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 12th, 2019

dedwards-1@comcast.net

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.

 

 

As a student of stock market history I look for previous trading patterns that are similar to current moves. In 1987 stocks crashed and recovered without a corresponding collapse in the economy. Earnings the following quarter were good. What bothers me is that when I listen to the financial news I hear many analysts making the same point. We live in a world of constant statistical comparisons thanks to inexpensive computing power and the availability of easily downloaded data. When I look at the faces of these analysts, many are young people who can quickly quote the history but have no memory of what it was like to live through the crash of 1987. As of Friday, our December crash was all but forgotten, a fluke and markets were once again headed higher. The 10% recovery out of the lows of the 26th assured higher prices. To the left is a chart of the post crash 1987 market. The green arrow points to the day that will match Monday's trading. Unlike today, in 1987 those of us in the market were scared to death. There was constant talk of a recession and real estate sales disappeared. For months fear was in the air as thick as a fog that closes down an airport. No one was talking about a "buying" opportunity on TV. For the next five weeks, prices traded sideways then fell toward the October 20th low. I don't hear and feel the fear from Wall Street this time around. They could be right or they could be like the mayor of Amityville in the movie Jaws, telling people to get back into the water because the shark is dead.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All the major averages have a similar pattern from last fall, an initial decline, a sideways move then the plunge into December 26th. The rally since then took the form of an up, correction then second up leg. Bulls will see the left side chart. They will look for any short term decline to hold above the "2" point and for the next rally to take out the peak of "b" as evidence that stocks are headed to new highs. Bears are still worried about the chart on the right. A three legged "a", "b", "c" type pattern is a common counter trend pattern before a market resumes its primary trend. A sell off that takes out the "b" point low will warn that prices are headed lower even if they trade sideways after taking out the "b" low.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Suppose we sell off again. Above are two potential patterns using the NYSE Composite. The left side infers that we are just starting "the big one." The next decline will increase in intensity as far as points in a day and stocks declining. The chart to the right is less negative. Perhaps another sell off will simply be the end to a large correction. Prices will close slightly below December's lows sometime in February or early March but the tape action will be less severe than December's massacre and some industry groups and individual stocks will fail to exceed their previous panic lows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The last update ended with charts of the above two industry groups, Financial and Energy Patch stocks. They were two of the worst performers on the way down and even with a moderate bounce, should have done well. Energy did a lot better than Financial. Bulls on oil and energy are hoping that any "over bought" pause will be temporary with higher prices to follow.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A key ingredient in the December stock market slide was the dramatic decline in oil prices. The 12 day rebound in stocks was accompanied by a similar rally in crude oil. On the right is a chart of Exxon-Mobil, a stock in nearly every institutional portfolio. This is the third time in the last 8 years that it fell below 70. One market theory says that a quick retreat from a price extreme indicates a rejection of that price level. If we head back toward 65 and stay there for a few sessions it will warn of lower prices to come.

 

 

 

 

 

 

 

 

 

 

 

 

 

This is a one month oil graph from the Barchart.com web site. The chart has the look of an item that wants to move higher after some kind of correction. If this market is any good the 48 to 49 level should be good support . A close below 48 will hint that new lows are probable. If you look at the Oil Prices chart above you will see that the sell off carried back toward the congestion zone between "A" and "B." This tips the odds in favor of lower prices sometime in the future. For now my plan is to buy "over sold" dips unless we break 48.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is a chart of the U.S. Dollar Index. On the right is a graph of DBC, an ETF that tracks the Reuters CRB Commodity Index. In late December it seemed like the world was coming apart. The order of the day was to sell everything. Now that the stock market is signaling that the world did not come to an end and a deal might be close with China, investors are buying back into "things." The Dollar is correcting a five wave up move off of last February's lows. As long as it trades sideways to down commodities will have a tail wind behind their prices even if the fundamentals of the individual commodity are poor. I am worried that the Dollar correction will be shallow and finish in the next few weeks. That would once again dissuade people outside of the world of users from getting involved with commodities as an asset class.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The worry I have with my favorite commodity, gold is that it is late in the game to be a buyer. Prices and sentiment are already elevated. A simple RSI momentum oscillator on the weekly closing price in NY is around the .80 level. In past markets this was not a good time to buy. You can point to the 2010 and 2011 markets as examples of when the reading was near peak levels and gold kept moving higher. While this is true, it is unusual.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The RSI readings for both the daily closing price in Dollars and in Euros is also creeping toward .80. RSI on the chart of Gold in Euros in particular has been a very good provider of clues for highs and lows. It is flashing a yellow light to traders warning them to keep their stop loss orders close.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This is a close up look at the trading pattern of the February Gold Futures contract from the Barchart.com web site. If it continues trading sideways in an ever contracting range it will hint of a final enthusiastic burst to the up side followed by a reversal. If you go to the Barchart.com web site, click on Futures then from the list on the left lower screen, METALS. A list of metals futures will come up. Click on February or April Gold Futures. When the chart comes up you can choose the time frame. You can also click on FULL CHART for a bigger picture and when it comes up you can change the time frame and add studies. It is a great free site for end of day pictures. Prices also move intra-day but are delayed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is a graph of XAU, an index of gold and silver mining company shares. When gold is up these stocks rally a bit and when gold pulls back the shares get slammed. Buyers are nervous and with good reason. They were punished regularly over the last few years. If my "contracting move then burst to a high" scenario works out I would expect to see a day or two when the true believers come out of the closet and gold and silver mining stocks jump higher. An oversized up move in these stocks could be a sell signal! On the right is silver. I expect it to follow gold. If I see the move in gold and an oversized jump in silver it will add to my suspicion that the end is near.

 

 

 

 

 

 

 

 

 

 

 

This is another Barchart.com graph.

A couple of years ago I mentioned that palladium was a buy. There was talk of the Russians being out of stock piled metal and car sales (catalytic converters) were good. I certainly didn't anticipate the huge move along with 20% plus lease rates. Palladium is the best market out there. Last month it formed a pattern that would indicate a top in an ordinary stock, one of the contracting type pennants for which I constantly look. Given the news around palladium, shorting it would be foolish. Given the pattern and the big run it had, unless you use the stuff, buying is very risky. Over time, when an indispensable items goes up in price and it seems like it can only go higher, smart people find ways to replace it. One should not doubt that this is the case with palladium. Platinum closed the week at 808 an ounce and there is no shortage. Catalyst researches are likely working on formulations of platinum on carbon to replace the many industrial uses of palladium on carbon to catalyze reactions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is a chart of the interest rate paid by 20 year T Bonds, 10 year T Notes and the spread between the two rates. As stocks plunged investors withdrew money in record amounts and invested in Treasuries for safety. As the market stabilized over the last couple of weeks investors sold their bonds and re-entered the market. If this year's post crash pattern is similar to the 1987 market then we could be in for a month of stalling prices and anxiety that gives bonds a bid in the short term. On the right is a graph of JUNK, a popular ETF that tracks the price level of high yield or Junk bonds. They tend to follow the stock market and enjoy a point of panic selling near stock market bottoms. I put yellow ovals at previous panic lows. Some analyst are adding the behavior of junk bonds to their list of reasons why the stock market made a major bottom in December and is now poised to go up. Back in 1987 no one was talking about buying Junk Bonds but then again, most investors had the good sense to stay away from them.

 

 

 

 

 

 

 

 

 

 

 

Strategy for this week: Two weeks ago I wrote that bonds look like the best short sale. They still do. Last week chairman Powell said he wanted to "normalize" the Fed's balance sheet. That means he wants to sell bonds. If we get some stock market indigestion and bonds rally back toward their peak I will short them again. I don't have the power of seeing into the future so I don't know if stocks have 1. Seen their low and will zoom higher. 2. Will pull back and test their lows before moving higher a la 1987. 3. Will make slightly new lows on less momentum and participation sometime in February or March then move higher. 4. Made their correction peak last week and are headed much lower. There are lots or reasons, based on past market history to believe that choices 2 or 3 are more probable but sometimes, when a set of statistics surrounding previous market behavior becomes suddenly popular it loses its efficacy. I would like to see another pop in gold and silver but any further upside action should be limited time-wise even if it is an out sized move price-wise.

Best of Luck,

DBE