Better Trader

Dow Jones on target

Today markets are higher on trade optimism, once again the Trump administration boosted the markets. Kudlow said a trade deal with China is getting close. This has been a regular thing since October, they talk about a deal but we are still waiting to see the deal, meanwhile markets rise.

If they keep promising a deal, markets won’t fall. The thing is the Trump administration uses these trade talks to boost markets, each time they say a deal is getting close the S&P adds about 10 points, as they say this several times each week no wonder markets are still going up. The S&P is now over extended, stock markets are ripe for a decline but they are being supported by the promise of a deal.

When the markets are ripe for a decline but they continue to rise, if what is expected is not delivered (the deal) markets will fall sharply because all the good news which is in the price must be removed from the equation. And if the deal is delivered but that news was expected, upside is limited. So we are in a situation where upside is limited but downside is potentially large. Therefore it is not a situation where you want to go long. It is a situation where you want to be short but it is frustrating because the decline is not happening yet. But a few days ago I posted this chart of the Dow Jones. It shows a clear pattern in five waves and the current rally is wave v inside wave (v) ending near 27900. The rally is ending.

 

Stock markets pull back, Fed, US-China trade talks supporting markets

Yesterday the tension between US and China flared and stock markets fell. There is no reason to expect good relations between the two countries, they are engaged in a war that will last many years or until Trump leaves the White House. Meanwhile talks between the two countries are still going ahead tomorrow. Each time the two sides meet markets tend to rise as people speculate on a positive outcome.

Another positive event for the markets is tonight FOMC statement at 7pm. Once again people like to buy ahead of this announcement because a Fed statement in general is never bearish on the economic outlook or the markets. People would be concerned if the Fed became hawkish and in this case markets would fall, but with the slowing economy the Fed is not on path to raising rates, it is more likely to cut rates and take a dovish stance.

I have said many times that people will lose confidence in the Fed, when this happens it will be the end of the bull market in the US. In the past when the Fed cut rates and did QE (stimulus) markets rallied. I believe that when confidence is lost, because people will realise these policies are not working, investors won’t follow the Fed anymore. The Fed will be powerless, and there won’t be anything else to push markets higher. What I cannot say is when this confidence will be lost. It could happen at any time, this month, at the end of year or next year. I will keep monitoring the market reaction to the Fed announcements this will give us some clues.

Some people say this loss of confidence is happening now, let’s see what happens next time the Fed is dovish. In the meantime stock markets are likely to rise until the end of the week.

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Learn to anticipate the direction of the markets

Yesterday I sent a quick message to my clients on the e-Yield app, "FTSE on the 200-day moving average, bullish"

The 200-day moving average is a natural support area, but that was not the only reason that prompted me to issue a bullish view. There were other factors that I discuss below. I also recommended a long on S&P 500 for similar reasons.

The e-Yield app is an instant messaging app, my clients use it to stay in constant contact with me 24h/7days. When I see something I alert them.

Elliott wave pattern

The first thing bullish I noticed was the Elliott wave pattern on the 60-min chart, The decline from 7380 in the FTSE was counter trend because this pattern contains overlapping waves.

 

This pattern is a downward double zigzag [(w),(x),(y)]. This pattern appears when the decline occurs in an uptrend (pullback). When this pattern is complete and below the 200-day moving average the odds of a rally are high.

Sentiment

Market sentiment as indicated by the BTI is bullish. This indicator turned bullish on September 10th. In general when when this indicator is bullish the stock market trend is up.

Gold

 

I believe gold should go down because the previous rally is in five waves. The initial decline to 1483 was the first leg of the decline. The rally to 1535 on Tuesday is the second leg. The current decline is the third leg. As gold and the stock market have been moving in the opposite direction recently, and gold was preparing to turn down to complete the third leg, this forecast on gold supported a stock market rally. Then I needed to confirm my forecast on the FTSE with the forecast on the 10Y bond yield.


US bond yields

 

You need to understand the correlation between gold and bond yields, they move in the opposite direction. If I believe that yields are going to rise then gold is likely to decline. I think yields will rise because what we are seeing is a counter trend rally in three waves [(a),(b),(c)] in yields. The latest decline is wave (b), the next move is wave (c) up. This rally in yields will push gold down and the stock market up.

But this rally in FTSE and S&P has limited upside for different reasons. We are near the end of the rally, not at the start. Furthermore gold is in the third leg down and yield in the third wave up which suggests these moves in gold and yields won't last.

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EUR/USD Forecast

On 21 March the forecast was down see EUR/USD forecast

The pattern appears to be a downward ending diagonal [A,B,C,D,E] and the rally to 1.1448 was wave D. The decline is wave E and this decline is not in a straight line. Normally wave E is in three waves which means the euro should rebound before folling further.

Overbought 34-day BTI

 

When the indicator is above 400 (overbought) the FTSE 100 is near the top. Previous sell signals in January and May 2018 were accurate, the stock market declined. The indicator is now above 400.

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Meanwhile the global economy is deflating, and the S&P 500 is rallying, these two things don't mix well together. When the economy deflates the stock market plunges.  

 

Investors hope the US and China will agree a trade deal. Any rally caused by government stimulus/deals will fade and the stock market will decline to new lows. The difficult bit is knowing when the decline will resume. These government interventions can support the market for longer than you expect.  

 

Inflation is falling which is in line with the start of deflation, I expect prices to fall in the months ahead, prices of goods, services and asset prices. Right now some people are talking about a possible recession in the US. It will take months before the recession starts and months before the depression starts.  

 

The dollar will continue to decline, which means gold and GBP/USD will continue to rally. At the end of the depression a new crisis will emerge, the dollar collapse. The economic crisis will have taken its toll on the dollar, this will probably prompt a run on the dollar and this will precipitate a collapse in bond prices. The result will be inflation and possibly hyperinflation. The dollar will lose purchasing power, the stock market will be considerably lower, it could take ten or fifteen years before the stock market reaches the bottom.

 

This won't happen in a straight line, governments will intervene along the way, in the process they will create some huge rallies like the current one. As you can see there is no hurry to short the market, what I have learned from previous bear markets is that you want to sell high, as high as possible, because there are always some huge rallies caused by government intervention.  

 

The best way to profit will be with short term trading, and if you don't have the time to trade I invite you to open a copy trading account. Here is the link:

 

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FTSE trading

Last week I posted this chart of FTSE 100:

I was spot on.The FTSE fell hard yesterday, down 172 pts. That is what I expected to see in a third of a third. The move is wave (iii) inside wave iii (circle) and it is not over yet.

The trade war worries are intensifying, if Trump thinks a trade war is good for the US he is mistaken. Harley Davidson announced that they plan to move production abroad in order to avoid EU tariffs. If they move production abroad it means the people working in the US will lose their job, the jobs will be created abroad. I don’t think people who voted for Trump will be happy about the move. But this is what a trade war does, the US will lose on many fronts. For example if China puts tariffs on US Beef, Chinese firms will buy French beef instead. If airlines companies don’t buy Boeing they will buy Airbus ...A trade war benefit those who are not engaged in a trade war.

The stock market is going down as a result of the growing trade war tensions because Trumps is going ahead with his plans. He can make a u-turn and the stock market would rally. Or he could negotiate better terms with China and the EU and the stock market would rally. Will he? That is the question. I believe that if the stock market continues to decline he will intervene because one of his objectives is to boost the stock market. So while the forecast is down you need to be cautious when the stock market is too low do not hesitate to take profits. These profits could vanish quickly if Trump changes his plans. I wonder how low the S&P 500 will go before we see a significant rebound. But it will rebound.

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S&P 500 trading tip

On April 16th I recommended a short on the S&P 500 June. I wrote "The low in the S&P was recorded two weeks ago, it is possible the reason why we have not seen a new low in the last two weeks is because investors bought the earnings reports. Now if the trend has turned down, earnings reports will not change that, the S&P will decline. When a bear market is underway the rules change, if good news is expected and the market rebounds, the bears will use the rebound to sell and the downtrend will resume. The FTSE is strong at the moment, probably because the S&P is not going down. But we are near the top."

Download S&P 500 forecast 180416

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FTSE 100 trading tip

Today I would like to point to the state of bullish sentiment on the FTSE 100. Unlike the S&P 500, the FTSE 100 is not near its all time high, yet I think it is doing extremelly well considering the surge in GBP/USD over the last six months. If the pound starts to go down, the rally in the FTSE will accelerate. There is potential for a move to 7450-7550 in the next few weeks. Shorter term it's possible the FTSE will go down near 7200 before rallying.

Thierry Laduguie is Trading Strategist at www.e-yield.com