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 January 14th, 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."
Today's date under the French Revolutionary Calendar is 25 Nivose CCXXV
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.
This is the last update featuring the French Revolutionary Calendar. Our Thermidor took place. The government that tried to push reality into college professor elitist "how it ought to be" is leaving and one more oriented toward "how things work" is coming into power.
If you are a chart fan you are watching the hour by hour pattern of trading in the stock market since mid December. After the dramatic Trump bump the Dow Jones Industrial Average moved sideways for the last month while traders of all types, professional and amateur assume that the market will break out to the up side. Chart guys are looking for a "contracting triangle" or "pennant" formation that will preceed the break out.
On the left is the same time frame looking at the S&P 500 and on the right the Russell 2000. These charts are from the Investools.com web site. Both show slightly different peaks and lows. At the bottom of these 30 day charts are slow stochastic oscillators and a moving average of the oscillator in red. Over the last month oscillator moves to the limits of their trading ranges were good buy and sell points.
This is an example of one of these formations in action from the Investools.com web site. The theory is that after a good run up everyone knows that the market has come a long way very quickly. As sell offs amount to nothing and the market keeps snapping back, investors who don't want to miss the next leg up get nervous. They know that everyone is bullish but at the time the news surrounding the event is overwhelmingly supportive to higher values. When the price moves above the upper line the urge to buy becomes irresistible. The market usually runs a bit higher as the last man buys then reverses.
If all you had to do was memorize a chart book then pick your winners life would be easy. Here is a very glaring example of a similar pattern that formed after an up move. As it was zig zagging back and forth traders increased their bets on an up side break out. Sentiment was extremely bullish. After the third touch of the lower trend line it looked like it was on its way to bursting to the upside. Instead, it ran out of steam and collapsed. During our month long stock market consolidation traders are increasingly confident in an up side break out just as they were in oil. The painfully learned lesson is that until it breaks out one way or the other you really don't know which way it will go. Currently, odds favor an additional move higher followed by a sell off that takes back some of the gain since November but who knows?
My fantasy trade is something like the lines drawn in on the chart to the left. I anticipate a small pop and reversal following our trading range. The pop might coincide with inauguration day. The intensity of the up move since election night usually leads to another round of buying after a correction as people who "missed it" the first time around feel smart by waiting for a pull back to get in. During the final up move the market thins out with fewer stocks rallying.
Caterpillar was one of the big beneficiaries of the Trump rally. It peaked in early December and its ups and downs are similar to the market averages. If it is making the classical contracting triangle before a final spike higher and reversal then it should have another trip down to the lower trend line before the ending pop. A break of 92 would have me worried that it is going to head lower. It could be a good stock to watch as a harbinger of how the rest of the market goes.
The NASDAQ 100 is trending higher but the number of stocks participating in the move is far less than the chart would indicate. Usually, when a market moves higher on poor breadth it doesn't take a lot to knock it back down. Once the handful of stocks moving it up run out of steam it quickly declines.
The Shanghai Composite is again flirting with a trend line that it bounced off of in the past. A year and a half ago the dramatic sell off in China spread to every market around the world including commodities. If there is a foreign market that can derail our rally it is China so pay attention.
Last time I noted the extreme pessimism toward gold and bonds. It was at levels where they rallied in the past. Both markets rebounded a bit as stocks stalled. The patterns look like they have farther to go. Short term they are both due for a correction . Every week the CFTC releases its Commitment of Traders report. The most recent showed that speculators are still extremely short bond futures contracts while commercials are very long. In the past that led to further gains for the bond market. The reddish chart is TLT, an ETF that tracks longer dated government bonds. I expect it to reach 125 before the move is over.
Above are two charts of gold's daily closing price with an RSI momentum oscillator below. The chart on the left is gold priced in Dollars and the one on the right is gold priced in Euros. High RSI readings do not mean that the market has to sell off but it often warns of at least a short term pause.
This is a 30 day chart of the GLD SPDR which tracks the price of gold. It is from the Investools.com web site. Note the slow stochastic oscillator at the bottom of the chart. Both the measurement and its moving average are near the top end of their range. As with RSI, this does not prohibit the market from going higher. If you look at the history of short term price moves and the level of the slow stochastic you can see that often the market corrected a bit after a high reading.
In December traders were extremely negative on gold despite the price being higher than the previous December's lows. This was a tip off that the market was about to rally. How high will it go? The pattern of the move off of the lows looks more like the beginning of something larger. After a brief correction I am expecting prices to reach the lower purple line in the mid 1,200s. More bullish analysts are pointing toward the upper purple line in the low $1,400 range. Gold is a very emotional market. I subscribe to SentimentTrader.com which keeps track of how positive and negative people are on markets. It keeps me away from jumping in when everyone else already bought. One of the best services on gold is Cyclesman.com. The writer, Tim Wood has been very accurate in picking inflection points.
This is a chart of bitcoin, the digital currency from www.coindesk.com. The recent up move was from Chinese people trying to move some wealth out of their currency which has been depreciating. Last time I wrote about China's debt woes and the government imposing capital controls. Bitcoin is a way to move wealth around the world. Some say that our recent gold rally is also Chinese buying in response to domestic currency instability. The vulnerability of Bitcoin is that it is web site based. The Chinese government can just outlaw it and block the coin exchange sites and transactions.
Gold promoters say that China is selling US Government securities as a way to get out of the Dollar and establish their own currency as the reserve currency of the world. Foreign exchange experts say they are selling U.S. Bonds to raise cash to support their own currency and banking system which is in trouble.
Silver did not do much over the last couple of weeks. Sometimes silver is late to the party and buyers come in near the end of a precious metals rally. When I see silver suddenly surge higher after gold had a good move I take it as a warning that the top is near.
I am looking for gold to correct then have another leg up. If it happens, watch for silver to play catch up.
Platinum and palladium joined the Trump rally. Palladium is doing much better than platinum. Check out the number of palladium contracts traded in a week. It is usually less than 25,000. S&P Futures and Bond Futures trade that much in a few minutes. Palladium is a very thin market. It stalled a bit lately as the stock market flattened. Fundamental analysts like to watch car sales as an indicator of palladium and platinum use because both metals go into catalytic converters. Car sales in December were unexpectedly good. I recently visited a client in the automobile components business. He has decades of experience. He told me that things have been very good for a few years and that he is expecting a slow down. He has no empirical evidence for his opinion, just experience with car parts cycles. I value his experience. It could be a warning for palladium.
Copper and other industrial metals got the "Trump bump." Markets where you can buy things at the click of a mouse are the easiest and fastest ways to express optimism toward the future. That good feeling may peak with this week's inauguration and base metals prices too. If China runs into trouble it will be a big negative for copper and other industrial goods. The Chinese new year is a few weeks away and markets in China are closed for a week. That could elevate any fear of future falling prices and cause traders to act ahead of the shut down.
This is a chart of copper adjusted for changes in the value of the U.S. Dollar Index. Countries buying things in terms of non-Dollar currencies are paying very high prices for copper and other items. If high prices cause a drop in demand then we have to remember that demand for things in currencies that are declining in value against the Dollar are effected.
Look at that correlation in movement between the Dollar Index and the Dow Jones Industrial Average. Wealth is flowing into the US and its target so far is the stock market.
Last time I was looking for a pause in both the Dollar and the stock market. Stocks traded sideways and the Dollar sold off a bit. I am worried that the Trump enthusiasm will peak this month and with it the Dollar and the stock market. I expect a short term low this week in the Dollar and another rally attempt. It seems like I am over hyping the China liquidity problem and capital restrictions but this is a big deal. We could see another dollar jump as wealth thinks the pro-growth U.S. is the place to find safety.
There could be no meaning to this whatever but it is puzzling. JNK is an ETF that tracks "high yield" or junk bonds. Usually they rally with stocks. The last little low and up move is from election time. During the last two months they under performed stocks. Part of it could be because interest rates also went up (bond down) and this kept buyers away. Still, when junk bonds lag I worry that something bigger is going on.
Chart guys like to think their shapes and lines apply to everything. CORN is an ETF that tracks the price of corn. Remember when it was around $7 a bushel? Corn for July delivery closed at $3.72 on Friday. When I was a commodities broker back in the 80s you had to pay attention to domestic conditions and export demand. Now you have to watch crops from around the world. With news coverage and the internet, the rain or lack of it in Brazil or Argentina can have a big impact on prices while our fields are covered with snow. The gyrations of currencies make it more or less affordable for countries in other currency blocks. It seems a lot more complicated than it used to be. If you just look at the price chart it hints of a big move coming one way or the other. If this were a stock I would be hoping for it to resolve with a final thrust lower then a reversal. If I see the thrust lower I will load up on corn in anticipation of a major market low.
Plans for the next two weeks. Above are two charts from the Investools.com web site. The one on the left features BND, the Vanguard Total Bond Market ETF. The right side graph is the S&P 500. They show that following the election there was a huge asset allocation shift out of fixed income and into potential growth plays. Most of it happened in 15 trading days. Over the last couple of weeks demand picked up for the higher yields now available and bonds rallied a bit while stocks stalled. In my last two updates I noted that hopes for the future often outrun reality. Hope is very high for our stock market and the future of business in the United States. Last week a measurement of small business optimism hit a level last seen after the election of Ronald Reagan. I didn't include the stock market chart from 1980-1982 again this week but the market stalled out in the first quarter of 1981 and did not bottom until August of 1982. Every gauge of stock market sentiment is at an extreme and active managers are fully invested. Mutual funds usually keep a small percent of their assets in cash but are now sitting on some of the lowest cash readings as a percent of their total holdings in decades. If the stock market begins to decline they will have to sell stocks to meet redemptions. Here is the S&P 500 VIX in red and the Dow Jones Industrial Average in blue. The VIX is calculated using volatility expectations built into options on the S&P 500. You can Google it to get the exact formulation. When it is low, investors are convinced that it will be smooth sailing ahead for the stock market. The VIX closed last week near record lows. Usually that is near a peak in stock market prices.
Gold and bonds look like they are going higher. I would like to see more of a pull back in both to relieve the technical over bought condition, perhaps as the stock market rallies to a final Trump peak. I am a short term trader so I am not predicting a big stock market crash or the end of the world. I am just anticipating a sell off based on patterns, sentiment and experience.
Best of Luck,