Next week should be interesting.  First, the Fed reports on Wednesday.  Second, Brexit happens on Thursday the 31st (Halloween).  Warning – only one of these statements is true!

Stocks continue to levitate, despite all of the less than impressive recent economic news. But remember, the market does not reflect the economy in real time, but it does eventually catch up!

One very interesting tit-bit I saw was that in the US, benefit payments to citizens have now outstripped income tax receipts for the first time. What a transformation for the United States!  From self-reliance to nanny state socialism in less than 100 years. But it follows a familiar pattern in the growth (and decay) of nations.

Politicians of all stripes and nationalities cannot resist finding projects to spend tax money on as it increases their power – and that is what drives them all.

I wonder what the equivalent picture is in the UK?  Not too far behind, I imagine. 

Fast forward a few years and guess what?  Will the benefit bill fall into line, or will taxes go up? No prizes for that one.  Bribing voters with their own money is always a winning strategy for office.

As I explained last time, the pros are pinning their hopes for further stock gains on what they believe the Fed will do next Wednesday when their monthly deliberations will be released regarding interest rates.  They are already well into QE4 with their T-Bill mopping-up operations.

And they believe they will buckle to Mr Trump’s repeated admonitions to cut, baby, cut! And they are probably right – the Fed will very likely cut Fed Funds as the 3-mo T-Bill rate hovers near lows at 1.66% – a full 55 basis points below the 2.25% Funds.  The Fed always moves to match the market – albeit after some delay.

Therefore, the Fed has room to cut up to 0.5% on Wednesday.

And if so, will stocks surge further on the news or has the runup to the Dow high on 17 October (which remains under the ATH in July) done enough to convince the bears to throw in the towel?  Here is clue they are doing just that.

Many follow the sentiment reports of the American Association of Individual Investors (AAII) for a handle on what the retail crowd are up to.  And last week, we saw a big jump in bullish percentage and a big dip in bearish.  While not a great timing tool, I believe it shows a greater acceptance of the rally off the big Christmas low (that was unexpected by most).

Last week saw some interesting earnings reports.  Tesla reported an actual profit – and the $50 jump put a mighty squeeze on the hedge fund shorts. But Amazon went the other way with disappointing data – but the stock price still recovered in the still-bullish environment.

With expectations for a Fed cut, this puts my alternate scenario for new highs in US indexes front row.

with the Nasdaq leading the charge. If my wave labels are correct, we shall see a new ATH next week above the July 8030 top.  And if it reaches my upper trendline around the 8200, that should just about do it for the entire D wave rally.

But when the Fed reports Wednesday, will we see a ‘Buy the Rumour, Sell the News’ spike?  That would likely put a top to the large D wave rally, if my wave labels are correct.   

As I mentioned last time, the public is in open revolt against their ‘rulers’ in several countries.  They have reached their limit in accepting the wealth chasm between the ‘elite’ and themselves, who remain mired in low wages and high living costs. This is not a recipe for positive social mood – the main driver of stock markets.

And when interest rates do ‘normalise’, home owners may join them!  Mainstream housing has been a seller’s market for some time and the only constraint on ever-rising prices is the monthly mortgage cost limit of affordability. It’s a see-saw between house price and interest rate so when rates rise, house prices will fall.  This will coincide with stock market losses.

 

A rollercoaster ride in Bitcoin

Last week saw one of the most tremendous reversals I have seen in Bitcoin.  From the Thursday low at $7,300 it surged to the current $9,150 just two days later.  That’s a gain of almost $2k (24%).  And I missed it!  Yes, I took my eye off that ball last week as Bitcoin had broken a key support area days before and was heading lower into Thursday.

Naturally, I was starting to dark thoughts of an extended bear trend.

But if I had been paying attention, I would have seen what a superb buying opportunity was being presented on Thursday because it had dipped to the Fib 62% support on a huge momentum divergence.

This makes the decline off the $14k high an a-b-c three with all sub waves in place.   Not only that but the decline takes the shape of a classic Wedge.

So what more do I need to proclaim the bull remains very much alive?  Anf if so, what is that saying to the outlook for the dollar and stocks? 

 

A chart reading lesson in GE

For PRO SHARES, I have been tracking General Electric as a possible candidate for a Buy Low/Sell High option.  The shares have been falling hard – all the while as the Dow has been in a strong rally mode.  This relative extreme weakness is always a red rag to my twitching bargain- seeking laser beam.

From the 2016 high at $33, it declined in five waves along my tramlines to the recent low of $6.50 – a loss of $26.50 (80%), making it one of the worst performers on the NYSE of major companies.  I will not go into the background to this weakness since what I am interested in is the question:  Has the bottom been achieved and what is the outlook for a good advance and at what risk?

These are the primary questions for a swing trader.  We try to seek out situations where the majority is on one side of the sentiment scale who can be encouraged to abandon their positions with a slight nudge.  My recent campaign in sterling (see past posts) is a case in point.  The vast majority of players were bearish to the max.  All it took to get them to re-assess was a small move against them that snowballed into an explosive eight cent advance in a great short squeeze. 

Here, we have a similar setup as sentiment towards GE has been truly bearish for months. But note the recovery pattern – first, it punched above the upper tramline, then came back for a traditional kiss, and is now pulling away.

Another reason I like these setups is that with the market at a low level only a small rally produces out-sized percentage returns.  With GE at $8, a $1 advance produces a gain of 12.5%.  But at $30, that same $1 advance is only a 3% move. 

So at the current $9 mark, my max downside is the kiss low at $8.20 with a large upside.

 

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