Weekly Wrap
That was a pretty ugly week for the Dow, but not for the Nasdaq, which maintains its bullish bias. This is a major divergence that I will be watching carefully.
And the generally so-so economic US reports did not help sentiment. Yesterday, the U of Michigan Consumer Sentiment showed a ‘surprise’ drop from the high reached in July when the Dow rallied towards the 15,600 area. If you plot the Dow against this sentiment index, you will find they are pretty much in synch. This fact backs up the Elliott Wave model – markets are driven by sentiment, not the news.
Weighing on sentiment are the two battles in Congress – that over the debt ceiling and that over the budget. As is the custom, this is going to the wire. Deadlines are fast approaching, and markets are sending out mixed signals about the likely outcome.
The stock market is a lot more pessimistic that Treasuries, which enjoyed a good week. But something has to give – and soon. I expect volatility to hot up on Monday.
Here in the UK, the mood music is sounding much more positive with the consensus believing we are out of the woods and clear blue skies lie ahead for the economy. But with FTSE near its all-time highs, this fits perfectly the pattern that bull markets turn into bear markets when bullish sentiment is extreme.
And the sudden outbreak of peace and goodwill over Syria (nerve gas) and Iran (nuclear bombs) is a reflection of the more positive sentiment that is emerging. That is one reason why I believe we are not quite yet poised to start a big leg down in stocks – that will come later.
Let’s take a a look at some markets:
DOW
This week’s decline has taken it to the Fibonacci 50% retrace:
With the pos mom div, there is a big chance we have seen the lows for now. If the market opens up Monday with a rally, the critical level is the previous high at the 15,400 area. And if it can overcome that, the next target is the 15,500 level.
Latest COT:
Hedgies have been adding to longs on the dip, while small traders have lifted their shorts. But hedge funds are now 7:1 long! This is about as lop-sided a ship as I have seen.
But look at what is going on in the e-mini S&P:
Talk about abandoning ship! All traders have got shot of longs and shorts last week – suggesting extreme nervousness of both bulls and bears. Conviction is drying up. Even the commercials (who largely hedge their portfolios) have less need to hold postions.
Also, the latest AAII sentiment data of small investors backs this up with a large increase in ‘neutrals’.
Next week will be critical.
FTSE
Is making a large wedge:
When the market moves out of the wedge, the move will be huge. I am watching.
EURO
Rallied and is making a five up:
Yesterday’s high fell just a few pips shy of the w3 high, so it is not clear w5 has done. But if the euro rallies Monday, that would set up the reversal I have been waiting for.
Latest COT is revealing:
Hedgies have been adding to longs (as have small traders), while the commercials have massively added to their bearish positions. This has all the hallmarks of an impending top.
A break into the pink zone should also give me the bearish signal.
GOLD
Has reached my upper tramline:
These are very good tramlines and I have confidence in them. Before, I had my best guess as a decline into a w5. But I have less confidence in this now. If the upper tramline can be broken, that would set up a good rally.
Have a great weekend!
