div, adding to the potentially bullish picture..

This is getting really interesting now!  Also, the waves down off the $1440 high in late August look like a budding A-B-C to me.

Sentiment is dreadful with DSI under 10% bulls ad pundits are falling over themselves making lower and lower forecasts.

This is an ideal scenario for a big counter-trend rally.

On the hourly, I have a good tramline pair on this C wave – and this C wave can be counted as five waves.

Now this is getting really really interesting!

So, if gold stages a big rally from here, what does that imply for stocks?  You guessed it!

The first line of resistance is my upper tramline.

ALCOA

As you know, I have been bullish on Alcoa for some months.  The chart is really shaping up as a classic!

This move comes after an extended bear market, remember.  My EW labels look good and we should be in w5 into a high above $10.  We should at least close the awning gap from early in the month.

At the time, I suggested this share as a long-term investment, and I have not altered my view.  UK investors should get the added benefit from a helpful advance in the US dollar vs GBP in 2014.

Have a great weekend!