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 March 11th, 2016
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.
Before I wrote the last update I shorted the Russell 2000 via TZA, an inverse ETF. This chart is from the Investools web site. The last two weeks of action are in the red rectangle. By Thursday the slow stochastic reading on a 60 day chart was near the low of its range so I covered. I was also cautious on precious metals going into the last two weeks because oscillators on shorter term charts were at the tops of their ranges and hedgers were very short, especially on silver. My caution was rewarded.
The Russell 2000 is a small stock index. It looked more vulnerable than some of the larger cap measurements. Over the next two weeks it might be wise to look at a sector that has, so far, been untouchable.
On the left is the NASDAQ 100, an index focused on Technology stocks. On the right is XLK, the technology SPDR. The NASDAQ chart covers the last 9 months. The XLK chart goes back to the fall of 2014. Investors are loaded up with these stocks and they were consistent winners. Lately there is a bit of hesitation. Let's use the sophisticated trading rule of "Every dog has its day." Two weeks ago it looked like the small cap stocks might roll over. Now, I am guessing that technology stocks could have a brief bout of vertigo.
Here is the last month of trading for the NASDAQ 100's largest components. Apple is the monster in the room, accounting for 14.6% of the weighting of the index. It topped out at the beginning of the month and has not done a lot in the last two weeks. Microsoft is second with 7.4%. It is trading sideways for now.
AMAZON is third with a 3.84% weighting. Just like Apple above it there hasn't been much upside action in the last two weeks. Next is Google C which was a winner going into the end of the week.
Facebook owns 3.41% of the weighting and its steady climb higher gives psychological backing to the "buy technology" story. Analysts on financial news networks have only good and better things to say about Facebook. Last week when SNAP went public Facebook was constantly portrayed as the good boy TECH IPO with Twitter being the bad boy. It reinforced the idea that you had to own Facebook. Why take a chance on SNAP when the gold standard is in front of you? So, why do I think that Apple and crew might take a short vacation? It is just a hunch. Here is something to think about though. Facebook is a leisure activity. Last month 300,000 people got back into the workforce. They will be concentrating on their jobs for eight hours a day instead of killing time by diddling with their cell phones. Their self identity will change from someone of worth because of what they can post to one of economic productivity. I see Facebook as an idle person's time waster, a perfect sedative in the Obama economy. In a working world it is less important.
This Investools.com chart shows the S&P 500. Last time the area between the red lines was highlighted with the comment that patterns like this should lead to a final up move then correction. By Thursday the market retreated to pre-Trump speech levels. Measures of volume on declining issues and the number of new 52 week lows were actually at "over sold" levels, a rare event for a market so close to all time highs. Late Thursday and early Friday we got an over sold bounce that could carry into early next week. If you look at most corrections, a single sell off rarely ends the form. There is usually an attempt to rally then another declining phase that scares the "I will buy on a pull back" crowd into staying away.
The NYSE Composite, a broader measure of the market also sports a single decline and quick bounce. Traders will be hoping that the lower red line stops the sell off. Support under that is at the bottom of the congestion range that formed in early January.
This is a chart of the daily moves in the Dow Jones Industrial Average adjusted for changes in the Dollar Index. If the Dow goes up and the Dollar does also then this chart goes up an extra amount to reflect both the stock market and the currency action.
"Long term" for me is two weeks but if pressed, this is still my dream pattern for the next few months. The bottom of "4" would be some time in late May or early June.
Built into the language of the recent stock market advance is the assumption that the Dollar will continue to get stronger against the Euro. This is based on 1. Higher short term rates in the U.S. 2. Stronger U.S. economic growth. 3. The probability of the Euro disintegrating as nationalist political parties win elections this spring. This is a graph of the Euro against the Dollar. Yes, the trend is down and the price broke below the March 2015 low. However, the pattern also fits an almost text book corrective "flat" pattern. If this were a stock I would be looking for a five wave rally back toward the green "c!" This goes against my strongest assumptions and I cannot find reasons for it happening but given the chart formation you have to be aware of the possibility.
For the last few years the Dollar and our stock market moved together with the assumption being that wealth from around the world was swapping to dollars and putting some of the money into our stock market. If the Euro unexpectedly begins to climb against the Dollar it could signal a larger stock market correction!
USO is an ETF that tracks domestic crude oil prices. Last time I showed two versions of this chart. One was like this interpretation, predicting a series of contracting moves that would lead to a final sell off below 2015's low. The positive way to view this chart is to see the action following point "a" as a coiling pattern for a burst higher. Both interpretations assumed a sell off toward the lower green line which we got last week. Oil bears are predicting that prices will continue to fall based on increased U.S. production. Oil bulls say that major oil companies are cutting back on basic exploration. OPEC appears to be doing its part by cutting production. They see any dip as an opportunity to buy.
This is an updated graph of oil (in black), an index of major oil company stocks (blue) and a ten week moving average of the weekly performance of integrated oil companies relative to other industry groups. The red ranking oscillator is still way below its normal range. This tells you that institutions dumped these stocks over the last couple of months, probably in anticipation of lower oil prices. They fell again a bit last week but not by much. Rumors that Exxon might buy BP sparked interest in the group. When an experienced management thinks that another major company is selling at a price that undervalues its assets it is a sign to other investors that the group is undervalued.
Ten sessions ago gold hit $1,264.80. Early Friday morning it was trading $70 lower. Gold mining stocks were poorer performers, giving back most of their 2017 gains in the last two weeks. The market expects the Fed to raise overnight lending rates by a quarter of a percentage point next week and the Dollar rallied a bit during the week. After Wednesday, the mining stocks flattened out, even with the metal edging lower and on Friday both gold and mining stocks bounced slightly. The action in gold mining shares looked like short covering as short term oscillators reached oversold readings.
Last time the simple daily RSI oscillators on both gold priced in Euros and in Dollars were at or near the upper ends of their ranges. I mentioned that gold was usually a "sell" when RSI reached such an extreme on the Gold in Euros chart. Both measurements are closer to their lower ends going into next week. I find these readings useful only when they are at extremes. My weekly RSI and industry group ranking charts are also neutral.
The sell off from late February has the look of a move that will continue lower. Short term I am expecting some kind of upward correction to relieve the oversold condition. Above I argued for more of a pull back in the stock market. If I get my wish there could be some gold buying from people worry about "the big one" in stocks. I subscribe to Cyclesman.com, a web site written by Tim Wood. He has been excellent on gold over the last few years. He says that there is a nine year cycle in gold. The last low was in 2008. He is looking for a major low in the coming year. It could be a sell off that takes out the 2015 lows or just a test of those lows some time before the end of the year.
I am less of a forward thinker. I look at shorter term patterns. Right now the odds are with some kind of a short term low near the Fed announcement and a bounce. It could have started with Friday's early morning lows.
Guys who like to use trend lines will point out that silver bounced off a down trending line last week. CFTC reports showed almost record short positions by commercials going into the last two weeks of trading. Prices above $18 were good enough for mines and dealers to make money and take no chances with lower prices. Speculators and wishful thinkers were on the other side of that trade. I have no great wisdom on silver. As with gold, it looks very short term "over sold" but any bounce should be met with selling. People who watch seasonal trends point out that gold and silver have a downward bias between now and June.
As mentioned two weeks ago, platinum and palladium are very sensitive to moves in the stock market. With stocks stalling a bit traders bailed on both metals with platinum getting the worst of it.
Precious metals were not the only "things" that sold off last week. Most commodities had a bout of weakness. On the left is DBA, an ETF that tracks agricultural commodities. On the right is DBC, an ETF that mirrors the CRB Index. It is odd that just as the Fed is about to raise rates deflation had its best two weeks of the new year. People who watch these measurements are worried that the Trump bounce is losing energy. If you are a regular reader you remember previous comments about the build up in M2 and short term pent up demand. Questions about the sustainability of this demand are showing up in the charts.
Last time I was hoping for a bounce in the bond market. I was dead wrong. Rates continued up (bonds down) as traders increased their bets on Fed action to raise short term rates next week. Note that gold and bonds have been moving in similar directions almost every day. As with gold I expect some kind of relief rally over the next couple of weeks. It could be a "sell the rumor, buy the fact" kind of thing. The turn down in commodities could be an early warning that we are seeing a short term peak in the Trump confidence bounce.
I didn't include a chart of Shanghai two weeks ago. I was worried that "the pot you watch never boils." It worked and prices turned down a bit. The government had a big annual meeting on the direction of everything. The President actually warned large investors against selling while the conference was in session. How is that for free markets? I am still watching for a break of the lower green line. Lately there has been a lot of commentary on how things are getting better in China. I don't yet see it.
Last month I made a big to do over cocoa. The cocoa futures chart on the left came from the CME delayed quotes site. The graph on the right is from the Investools web site. It shows NIB, an ETF targeted to cocoa futures. Fundamentals on cocoa are still bad but hedgers, those involved in the cocoa trade, have moved to record long positions in cocoa futures, locking in current prices. Usually these guys are good at identifying price levels where something should be owned. I am long NIB. It is a very risky play because it is based on a single commodity price and commodities are notorious for losing people money.
Strategy for the next two weeks: Remember, the U.S. government is like a company with a credit rating of Junk Bond status. After being mismanaged for a decade a new ownership is asking the world for new lines of credit while it takes obvious steps to improve business. When it looks like those programs are in danger people will sell. When hope returns they will buy. Last week they sold.
Short term I am watching the Tech sector. It looks very over trusted and over loved. I am shorting it with a shaking hand holding my chardonnay. Oracle, a big name in tech, reports earnings Monday. Watch Facebook in particular. Traders see it as untouchable. Weakness in this stock is going to be key to the group holding up or giving ground. A miss by Oracle could be the catalyst. Gold, silver and bonds are over due for a bounce. Watch the Euro/Dollar rate. No one expects the Euro to rally but the charts are warning me to prepare for a surprise.
Best of luck,
D B Edwards