Weekly Wrap
ANNOUNCEMENTS
I will be holding an intensive 2-hour trading workshop at the London Money Show on Saturday 8 November. Full details here.
In one or two weeks, I shall be changing the format of my blog and introducing an exciting new service in conjunction with the publishers of my book Tramline Trading. It is an Alert service where I will outline promising trade setups in various markets in real time. These trades will be in one of the five best trade setups I show in my book. Watch for details out soon.
Well, it’s now over. No – not Halloween, but October – surely one of the most volatile months in US stock market history. Last week we had the monthly Fed report (no more QE) and yesterday, the sneaky Japanese overnight announced a surprise huge jump in QE stimulus aka money printing. That knocked the yen sideways, as well as gold/silver and most of the major currencies. But what a shot in the arm for stocks!
But as AEP in today’s Telegraph points out, this gigantic weakening of the yen runs the risk of sparking off another round of competitive Asian devaluations, especially with China. In addition, this will put further pressure on European exports to stay competitive – and possibly deal a hammer blow to the EZ economies while driving it further into deflation. The pressure for the ECB to do their own QE will be intense.
Currency war is on!
China will not take this lying down and will fight back by devaluing the yuan and send the world into deflation. It was always going to end this way with overcapacity in industrial economies and tepid final demand.
That means I have revised my EW ideas for shares, of course (but only slightly). Remember, forecasting is all about probabilities. I may not have found the all-time Dow top yet, but many other indexes from DAX to FTSE are still way below their highs.
As Damon Runyon once said: “The race may not always be to the swift nor the battle to the strong, but that’s the way to bet”.
OK, so I got US stocks wrong, but my gold and currency and T-Bond trades are just fine. You cannot win them all, and three out of four isn’t bad. And thank goodness for stop losses – those kept me out of major trouble on my short Dow position, having taken big profits on the way down.
But with the Dow trading at new all-time highs has my long-term bearish opinion, based on massive deflation ahead, really changed? If anything, it has strengthened. Recent data shows a marked slowing of US economy with existing home prices down a whopping 8% last month and today, M/M consumer spending was down 0.2% vs expected +0.1%.
Are there any stock bears still standing?
At the same time, bullish fervour towards shares remains highly elevated. AAII data shows bulls/bears at a near record, while money managers are almost universally expecting new highs next year. Here is chart showing record Investors Intelligence data:
chart courtesy elliottwave.com
And over in the eurozone, consumer prices continue to head towards deflation, despite the ECB ‘stimulus’. I expect the official inflation rate next month will be highly manipulated in order to put off the evil day of releasing a zero or negative number as long as possible.
Sanity is very slowly returning to sovereign bonds with yields on Greek bonds jumping over 8%. But basket cases of Italy and Spain yields are a smidgeon over German yields, which tells you that risk is still on here, and the day of reckoning is being postponed (again). Ominoously, German ZEW economic sentiment turned negative, heralding a slowdown into winter.
Interestingly, US Treasury yields edged up last week. Conventional wisdom (which is seldom correct, but in this case, appears to be so) had it that with the Fed out of the market, bond yields would rise and prices fall back. That is indeed occurring.
My Plunge-ometer (junk bond index) spiked back up last week with shares but closed back down yesterday. This could be a subtle sign that the stock rally is nearly over.
DOW
Just when I believed I had the EWs figured, the market delivered a real Halloween surprise. Now, I have a clearer idea of where we are going:
We have been travelling in large C wave since 2011 and within it, I have a much better five-wave pattern. You can sub-divide wave 3 until the cows come home into smaller and smaller five-wave patterns. Also, wave 4 looks much better as an A-B-C counter-trend form than an impulsive five-wave move. I am happy with this.
If I am correct, we are in the final thrust higher in a fifth wave. Now, how about any tramlines?
I am happy with those, and show the October plunge was stopped right on my tramline support.
Now, with momentum way overbought in a fith and final wave and the market testing my highest tramline, any further advance will run into pretty stiff resistance.
My short trades returned a good profit – although much less than I had expected! Thank goodness for stop loss orders, I say. I shall be looking for signs of a top at any time now. I will definitely not be looking to position long, especially with bullish sentiment up at the roof.
I do not regret missing out on this stock market rally. I have taken great profits out of Alcoa (long) and more recently, short gold, short euro and long and short Treasuries. Don’t expect to catch all of the big moves. If you can catch a few a year, you are doing miles better than most, believe me.
GERMAN DAX
As one of the global indexes not to blast into space last week, here is daily:
The huge momentum rally has only carried to a pathetic Fibonacci 62% retrace. With eurozone economy in retreat, I very much doubt if it can scale new heights.
Ideally, I would like to see an A-B-C on this rally, but if stocks retreat next week, the DAX (and FTSE) should be big losers.
NIKKEI
Let’s get yesterday’s rocket into perspective. At 17,000, it trades at a 56% discount to its all-time high back in 1989. Here is the daily:
It poked into new highs for this move, but is heading for my tramline, where there should be very strong resistance. It will follow the yen lower (see later) and when that bottoms vs the dollar, Japanese stocks will retreat.
Could it be sheer coincidence that just when the US Fed stopped its QE3 scheme, the Japanese central bank started up its much bigger QE? Maybe there was a phone conversation between them? In my book that is market collusion and if private corporations had done this, their feet wouldn’t touch the ground before they landed up in clink.
The central bank has pledged to buy equities (and bonds), but is this the way to grow the economy on a sound footing? It’s nothing less than financial engineering to manipulate the inflation rate (they will fail). With a rapidly ageing population, Japan is doomed to perpetual deflation or low inflation. When this massive (and growing) house of debt cards falls of its own weight, the effect will be the biggest collapse in human history.
USD/JPY
With yesterday’s 250 point rally into new high ground, I have had to amend my EW labels – and I have some real doozies:
From the 2011 lows, we are in the final fifth wave up, My wave 4 is a classic wedge, which usually precedes the final thrust up. Here is close-up of my wave 5:
From July, I have a textbook five wave pattern with a long and strong wave 3 and A-B-C in wave 4 and a strong wave 5. So now we are in the end-game for the yen. I shall be looking for a top soon.
EUR/USD
Moved down to the 1.25 area again, but we are in the fifth wave down and a rally could start at any time:
I would like to see a little more downside before wave 5 terminates, but a rally cannot be far away.
GOLD
I had coverage yesterday in my MW Trader email. We could see a bounce next week if stocks struggle and if the dollar edges back, but the main trend is down. The critical $1180 level has been which spells more trouble for the bulls. My immediate $950 target remains in place.
I remain short from $1250 level, having taken partial profits.
Have a great weekend!
