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 25th, 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.
I am writing this while listening to "Rachmaninoff - Piano Concerto NO. 2 (Helene Grimaud)." If you type that into the YouTube search box you should find the proper reading music. Note that the second movement was copied almost note per note in a 70s era soft rock hit. If you are in your 50s or 60s you will remember it. I am bored with the stock market so here are some oddities.
These charts are from the Investools web site. On the left is USO, an ETF that mimics the movement of domestic Crude Oil. On the right is a chart of Exxon Mobil, the stock with the largest weighting in any index of major oil companies. If oil is stable in the low $50 range why is XOM hitting the skids? The latest data from the CFTC shows that speculators have record long positions in crude oil and hedgers have record short positions. Speculators and funds are betting that the OPEC agreement to cut production will result in oil breaking out to the up side of its trading range. Producers and dealers are taking no chances. They are loading up on shorts as a way to hedge what they are producing or carrying in inventory. How bearish on the sector are stock market investors?
On both these charts the black line is the weekly closing price of WTI Crude. The blue line is an index of major integrated oil company shares. The red lines are moving averages of this industry group's weekly performance against other industry groups. The chart on the left uses a five week moving average. The other chart uses a ten week moving average. When the red line reaches an extreme to the down side investors have been dumping the shares for weeks. Usually there are "good reasons" for selling. However, the history of my ranking charts is that when the red lines get to extremely low readings longer term investors are buying the industry group at decent entry points.
Here are two daily charts of the oil, USO ETF. Since the low of the crude crash in early 2016 some see the chart on the left; a series of contracting back and forth moves that should lead to a final sell off that takes crude prices toward $20 per barrel. Bulls see the same formation as a base for some type of pop to the up side as shown by the right side graph. Right now, investors are anticipating lower prices and profits in the oil sector and are selling the companies involved in its production.
Something similar but not quite as drastic is happening with gold and the price of gold mining companies. These two charts are also from the Investools web site. On the left is GLD, the most popular Gold ETF. On the right is Newmont Mining, one of the heavy hitters in the world of gold mining. Look at the last couple of weeks of trading in both. On Friday, gold got to $1,260. Newmont and most gold mining stocks had a bad day relative to gold.. Some analysts say that when mining stocks don't respond to bullion moves it is a bad omen. From the "tape action" it looks like some funds are unloading while they can as gold rallies. My ranking charts on gold are not showing an extreme similar to oil related equities. The red lines on the five and ten week moving averages are in mid range.
The graph on the left shows the daily closing price of gold in NY and a simple RSI momentum oscillator below. It is not at previous extremes but it is fairly high, telling you that lots of buying has taken place already. On the right is a weekly chart with the same kind of RSI reading below. We are coming out of a low reading but are only in neutral territory. High readings on the daily chart tell me to expect short term corrections. When the weekly chart approaches .80 I don't want to be long the market.
If you are a pessimist on gold you see an upward correction that ended at point "c." You note that the recent advance is stalling near $1,255, a .618% retracement of the last down move that started in November and near a congestion range that formed on the way into the "c" top. We need a weekly close well above $1,255 to win over the doubters. Friday's close was $1,256.90.
On the left is a graph of gold, priced in Euros and a simple RSI oscillator below. The reading is above .80. In past markets this was a good time to sell! The alternative is that the Euro will take a jump against the Dollar which will reduce the number of Euros needed to buy an ounce of gold. On the right is the price of gold adjusted daily for changes in the value of the U.S. Dollar Index. This gives me an idea of what the gold chart looks like to buyers in non-Dollar currencies. I notice that in many sessions gold is going up before it opens for trading here in the U.S. There are major European elections this year. Establishment candidates are slipping in the polls and support for a Brexit type move is growing all over Europe. State oriented media refuses to cover the immigrant crime and violence that everyday people have to put up with while the elites favoring open borders live behind gates and walls. Along with the Dollar gold may be acting as a haven for wealth.
Silver closed at $18.33 in NY on Friday. In the chart you can see previous trading action between current levels and $19. Lots of investors own silver at higher prices so pauses in upward momentum will be met with selling. Silver miners and dealers who purchase forward contracts from silver miners are not waiting. The latest CFCT report showed nearly record selling of silver futures by industry participants who see current levels as favorable for locking in profits. Speculators who think it will go higher are on the other side of those trades. Usually, when positions get to extremes the hedgers end up being correct. The other factor to watch is the stock market. Traditionally, a strong stock market is thought to reflect robust future economic activity. Silver is used in circuit boards and other industrial applications. Expectations of a better economy favors future silver demand. If stocks are topping short term (which I think they are), any sell off could dampen the enthusiasm for silver.
The same is true for platinum and palladium. Between the two metals palladium is the winner. Platinum did not do a lot over the last year. If stocks take a tumble watch for these two metals to also gap lower.
People predicting the collapse of the Euro see a panic type move of wealth into the U.S. Dollar. On the left is a longer term chart of the Dollar Index showing a lengthy consolidation following the first series of moves up that ended in the spring of 2015. On the right is a shorter term graph. If we are off to the races then it shouldn't be long before the Dollar finishes a minor correction then heads higher. The danger to gold and other internationally traded items is that a stronger dollar means lower Dollar denominated prices. In the case of gold, escape from the Euro or Chinese currency could help it to the upside. Dollar bears think we are near the upper end of the Dollar's trading range and that confusion over the new administration's policies on taxes and trade put a cap on the Dollar. I am more of a Dollar bull. We are certainly a long ways away from 2008 when books were coming out predicting the Dollar's collapse.
Remember when economic growth was near zero and interest rates were thought to be headed the same way here in the U.S.? Everyone wanted to own gold and longer dated bonds. Rates bottomed (bonds topped) last summer and so did gold. When Donald Trump won, people quickly (within an hour or two) looked at his policies and realized that they were very pro-growth. Who needs longer dated bonds that pay nothing and gold when things in the economy are going to rock and roll? Both sold off and reached sentiment extremes. Gold had a better last few months than bonds. The reddish colored line that stands for bonds is TLT, an ETF that tracks longer dated Treasury bonds. After its initial move off the bottom it consolidated and now looks ready for another rally phase toward 125.
IEF is an ETF that tracks the U.S. 10 Year Treasury Note, the most widely traded government debt. As noted above, bonds look like they need another pop to complete an upward correction. After that I expect them to resume their sell off. Sentiment toward bonds reached a bearish extreme last month with the world expecting higher interest rates. Sentiment is still very tilted toward higher rates (lower bond prices). A quick and nasty stock market sell off could be just the event that causes flight to safety bond buying.
The above charts are from the Investools web site. So how is that stock market doing? Last time I thought it was close to a peak. Well, it depends on what measurement of the stock market that you follow. On the left is the Russell 1000 index. It is made up of large capitalization stocks. Its pattern looks like the Dow Jones Industrial Average and the S&P 500, making new highs last week. On the right is the Russell 2000. It is made up of smaller companies and was the star performer after the election. It did indeed stall out over the last couple of weeks. I liked the pattern so much that I shorted it! So, if stocks go gang busters to the up side again next week you know that I will be drinking chardonnay mixed with tears of regret.
Two more charts from the Investools web site. On the left is the S&P 100 made up of the 100 biggest companies. Last week it traced out a contracting triangle form that is between the red lines. Usually these patterns lead to a final burst of enthusiasm in the direction of the previous trend. On the right is the S&P 500. I put red lines around the expanding pattern formed last week. This is the opposite of the contracting sideways move from the week before but has the same implications for a pending top. I read a few excellent market commentary services. All note that the advance of the last couple of weeks was accompanied by lack luster advance/decline statistics and advancing volume versus declining volume. One, the Elliott Wave Theorist notes that streaks of winning days tend to cluster around specific market events. We just saw 11 up days in a row on the Dow Jones Industrial Average. According to them, when these have been accompanied by poor breadth and volume numbers in the past it preceded a sell off.
Here is my fantasy trade. Both these charts show the daily Dow Jones Industrial Average adjusted for changes in the U.S. Dollar Index. Why? Because much of the buying over the last couple of years was from wealth outside the United States hoping to make money from both a rising stock market and a strong Dollar. These charts reflect both the upward move of stocks and the tail wind from a better behaving currency. On the left side graph there is a purple arrow where I am beginning my count for the current series of moves. Note that in Dollar adjusted terms the February low of last year did not take out the August panic low. The right side chart shows my numbering of the advance. It should be complete after five green waves. The third wave was extended, forming five sub waves. We should be near the end of (3) and ready for (4) which will be a corrective wave that scares everyone including those who were looking for "just a correction" and planned on buying after a brief sell off. After that there should be a final (5) before a larger decline.
Here is some deep Chart Mysticism that you can ignore if you are a realist. Back in the early 80s I read books by W D Gann who died in 1955 at the age of 77. He was a very successful trader in the first part of the 20th century and wrote about his methods. He said that you had to graph markets on a percentage move basis and that the percentage you used to calculate the graph was important. He took a previous large move, top to bottom and figured out what percent to use so that you could draw a "one by one" angled line to fit from the low to the high. He said that this angle of move was important to the market. I started doing this with the stock market based on a percentage that made the "one by one" line in the big moves of the 1980s. Here it is starting in 2002. I now have a one by one and a two by one line intersecting near our current highs. Gann said to watch for intersections of these lines to be turning points. We shall see!
I am still watching Caterpillar as a key stock. After all, if we are not going to be digging and moving stuff then the whole premise of the Trump rally does not look good. Since a day or two after the Trump explosion it has been trading in a range and looks closer to breaking down than bursting out! Let's see how it does next week.
Clever chart of the week!
Every chart guy has a "clever" chart, something that no one else is showing that is suppose to have a deeper meaning. The purpose of the clever chart has nothing to do with the markets. It is suppose to convince you that the analyst who came up with it has special insight into deep events that will effect your financial future and perhaps the course of the world. He must be guy worth paying for this special insight.
Why is gold a fellow traveler with the Hang Seng Index? Both could be a way to escape fiat currencies, one in metal and the other in shares of on-going businesses but I don't really know the answer. It will work until it doesn't. Beware of "clever charts" along with special theories and especially the people presenting them. There is nothing new under the sun. That's Biblical.
Summary and strategy for the next two weeks. Stocks look like they are topping. The breadth and volume numbers just don't look good and smaller stocks that once led are now lagging. We could be in for a rough March. News about European unrest and elections could be the background story to justify it. Gold looks like it should go higher on worries about the stock market but it is already approaching short term over bought conditions so I would not bet the farm on it. Oil company stocks are anticipating a big crude decline. If we don't get one someone is going to have the guts to start buying Exxon and BP and we should get a decent bounce.
Remember my comments about an interview I listened to with Alan Greenspan from last October? He said that there was an unusual build up of M2, hoarding by consumers who were worried about the future. He thought that some catalyst would come along and that suddenly all of this pent up money would come into the economy quickly causing a short term burst of inflation and a jump in economic statistics. If you just watch CNN or MSNBC or live where I do in Massachusetts you would think that the country is in a panic over Trump. The truth is born out in the economic statistics from January. The election results caused a big sigh of relief every where in the country except in a few liberal enclaves and network news rooms. That M2 burst that Alan Greenspan predicted came to fruition. Pent up demand was unleashed in a wave of renewed confidence. As you read above I am predicting a short pull back then a final top before a longer sell off similar to what we had between the spring of 1981 and late summer of 1982 after Reagan was elected. This could be caused from lag between the end of the pent up demand and real growth generated from Trump's policies being put in place.
Best of luck,
D B Edwards