Weekly Wrap

ANNOUNCEMENT

In conjunction with my book publishers, we have launched my Tramline Trading Alert service. This service will highlight promising trade setups such as those I have featured in my Weekly Wraps – but before they happen. The Alerts will not give specific trade orders, but will focus on the setups that may develop into great trades.

I will send the Alerts as and when I see a good setup forming and I expect to send on average about 6 – 10 per month.

The Alerts will contain references to the relevant chart setups in my book Tramline Trading and will be invaluable if you wish to delve more deeply into my trading methodology. Most will reference my five top chart patterns that I outline in my book.

You can get full details here.

This means that the format of my Weekly Wraps will change. I will keep focused on market commentary, but will have few trade setups – those will be reserved for the Alert service, which will become much more valuable since they will highlight potential great trades before they happen, not after.

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Market Commentary

We are off and running! Last Friday, the Dow came within nine pips of the round-number 18,000 print. Since then, it has been downhill- fast. The thousand pip levels are important because many forecasters use them for their targets – and the 18,000 Dow level was a popular one. As I have observed many times, it is uncanny how often the market will approach – but not quite hit – these round number targets. The market definitely has an ironic sense of humour.

And as I have long maintained, deflation is now sweeping around the globe, starting in Europe. Yesterday, news that France has just had a negative consumer price data point – the first since records began – is the first of many and is not what our masters at the central banks wanted to hear. They are deathly afraid that if deflation becomes rooted, the Everest of sovereign debt will keep growing like Topsy with no end in sight. Markets would finally get spooked that the ECB would not after all be able to buy up all that sovereign debt that they had front-run. They jig would be up and the house of cards would collapse.

Countries are simply unable to cut expenditures without stoking social unrest and taxes are already at their limit in Europe and USA. What to do?

The central banks have boxed themselves and governments into a corner with no escape hatch with interest rates on the floor. They have signally failed to stoke inflation – one of their primary aims – and with crude oil in free-fall, their worst nightmare of deflation is on their doorstep.

If only they had not bailed out the banks, hedge funds and assorted cronies, we would now be in growth mode after the dead wood had been cleared. But they took the easy way out and punished savers. Now they are about to get their just rewards.

Isn’t that ironic – their massive QE experiment has stoked deflation, not inflation! This has to be the greatest demonstration of the Law of Unintended Consequences ever.

So, finally, the penny has dropped for stock markets and they are starting to recognize reality.

It has been a long wait, but I believe was worth it because we will see some spectacular moves now. Yesterday’s 300 pip drop in the Dow is just a taste of things to come.

Retail investor sentiment remains high

Despite the falls, US retail investors remain complacently bullish with the AAII data showing bulls at 45% and bears at 22%, which is near an extreme. And why not? After all, dips are what buying is for. That rule has been spectacularly successful since 2009, so why stop now?

But despite the falls last week, I see no signs of panic. Much comment has been along the usual lines of: “Hey, stocks are cheaper, buy more. They may get a little cheaper, but what a great opportunity to pick up bargains”. But this time, it will be different. Those falling knives will cut deep into the hands oft the dip buyers.

THIS IS THE MOST IMPORTANT CHART YOU

NEED TO UNDERSTAND THE MARKETS

Here is the most important chart you will ever see on the state of markets:

chart courtesy www.elliottwave.com

It’s not really about crashing crude prices alone. It is about the switch of investors from risk-on to riek-off and the drying up of liquidity. The Junk/Treasury yield spread is the most reliable barometer of risk I have.

Sentiment is slowly turning negative.

Look what happened in 2011 when the yield spread suddenly widened – a few weeks later, stocks finally got the message and retreated. This time, the gap is an awning chasm – and the declines will be that much more severe.

Outlook for shares

The presumed Santa Rally has been cancelled! And 2015 will continue the deflation theme started last week, only intensify as tsunamis of selling sweep across all markets. Miners will escape as gold/silver build on their counter-trend rallies. But when PMs resume their decline to my target around $950 – and lower – miners will get thumped.

DOW

This is a very pretty picture for an EW enthusiast:

The first five down says the trend is now down. The corrective waves are all A-B-Cs. Now we are in a third of a third wave – the most powerful in the book.

Here is the daily: