With the US government shutdown and the looming debt ceiling drama, the markets are still tracing out recognizable patterns! In fact, I had a post yesterday calling for a bounce in the Dow, which arrived right on cue.
Do you spend much time reading what the pundits have to say?
The question traders need to ask themselves is this: If I spend a lot of time taking in the chatter and pundit’s opinions on the likely effect of the political tug-of-war (or anything else), and trying to make profitable trades based on all this information, is it really of any help in identifying the correct way to trade – and when?
Of course, a shutdown of the US government is a highly dramatic story – and demands front page coverage and plenty of spilled ink. But as we know, the important stuff for trading always lies beneath the surface.
Naturally, there are many gloom and doom scenarios being bandied about – from the collapse of civilisation as we know it, to collapse of the dollar and stock markets. No doubt about it, these stories sell newspapers.
But in my experience, there are so many ‘on the other hand’ qualifications in headline stories, most people end up more confused than if they had not bothered – and had kept to their charts for sole guidance!
I will stay with my charts
Yesterday’s Dow bounce was a stark illustration of why keeping it simple is the best policy – at least for me. I noted the Dow had declined to a precise 78% retracement of the big wave up, the momentum was oversold, and it was entering heavy chart support. All it took was a five second glance at the chart to make that assessment.
And I knew where to place a stop if this forecast was wrong. Whether you choose to take that trade is another matter. A bearish trader would wait for the rally to peter out and position short. A bullish trader would jump on this rally. You trade your convictions!
My attitude to the news – yes, I do read what some others are saying, but I use it to judge sentiment. And when a particular viewpoint is universal, I look to trade the other way.
Sadly, one effect of the shutdown is the non-appearance of the usual Friday COT data. I will have to fly solo this week.
The fact remains we have had a stunning bull market in stocks for over four years taking some indexes to new all-time highs. This has built up bullish sentiment to near record levels. Even junk bonds, emerging market bonds, and now frontier bonds (the most risky bonds on the planet) have been well bid. Investors are now all-in to the bullish side.
The elephant in the room is still there!
Many are talking about the start of a new era of rising markets as world economies recover. What a seductive idea! I have the opposite view -remember the elephant in the room of a few years ago? That was the huge pile of debt racked up by governments, companies, and individuals alike.
That was then. Today, government debts are even higher than when they became a worry – by a huge margin. Now, interest rates are on the march from their QE-engineered puny levels. This is already adversely impacting the US real estate market as mortgage rates have jumped.
The socialist model that all ‘advanced’ nations follow will soon implode, as entitlements – which can never be withdrawn in scale without loss of votes – inexorably rise. With rising rates on government debt, budget deficits will continue to expand, despite what politicos proclaim. This will inevitably put increased upward pressure on taxes. both direct and stealth.
And because US and UK economies’ GDP are 70% consumer spending, and this is destined to decline, company profits have almost certainly reached a peak – with bearish consequences for stock prices – eventually.
And when investors try to rush out of the door at the same time to raise cash to payoff their massive debts, the tsunani of selling will be intense. This will be a third wave scenario.
But that day is not here yet. The effects of QE are still with us, but it seems inevitable that tapering will begin sooner rather than later. Unless, of course, central banks panic and ramp up the money printing as they see their tepid recoveries wilt. But if this were to occur, I believe investors will see the light and view it as a last-ditch panic move and ask “What do they know that I don’t?”. And the selling will become even more intense.
The Dollar has likely bottomed
The US dollar rose sharply against several currencies last week and appears to have made a bottom. GBP lost 200 pips, and I was fortunate to have shorted near last week’s high – again ignoring the UK economic data that pundits were calling excellent – with a forecast GDP Q4 rise of 2% annually, supposedly beating the world.
With sentiment bearish the dollar – and the US shutdown and debt ceiling nonsense reinforcing this – the scene is set for a massive rebound. And if armageddon can be avoided, this will certainly set the dollar alight.
I had a MW Trader email yesterday on the likelihood of a bounce off the 78% retrace from its 700 pip decline off the 19 September high, and wrote that if the upper tramline could be broken, then a decent rally could get underway:
Nice hit! Now, with the tramline broken, it sets up the possibility of an A-B-C upward correction, as I have shown. The key is the upper tramline – if a decline to there can be reversed, the A-B-C is on. But if not and the market keeps declining, we are headed for a new low. But so far, the odds favour more bounce.
I have been pointing out the massive divergence between it and the Dow recently. Yesterday’s bullish action wiped out almost all of Thursday’s slide:
Yesterday’s recovery is impressive – and augers for more of the same next week. But if it does make a new high, I shall be looking for tops in the Dow, S&P and Nasdaq. A positive news development in Congress should produce an upward spike. That should be my signal.
It made a new high for the move last week, but could not hold the gains:
Yesterday, it broke below my tramline after a five up. We could see a small bounce early next week, but the trend has turned. I am short near the top.
Action has been puzzling to the bulls recently. In spite of the end-of-the-world scenarios painted in the US Congress, gold has not rocketed up.
In fact, it has been held in check by my long-standing downtrend line and appears headed lower. But if this line can be broken to the upside, another assault on the $1360 area looks likely.
I had a wash trade last week and am standing aside for now. But I am eyeing the solid band of support just under the market – a break here should send it scurrying back towards the $1180 lows again.
Have enjoyed a solid rally of late – just as all the talk was of rising interest rates! How ironic.
That must have cleared out a lot of shorts, and with the market looking toppy, a break below my lower green line would send yields back up again – and support stocks (and gold) for a while.
The alternative is that we have one more upside pop before the final high is in in a fifth wave.
Have a great weekend!