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 August 10th, 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.

 

 

 

 

Two weeks ago things were lined up for some kind of stock market sell off. Many individual stocks were lagging the major averages while sentiment was extremely bullish. From the middle of July the Dow Jones Industrial Average fell 1,959 points from high to low, a 7% decline in 16 trading days. There were a couple of days with large point drops which set off "end of the world" kind of reactions. This is a chart of the daily closing price of the S&P 500 with a 50 and 200 day moving average. Please note that we are still above the 200 day moving average and that average is rising. Many analysts say that a market that is above a rising 200 day moving average is still a bull market.

As a short term trader I am focused on the next few days of trading. I will be using a lot of shorter term charts from the Barchart.com web site to illustrate my thinking.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is a graph of last month's price pattern in the Dow Jones Industrial Average. On the right is the same time period for DBC, an ETF that tracks a basket of commodities similar to the CRB Index. Investors were already selling "things" as news stories predicted a world wide slow down. When stocks in the U.S. hit the skids they sold everything without discrimination, similar to the selling that hit 11 years ago during the financial crisis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The two most defensive markets, Government Bonds and Gold spiked higher as if the stock market was going to go to zero. One of my favorite investment web sites is Sentimentrader.com. They reported that two weeks ago investors pulled 25 billion dollars out of the stock market. Most likely they also sold again last week. The bullish reading from the American Association of Individual Investors fell to 32. This kind of selling and sour sentiment is what you usually see after a long decline when investors give up on the market. Sentimentrader points out that in past cycles these types of readings led to some immediate back and forth but higher stock market prices six months later almost every time. There were some exceptions but most of the historical precedents pointed to this kind of pessimism as a buying opportunity. Those of you who are long term readers know that I am naturally bearish. I like down markets. Yet, when I see the kind of panic and Armageddon kind of buying in bonds and gold I have to rein in my bearish tendencies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart wonks are still in the Bear's camp. They are looking at the graph on the left and comparing it to text book patterns that identify the expanding back and forth moves following the early 2018 top as an expanding triangle or expanding pennant. Under this scenario stocks should have a shocking sell off toward the lower, declining red trend line. One could also argue for a smaller similar pattern in the making that would lead to one last stock market high and this pattern is shown by the green lines on the left side chart and amplified by the right side picture. Perhaps stocks are making this smaller expanding triangle which could be complete with one or two more weeks of bad news and panic selling. If a few days of large declines caused such panic world wide in the financial markets, a move toward 24,000 would push every sentiment indicator out there into "screaming buy" territory.

 

 

 

 

 

 

 

 

 

 

 

What about the similarities between now and the 1987 crash? In past updates I said I would be worried if the rally continued into late August like it did in 1987. So far, this year's top was in mid-July. August trading has predictive value. If stocks make a big move in August the next year tends to do so in the opposite direction. If we get a quick recovery in stocks over the next couple of weeks with the Amity Island Mayor (from Jaws) telling you that it is OK to get back in the water and buy stocks then I will start to worry again.

Bears like me will point to the yellow shaded area from the 1987 market. Following the initial sell off from August 26th stocks traded sideways for 17 days. When the previous low was rejected on the tenth day of trading, analysts thought that "a good bottom" was in and that the "over bought" readings were worked off enough to allow the bull market to resume. Conditions are very different now. The kind of immediate panic that we saw over the last two weeks warns me to stay away from loading up on bearish strategies except for very short term plays.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The negative side is going to be difficult to hold back! Some of the charts are screaming bearish warnings. On the left is a graph of the SPDR Retail ETF and the Dow Jones Industrial Average. Over time the correlation in directional movement of the two is close. Lately, the Dow pushed higher while retail sold off, a clear divergence in behavior from past history. On the right is Wal-Mart. The price pattern formed a classic contracting triangle, burst higher then reversal. The chart books says that it should decline to at least the mid 80s. That is a long way from where it is now.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is the chart with the purple line marking the distance between the closing price of the S&P 500 and its 40 week moving average. It is still on the high side of its range, an argument for the bearish case or at least a caution against loading up on stocks. On the right is a picture of the NYSE Composite. My long term theory is that it is making a big sideways pattern that will end sometime next year. We were at the high end of the range in July. I would like to see it move toward last December's lows before I commit long term money to stocks. If it gets there I will probably be too frightened to buy!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Last time I wanted to see a slight pull back in gold prices and another advance. I wrote that my weekly RSI reading kept me from embracing the market and it still does. On the left is a chart of the weekly closing price of gold in NY and a simple RSI momentum oscillator below. The correlation between the red line being this high and gold market tops is too consistent for me to bet the farm on gold at this point. Besides, much of the recent enthusiasm for gold has the underlying theme of a stock market crash in the back ground but the level of panic buying in gold looks more like the end of something rather than the beginning. On the right is a graph from the Sentimentrader.com web site. It shows the futures positioning of gold hedgers or "Commercials" in the gold market. Note the extreme level of hedging and its correlation to previous highs. On the other side of these contracts are hedge funds and speculators who are now holding near record long positions, betting that gold will go higher. These types of traders usually load up near the peak and are on the wrong side of markets at turning points.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The left side chart of daily gold prices has a horizontal green line at around $1,574. At that point the length of travel of the rally following point "e" will be equal to the move from the "low" to point "A," a common relationship in these types of forms. The right side graph is very interesting. It shows the price of gold on a weekly basis with the price adjusted for the weekly moves in the U.S. Dollar Index. Some analysts say that gold is a good inflation hedge. Actually stocks and real estate have done a better job at protecting your wealth from a general price increase. Gold is really a hedge against government and the tendency of governments to ruin their currencies. This chart shows what the price pattern in gold looks like to many non-Dollar holders of the metal. It did its job. As the other major currency blocks, Euro and Yen weakened, gold compensated. This is sort of ironic because a decade ago most of the big gold bugs were arguing that the Dollar was going to collapse, driving Dollar denominated gold prices higher. The Dollar did the opposite, keeping Dollar based gold prices in check.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

You can't say the same thing for silver. This is a graph of silver adjusted for changes in the value of the Dollar Index. We got a pop last week but that bout of speculation might be signaling a top in the precious metals world. There are silver fanatics out there and I hear from some of them when I am negative on the metal. The charts speak for themselves.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So what is the real value of an ounce of Palladium? Is it $1,600 an ounce where it traded in July or $1,400 an ounce? The obvious answer is that no one knows. When stocks hit the skids traders sold everything. Short term it looks like it is consolidating for another move down. If my skepticism about another big sell off in stocks is founded then lower Palladium prices could be short lived.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platinum bounced a bit with gold prices but it is nothing relative to the previous decline. If gold tops out in the next couple of weeks when stocks do not go to zero, will platinum sell off in sympathy with gold or rally in celebration of things being better around the world than expected? On the right is a long term chart of copper. Some worry that we are going to return to the pre-China build up price levels of $1.50 a pound and lower. It is unlikely that these levels could be sustained because mining costs are also much higher now and production would drop off quickly at those prices. In the mean time, at current levels "commercials" are buying up more and more copper futures. This is a warning to copper bears that down side moves could be limited, especially if there is no collapse in the stock market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Precious metals fans are watching the Dollar. The chart on the right shows the last month's trading pattern. The mentality of the market is that something is about to break apart. Many believe that the Dollar is one of those items as a world wide recession finally claims the U.S. economy as one of its fatalities. Gold often moves opposite the Dollar. Note the trading pattern between the red lines. It looks like a form that will lead to another drop then reversal to the up side. The currency tail wind for precious metals might be short lived.

 

 

 

 

 

 

 

 

 

 

The low in interest rates was back in the summer of 2016. At that time, Hillary was considered to be the easy winner of the election in the U.S. The Obama policies of increasing taxes, choking businesses with regulation and lecturing the country on our shortcomings had all but eliminated business investment. Corporations and individuals were hoarding cash while the economy was coming to a stand still.

Currently, the economy is doing well. There are "help wanted" signs everywhere. Rates dropped over fear of what could or might happen. Another factor is negative interest rates in Europe and Japan. On a competitive basis, the paltry yields available in the U.S. look good.

In the late 70s traders were focused on the weekly money supply numbers and worried about future inflation. They were afraid of bonds that were paying an annual yield of 15%. Now we are at the opposite end of the spectrum with smart people coming up with theories about why deficits don't matter and how governments can keep printing money without any bond market consequences. I will say it again - The sovereign debt market is the new dot.com bubble. It is just a question of time before rates increase, trapping trillions of Dollars in bonds that pay next to nothing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The world is floating in crude oil. U.S. production is predicted to increase while analysts are talking about a slow down in the world's economy and along with it, weaker demand for energy. Last week the price rose slightly after Saudi Arabia said it would not tolerate lower prices. The implication was that they would cut production to support prices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The hopelessness of the crude oil market is not lost on investors. In any commodity related business, profits are usually geared to the price of the underlying item. The higher the price, the more room for making money. As gloom and doom settle in on the oil patch anything related to it is declining in price. When I see markets anticipating a no hope future I get interested. Exxon-Mobil is approaching the $70 a share level for the fourth time. There is an old trader's saying that when a market touches the same point for the fourth time, expect volatility. Of course, that could be in either direction! Still, with a 4.9% dividend yield and low expectations about the future it isn't the worst bet out there. On the right is XOP, the SPDR exploration and production ETF. It is back to 2009, market bottom levels. No one expects this group to do anything. If fears of an impending crash are wrong this group could rebound. I am trading in and out from the long side, using short term momentum oscillators.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All things agricultural took a hit last week as trade tensions increased. I planned to buy DBA, the agriculture ETF when it hit the red line. It blew right through it so I held off. Now, it looks like a bargain. We have a lot of grain in storage from previous bumper crop years. Some of that will be used up this winter after smaller harvests. I think we are at the bottom of the food price cycle. Buying things when they seem hopeless is every investor's dream. The problem is that when that point in time comes it makes absolutely no sense to buy because there is no supporting rational reason for doing so. That is where we are now with food items.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fantasy Trades for the next two weeks - Investors are pessimistic and exhibiting behavior that is common near stock market lows. I am going to believe that the Shanghai market is close to finishing an a,b,c correction following the five wave advance from the beginning of the year and that instead of 1987 we should be watching 2007 when stocks peaked in mid July just like this year. Everyone was anticipating a new 1987. It was the 20th anniversary of that famous crash. Credit markets were showing signs of extreme stress as pools of mortgage backed securities began defaulting. Most of us assumed the worst going into August because September and October have a bad reputation. The market hit a low on August 16th then rallied into September 4th. Again, those of us with long market memories knew that the time around Labor Day is often a change of trend point so we figured that the rebound was over and October would give us a crash. You can see what happened on the chart above. I will buy another sell off into the 16th!

I will look for gold and bonds to trade opposite stocks. If we have another stock market swoon this week as in 2007 then gold should get a pop and bonds a test of the recent high. Given the weekly oscillator on gold shown above I am going to assume that any rally is a final up move and the same for silver. I will short a gold price approaching $1,570. If stocks bottom later next week then oil related things, shunned and forgotten now, could be a group that rebounds well.

Grains and other food items were dumped last week because of trade wars. In the end it is weather and growing conditions that drive food prices. As we continue into a major solar minimum both should get worse. I am buying these bargain prices.

Best of Luck,

DBE