We are well and truly into the dog days of summer with reduced trading volumes and relatively gentle market action. This may well persist for a while as Europe’s trading desks will see an exodus for the beaches next month.
The ECB reported on Thursday and Draghi let off a damp squib with no talk this time of ‘whatever it takes’. And no wonder, with EZ bond yields deep into negative territory, how much lower could he push the policy rate below the current minus 0.4% and expect to do any good for the languishing EZ economy? That’s what the term ‘pushing on a string’ was coined for.
At least he had the good sense to do nothing – and to let the euro chips fall as they may. Of course, the mercantilist Germans – who run the whole EZ show – want a lower euro to help drag their economy back on the road. Latest data tells us the wheels are starting to fall off especially on their motor industry. And the trade wars are definitely making their mark with China slowing.
Next Wednesday, the Fed reports and I am sure what Powell will say will not be seen as such a damp squib! Already since the Spring, short term rates have fallen by around 0.5% and my confident prediction is that he will lower the Fed Funds target rate by the same amount either in one go or in two.
That’s why US stocks are near record highs as bullish enthusiasm still reigns with latest DSI data showing S&P bulls at over 90% and over 93% in the Nasdaq – a record. But with underlying US data ominously turning lower, even a large 0.5% cut next week may be the very signal the bulls are waiting for to start rushing for the exits.
And if we get such a cut of 0.5%, I will be asking what does the Fed know that I don’t? Would it be a panic reaction to disaster forward projections they are seeing? I am sure I will not be alone in that thought.
And yesterday, the Q2 US GDP figure came in way above expectations at just over 2% annual rate, which is pretty far from the widespread view of a slow-down. So if you thought the Fed’s job was relatively easy next week, it got a whole lot harder now with an economy much stronger than thought. Lowering rates would sent it flying, surely – and stole the dreaded inflationary fears.
And that performance is in sharp contrast to that in the EZ and especially Germany. I am quite sure Mr Trump will be bragging about this GDP data and remember, he has warned the ECB not to smash the euro’s exchange rate.
But it appears likely the euro downtrend will continue for a while and if so, all bets are off on the Trade War front between the US and EU. Expect to see more tariff barriers soon – and further pressure on the stock market rally.
Powell certainly has some fast footwork to do next week to keep the Fed show on the road. With these cross-currents raging, next week promises to be a humdinger in stocks.
And we have a rare wave pattern in the S&P as it approaches the top of the stairs:
I have pretty decent tramlines that contain this nine-wave pattern and the market is currently into new highs in the final wave 9.
I am not sure how this pattern fits into the bigger picture, but next week’s action should resolve the issue.
Has gold turned, as I forecast?
Last time, I suggested the gold rally was over – for now. And just when the MSM pundits are leaping aboard with exquisite timing. I noted two bullish articles last week from writers I have relied o n in the past as contrary indicators. Here is just one of the trades VIP Traders Club members have completed
I have a very tidy five up to the $1450 area where we took profits last week. A break of my blue trendline should send it lower to at least the $1380 region.
And latest COT data supports this view. Hedge funds remain at a hugely lopsided bullish stance at a net 6/1, while the small trader cohort have likewise jumped on the bandwagon last week zooming up to a net 2/1 bulls. Meanwhile, the smart money commercials are now a net 2/1 bearish. Hmm.
And please note the while gold was storming up in the strong wave 3 rally from June, the dollar was in rally mode. That wasn’t supposed to happen! Doesn’t everyone know that when the dollar is strong, gold weakens? If you still believe that, just go over to the charts and then lie down for a while. I am sure you will then abandon any such conventional view.
Each market and its chart patterns must be analysed individually, Yes sometimes there are cross-correlations, but doggedly sticking to them in every situation can easily lead you astray, as here.
I have been wrong on the euro
Even when all your ducks are lined up in a row, there is no guarantee you will shoot them all down! On occasion, even the low odds scenarios do win out against the high probability ones. And even 100/1 no-hopers do sometimes win horse races.
The always-present uncertainty about the future of markets (and life!) makes trading a high risk business. But unlike a losing bet on a horse, here we can cancel our bet at any time by using stop losses. A horse race has a definite end result at the finish line – the financial markets have no end.
So we are now out of the market having taken our loss at our stop (actually, we had our stop set at our entry price for zero loss).
How do the charts look now? Here us the long term weekly
I still have my huge wedge pattern with multiple highly accurate touch points and the wave patterns off the 2011 top are extremely complex. But ny best reading is that we have a Double Zig-Zag ot a pair of three downs linked by an X wave.
And in recent weeks, the market has bounced down off the upper wedge line in a steady – and relatively low volatile – easing lower. Note the momentum divergence building up. This is a picture of a market that is near an upside reversal that could arrive as early as next week with the Fed reporting.
And latest COT data supports this view. Last week, hedge funds ramped up their short bets and are now net short after being neutral.
I will be looking for that upside reversal and an eventual test of the upper wedge line around 1.20 .
At the same time, I have been wrong on sterling as the Boris Bounce quickly fizzled. The MSM pundits ascribe sterling weakness to the prospect of a ‘no deal’ Brexit. That is patent rubbish. No matter what happens, the UK will have a multitude of ‘deals’ with the EU from their mutual interests, such as aircraft landing rights and free flow of goods. With the German car industry already suffering, they will do all in their power to keep their UK sales up – and prevent their politicos from doing damage.
The UK scientific community are also running scared as they view the prospect of Brexit as cutting off their funding for research. But where do they think the EU funds come from anyway? Despite what they seem to believe, there is no Brussels Magic Money Tree! The funds emanate from the UK as the EU’s second largest ‘contributor’. After Brexit, the EU middle-man would be cut out and the funds directed straight from the Exchequer with no EU cut. Simples!
So with latest COT data showing specs massively short sterling, we are setting up for a surprise to the upside – and that could arrive very shortly.
Metro Bank hits the skids – is it now a buy?
This bank set up by Vernon Hill in 2010 was billed as the first major high street UK bank in may years and was about to shake up the cosy world of retail banking. In fact, the only thing shook up were the poor investors who have seen their shares drop from a high of 400p to last week’s low at 40p.
So with that 90% loss in value, I started to analyse the charts to see if I can make a bull case. Here is the weekly
And I have an excellent tramline pair with the decline in a clear five down and noe setting up a very large momentum divergence. Odds are now good that when the fifth wave terminates, the ascent should be rapid. Here is the closeup of the fifth wave:
And it, too, has a five wave structure – and there is a momentum divergence as well. Hmm. Signs are looking good. Here is a further closeup of the purple fifth wave
Once more, I have a very nice tramline pair working with last week’s plunge to the 40p area hitting the lower tramline. If this support holds, it will be the low of all three fifth waves – and herald a major rally phase – much to the surprise of the army of bears. At one time, it was one of the most shorted shares in London.
I have started a campaign for VIP PRO SHARES members in Metro Bank.