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This week saw the now traditional “V” shaped stock market rally extend to a full Fibonacci 62% retrace in the Dow as the Buy-the-Dippers got stuck in. They see another fabulous buying opportunity as they foresee new highs soon. Money managers are the most bullish, despite the imminent ending of the Fed’s QE this month – maybe they hope it will be extended.
I do not see that happening at all, despite the chatter. And Fed stimulus propping up asset prices (but not consumer prices) is yesterday’s story anyway. Any move to suspend the taper – or introduce QE4 – will be met by market turbulence as the idea will go around that the Fed sees something nasty in the woodpile. A tsunami of selling in the confusion will result.
The world has changed since 19 September, and bad news will not be good any more as market forces begin their long and winding road back to normalisation. With the Fed now having ceased asset purchases, investors maxed out on margin (it remains a record on the NYSE) and stock buy-backs peaking, who is left to prop up the market?
The dollar hasn’t crashed, as many said it would, and is regaining its traditional role as the currency of choice in a world of competitive devaluations. There is much hot air being released over the desire of China and Russia to strike oil deals not in petro-dollars, but in something else (what, exactly?). But this is a non-event. Long-term dollar interest rates are now starting to rise in a strong third wave, and with the safe-haven status of Treasuries, that will be another boost for the dollar. Remember, my long-term target is 100 and then 120 on the dollar index when a real market panic sets in.
It was pretty quiet on the Ebola front last week, but I do not expect that to last. As I mentioned before, this outbreak of a killer virus coincided with a downturn in social mood, which drives all human activity.
It was far from quiet on the junk bond front, though. On Thursday, it spiked on massive stop-loss buying into new highs, but just as quickly, fell back on heavy selling:
This blow-off action precisely mirrors that in Treasuries where we saw a similar buying exhaustion. The path is now up for bond yields.
And news from China wasn’t good with the real estate bust gathering momentum. And with unit labor costs zooming up, it is not the go-to place to manufacture cheap goods. The hard landing may well have started.
Made a stunning recovery last week, but at yesterday’s close, hit the Fibonacci 62% level. Here is the daily:
My wedge was broken and last week’s rally has planted a classic kiss on the lower line. That is stiff resistance. Here is the hourly:
This chart shows the “V” low perfectly (actually, more of a “W”). But with the small neg mom div (see red bars) at yesterday’s close, the odds are heavily stacked for a reversal early next week. I shall be poised!
The mini-rally to the Fib 50% is over at the $1250 area – and I was poised to swoop:
My trigger was the neg mom div. That completes w4 and it is now down in wave 5 to below the critical $1180 level.
Many gold bulls are hoping that the Swiss referendum next month over central bank additions to its gold reserves will boost the market. I very much doubt if this will occur. The news is already in the market.
And the COT data yesterday shows hedgies piling into long trades, just before the $30 decline:
Hedgies made a big swing to the bullish cause (both increasing longs and decreasing shorts) right at the wave 4 high. This is entirely typical behaviour – and we nimble traders can take advantage!
I remain short from $1252, having taken decent profits on the wave 4 rally.
With dollar sentiment uber-bullish, I have been looking for a reversal in the GBP/USD from down to up. Yes, I am long-term dollar bullish, but with every man and his dog currently bullish, it is time to surprise the majority with a sharp rap on the knuckles. And I believe I have found my reversal in the form of a H&S bottom:
All ingredients for a reversal are here: a H&S, pos mom div at the head, the RS made a Fib 62% retrace of the head on a mini-pos mom div and short-term tramline breaks. In other words, a perfect trade setup.
If the green neckline can be broken, I am looking for another 200-300 pip rally to 1.64 – 1.65 area
I remain long from the 1.6200 level -the RS low.
Remember, if you would like to get my trade setups before they happen, watch out for my new Alert service.
Have a great weekend!