Following are my personal comments on specific markets and issues. I chart markets for a hobby and my comments are the result. They are not recommendations to buy or sell anything and should not be thought of as such. They are for entertainment purposes only so enjoy.

David Bruce Edwards - Northern Front LLC February 11th, 2018

Please remember, the following is pure speculation based only on my experience and chart patterns. "Every sunken ship has a room full of charts."

Note - I got a new wider screen monitor and when I look at this web site with the screen size in full, the site spacing does not come out properly. By making the window less wide all of the text and graphics slide into place. Perhaps you are having the same experience. DBE.


Wow! What a couple of weeks in the markets. Readers know that I was "fighting the market" for months. Statistics on sentiment and momentum were through the roof while market breadth lagged, never a good combination during a parabolic move up. The final straw was the volume surge on the NYSE from mom and pop investors at self directed internet brokers. So where do we go from here? Let's look at some previous market bashes.



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On the left is the 1987 crash. I was working as a broker at the time and had clients in stock index futures and stocks so the week leading up to the event and following it are burned into my memory. The intra-day pattern was very similar. On Friday the market sold off into the close. On Monday the market gapped down and closed with a panic sell off to hit the lows of the day. On Tuesday it rallied violently for 45 minutes then sold off into noon hour then rallied again. The mid-day Tuesday bottom turned out to be the low of the cycle. All the analysts who had been telling people to buy the week before were now saying that the bull market was over. Even though the economy was doing well and earnings were great, Wall Street was convinced that the 20% decline signaled the on set of a recession. Every down day following October 20th was thought to be the beginning of another violent sell off. For two months of fear the market traded sideways then began to recover. Most advisors were telling clients to sell on any strength. It turned out to be the buying opportunity of a life time.

On the right is the 1984 sell off. It was not as violent as the 1987 plunge or the collapse we just saw. However, it is worth looking at because the market lost a lot of value in a short time. All momentum and sentiment measurements reached negative extremes and it looked like the explosive rally from 1982 into early 1984 was completely over. The market consolidated for a couple of months in a sideways form then declined again into August. Given a choice between the two previous markets my guess is that the 1984 pattern will be a better fit - a consolidation phase followed by another decline. In 1984, the August low led to an explosive rally that really didn't stop until 1987.










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The recent stock market surge created a parabolic up move, more like a commodities top than a normal stock market peak. Commodities usually finish their rallies amid fears of shortages which cause buyers to think that if they don't get in now, they never will. A few weeks ago, equities traders thought the same. Above are two instances from the gold market where it reversed from panic buying. On the left is the 1980 peak and on the right is the 2011 top. Hmmm - 31 years apart just like 1987 and 2018 in the stock market. I am putting on my tinfoil hat! I drew yellow boxes around the subsequent consolidations and will be watching our current stock market for a replica of one or the other, particularly the post 2011 form since we are 31 years from 1987, the equivalent span for the 2011 gold top.

















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If you are a fan of Elliott Wave patterns, you look for "five waves" in the direction of the major trend and "three wave" corrections. In the five waves waves 1,3 and 5 are in the direction of the major trend. Waves 2 and 4 are counter trend. Waves 1,3 and 5 are made up of five sub-waves. Usually one of them is an "extended" wave, much bigger than the other two. Most often it is wave 3 and you can count five smaller waves within the extended wave. Above are charts of the Dow Jones Industrial Average and the NASDAQ 100. On the left, the numbering implies a finished five wave sequence to the upside then a reversal It could be that the trend has changed and we will now make "fives" to the down side and corrective waves up. If you are a purest you can make the case that January's blow out was the end of an extended wave 3 with a wave four and five to follow. Some other internal market history would suggest this as a possibility. Most notably, the advance decline line on the NYSE did not diverge with price much at the peak. The Dow Transports diverged during the last couple of weeks but it was a very short period of time. In most prior major peaks the Transports had a larger and longer failure to confirm the Industrials and the Advance Decline line likewise diverged from price. The glaring exception is 1929!










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The U.S. Dollar Index was my chart of the week last time. It looked like it was approaching a reversal point in terms of pattern and sentiment. Traders were loaded up on short-dollar, long-Euro positions. We got the reversal. The question is, did we see the low or like stocks above, was it the bottom of an extended wave 3 with just an upward correction now forming. On the right the numbers are drawn to favor the second theory. A purist would favor the right side. Wave 2, an upward correction (yellow box) was a simple retracement. Elliott Wave lore says that waves 2 and 4 should alternate in their form. If wave 2 is simple then wave 4 should be more complex such as the red lines drawn in on the chart. Italy is having elections in March. The uncertainty surrounding the outcome should favor the Dollar against the Euro for now. I am hoping that the chart on the left is the correct one but I will be watching the pattern of trading for any indication that the up move is simply part of a wave 4.










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Last time I was pessimistic on gold. Sentiment statistics showed rampant bullishness toward the metal and if the Dollar reversed it would not favor gold. From the end of the up move north of $1,360 we fell to $1,309 last week. Many gold fans were disappointed when gold did not rally as the stock market tanked. Gold promoters paint the metal as a hedge against the stock market with the implication that if stocks hit the skids, gold will soar. When it failed to react sellers emerged. Now, many of the best metals analysts I read are convinced that it is headed lower. I am not so sure. We had three December lows followed by up moves, sideways consolidations then another move higher. If history repeats then we should once again be in a sideways phase with a rebound close at hand. None of the previous corrections reached the lower half of the previous advance so if we sell off below $1,290 I will switch to the more bearish view.












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The chart of gold in constant Dollars does not help! The pattern is a sideways contracting pennant that can be seen as a ramp to an upside breakout or a collapse to new lows. My trading experience tells me one thing - don't bet the farm on one direction or the other because there is no way to know which path the metal will take. Patterns like this lead to volatile, over sized moves so if you are right you make a lot of money. If wrong then you don't tell your spouse.










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Are the adds for "$100 silver" still showing up in your area? I see them every morning. If my "consolidation, not a melt down" theory on gold is correct then we could be close to a bounce in silver. I would like to see it test the dashed red line near $16 just for the sake of symmetry.














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All things industrial took a hit along with the stock market. In recent updates I highlighted the connection between palladium and the stock market. It turned out to be true. There are very few palladium traders compared with other major markets. When sentiment turns negative buyers are few and the metal has an over sized move.













This is a chart of 30 year government bond rates (blue) and 10 year rates. The ten year moved more than longer rates, flattening the yield curve. Analysts point to higher rates as a culprit in the stock market melt down. The upward move looks almost like the January surge in the stock market. My guess is that we are close to a correction as shown by the green and red lines next to the 10 year rate. We are approaching spring real estate season. Where I live any house smaller than 1,500 square feet is priced between $360,000 and $400,000 because that is where most dual income younger people qualified for a mortgage at the lower rates we had last year. Now that a 30 year mortgage is nearly a percentage point higher, what will it do to those prices?











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Chart of the Week!

So, if we are going to get a downward correction in rates, how do you take advantage of it? One way might be utilities stocks. This group has been absolutely dumped and the sell off started last month while the broader stock market surged higher. One of my subscription services, reports that utilities are among the most hated industry groups and that when this out of favor in past cycles, they rallied over the next month almost any time. If you like buying things when others are dumping them then here is an example. XLU, the SPDR utility ETF has a yield of 3.41% and a current price earnings ratio of 8.











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Regular readers know that I like agricultural items such as cocoa and corn. I trade these from the long side. I think we are entering a period of global cooling that will effect crops world wide with not only temperature but rain, or lack thereof. The charts of coffee and soy beans both show sideways, coiling patterns. I am hoping that both break to the down side for a final plunge. If you see it you will know that I am buying both! Lots of people are watching the same charts and lines so a move above the upper red line will bring in buying.










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Strategy for this week - Above are two hourly charts of the Dow Jones Industrial Average. Earlier I wrote about five waves in the direction of the trend. The most bearish analysts I read see the recent decline as the chart on the left. We finished the first wave down and a wave two correction. Now we are starting on a powerful and extended wave 3 down. The end of last week was wave 1 of that monster to the down side. If this interpretation is correct then any rally will not top the green 2. I am more inclined to see the market like the chart on the right. I think that we saw a completed five waves down last week or will do so with one more lower low early next week. After that I expect a wave 2 upward retracement of some kind. Sentiment is so negative and expectations so low that once it starts you could get quite the pop. Commentators will remind you that we had other "flash crashes" and sell offs such as in the fall of 2015 and buyers were rewarded, etc. Bonds look close to a bounce (interest rates pulling back a bit) and I will give gold the benefit of the doubt. If we get an early week extension of the sell off in metals I will be a buyer. What caused the crash? The same thing that always makes a crash - a long lasting trend that convinces people that prices can only go higher. As confidence increases so do bets. As bets increase, institutions come up with new ways to leverage those bets. When things turn all the leverage works against you. Human nature never changes. It happened in 1987, 2000 with the bubble, real estate in 2005 and 2006, gold in 2011 and now the stock market. Near the high the only logicl thing to do is to buy. Market and economic cycles are inevitable. What is the number one rule to remember when it looks like you are going to get rich in the markets? - Don't quit your day time job.

Best of Luck,