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 September 7th, 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.

From my September 25th update:

"Strategy for the next two weeks: Everything seems to be driven by the stock market. The theme is that the sky is falling and the only places to hide are bonds, gold and silver. This type of sentiment is usually seen nearer the end of a move than the beginning. My tea leaves have me looking for some kind of tradeable stock market low over the next two weeks and top tick for metals and bonds. There are plenty of good sectors and companies such as energy that could rebound nicely if I am right. "

It was one of those two week periods when the markets followed my script. Remember, everyone has a batting average. I am now above my long term record. That means that I am likely to hit a period of time when I can do nothing right and my best guesses will lose money. Time to reduce my positions so that when I hit my losing streak I do it with less money on the table.

In the last two updates I wrote about the dichotomy between text book chart patterns that are warning of a decline and sentiment readings that coincide with previous buying opportunities. These are still in place. Let's review by looking at the patterns first then some evidence for buying.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The best text book chart fit for the trading pattern since January of 2018 is shown on the left, an "expanding triangle" or "expanding pennant" form. Traders sticking to text book perfection are looking for a startling decline toward the lower red trend line which would imply big losses for anyone in stocks with nowhere to hide. Within that larger pattern is a smaller form of the same kind shown on the right. The rebound in stocks last week did not disqualify either of these two patterns. Hard core bears will stick with the book.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It is still worth watching two other previous years and comparing the action to this year's chart. On the left is the infamous 1987 pre-crash set up. Unfortunately it correlates well to our current year's form. On the right is the trading record from 2007 and it continues to be a better fit. The July high was on the same day, the initial decline within one day of this year's and the subsequent moves similar. In 2007 there was a rebound high on September 4th followed by another nasty sell off that lasted four days. So far, our rebound peak was Friday the 6th. Let's look at some sentiment measures that argue for little down side risk.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Both these charts are from the Sentimentrader.com web site, a subscription I gladly pay for because it looks at current market events and compares them to previous cycles. Many times you will see the financial media or news letter writers obsessed with a particular number, claiming it has great implications for the market. On Sentimentrader.com you find that in past periods when the same set up occured, the market action was equal to random or the opposite of what the press or market pundits are claiming. I will read a news letter and think that the market is going to crash then I read Sentimentrader and avoid a mistake. On the left is a graph of the put option buying by small traders. These guys tend to get emotional at tops and bottoms and bet in the wrong direction. Put options make money when the market goes down. On the chart you can see the correlation between put buying at high levels and future stock market direction. The chart on the right measures investor's preference for avoiding stock market risk by taking money out of the market and parking it in bonds, cash and other things such as gold and inverse ETFs that profit from down moves in stocks. Note the current low reading in Risk Appetite and its previous correlation with low points in the stock market. These graphs are tempering my normally bearish inclinations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Two of the best performing stock market sectors are defensive groups, Consumer Staples and Utilities. On the left is the Consumer Staples SPDR. Its top holding is Proctor and Gambol then Coca-Cola then Pepsi, three big companies selling things we buy regularly. On the right is the Utilities SPDR. History shows that when these two sectors greatly out perform the broader market we are in a period of great worry over the economy and often near a low for the broader market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compare those charts with the two above, XLI, the SPDR Industrial ETF and JETS, an ETF that tracks airlines. The best fundamental reasoning out there says that companies which rely on selling things into the world economy are impacted by the general slow down outside the U.S. that started before the tariff wars and is made worse by them. Firms that do most of their business within the U.S. (outside of the financial sector) are still doing well. Last week the ISM purchasing managers index slipped below 50 for the first time in a while. Stocks hit the skids that day. Before the next session opened the ISM purchasing managers survey for Services was released and it is still doing well reflecting a robust domestic economy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Did we see "top tick" in gold and bonds? It is too early to say for sure but all the ingredients are there for last week to have started a major decline. Even if we get another rally attempt, if it takes out last week's highs I would expect it to be terminal. The bond futures chart on the right is from the Barchart.com web site.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

My price target for the gold rally was 1,590. That is the level where the move from "low" to "A" would be matched by an up move from point "e." We got to 1558. Was it close enough? On the right is the weekly chart of the closing price of gold in NY and a simple Wilder RSI momentum oscillator below. I drew in a light blue line at the 2011 top. Note that the RSI reading hit a peak close to the level we had last week prior to the final 2011 top. It could be that we see a similar pattern this year. The RSI reading and price patterns say that this is a high risk market for now.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is TLT, an ETF that closely tracks longer dated U.S. Government Bonds. It fell sharply last week when stocks didn't collapse. On the right is a graph of the daily returns on both Ten Year Treasury Notes and Thirty Year Treasury Bonds. Remember, billions in over seas government bonds have been recently bought that have a negative return if you hold them to maturity. By late in the week there were reports of worry by portfolio managers who own these negative return securities and even recent buyers of our bonds who were convinced that when stocks crashed more money would chase after the bonds they just bought. When stocks rallied instead they had to ask themselves if they bought the top. I continue to believe that the world wide bond market is the next dot.com bubble.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I wrote that often, when silver finally gets a pop it signals an end to the metals rally. So far, the gray reaper is following the script. The metal lost a quick Dollar and a half in a couple of days. When something makes a parabolic up move there are lots of early buyers who are ready to dump as soon as the momentum turns. If stocks sell off a bit next week the metal could rebound a bit but buyer be warned. On the right is a longer term graph of silver prices. We are still near the lower end of the trading range of the last decade. Millions are sitting on metal bought at higher levels and anxious to get their money back.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is a recent picture of the U.S. Dollar Index. Whenever it pulls back people start talking about an end to Dollar strength. So far it is within the trend lines formed by past highs and lows. Until there is a definitive break of the lower lines you can't count it out. To the right is a longer term graph of the Euro versus the Dollar. When it rallied from around 1.05 it looked like a five wave advance that would be followed by a correction then another five up. Sentiment toward the Euro is very negative and at levels where it bounced in the past. I am a Euro bear and believe that the currency will eventually collapse. Still, I can't ignore the current sentiment extreme and chart pattern that is in line with a possible rally. Gold fans say that if the Dollar declines, gold will go up. Gold rallied while the Dollar was in an up trend and the Euro declined. If the opposite happens then it could be negative for gold. It might turn out that much of the gold buying was from worried Euro holders anxious over their currency and when it turns up they will have less reason to own gold as a substitute.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I am in the palladium and platinum business but won't trade palladium. One hundred Dollar weekly swings are more than I can stomach. Watch the red trend line. A break will have chart based traders selling the stuff. No one knows why it goes up or down the way it does so chart reasons are as good as anything else. On the right is a chart of platinum in blue and the price spread between platinum and gold in red. It recently hit an extreme. Old timers say that when gold gains against platinum it is a sign of worry. When platinum does better than gold it implies a strong future economy. Platinum is up $100 since mid-August and the negative spread just contracted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Both charts are from the Sentimentrader.com site. On the left is a seasonality chart of cotton. It looks at past prices over a yearly period and tells you the average path. We are around the seasonal lows. On the right is a picture of the positioning of a sector or cotton futures traders who are involved in the physical cotton trade. People involved in commodities markets are usually holding the physical commodity and selling short the futures as a way to hedge against a price decline in the item that they hold. People in the cotton trade are long futures, wanting to lock in current prices. In past years they did this near low points.

 

 

 

 

 

 

 

 

 

You are thinking, "He keeps showing that useless chart of DBA, the ETF that tracks a basket of agricultural commodities. Corn, soybean and coffee prices are hopeless. There is an endless glut of these things and the trade wars are giving them an additional flush down the price toilet."

I worked for a Swiss gold refinery from 1988 to 2005. I remember waking up one night in 1999 when gold was trading near $250 an ounce and saying to myself, "There is nothing keeping the metal from falling to $50 an ounce tomorrow. If it does I won't have a job." That was the week of the low.

In 1982 I was working for E.F. Hutton, the country's second largest stock brokerage firm. I spent all day, two nights a week and Saturday morning cold calling businesses and people in wealthy neighborhoods trying to get them to buy stocks. The market had gone nowhere since 1966 and investors bought during upswings then lost money on the sell offs. Interest rates were still high, the country was in a recession and there was no reason to buy. It was August. On a wall in the office was a large horizontal display of stocks as they traded. The "tape" moved quickly across the screen showing the symbol and the shares traded and the price when volume increased. On these August days, with the Dow approaching 882 the tape barely moved. Sometimes it just stopped for a few seconds. When I reached a potential investor and tried to pitch a stock they would laugh at me and hang up. I remember thinking, "This is useless." August of 1982 was the low.

 

 

 

 

 

 

 

 

 

 

 

Strategy for the next couple of weeks. - The chart patterns are warning of a decline. Sentiment indicators are flashing "buy." I have no special insight into which one is right. A way to avoid it is to say that short term we could be in for some violent swings as the market sets up for a major rally phase. It is a nice word picture but useless as a guide for making any money today.

I am hoping that there is follow through to Friday's surge as over the weekend investors worry that they are missing out on a rally. On the chart to the left are two vertical green lines of the same length. There was an up move, a consolidation then another up move. 3,005 is the point where the current rally will be the same length as the first up move. If we get near and prices are running out of steam, I will short stocks. I am going to bet on a continuation of choppy markets with metals and bonds moving counter to stocks. I will play them only from the short side for now. I am adding to DBA piece by piece and trading in and out of cotton from the long side.

Best of Luck,

DBE