Two Different Markets

We have two different markets operating in the stock market presently. We have the New York Stock Exchange Index, which is the broadest index of all, telling us that this rally since August 9 has been incredibly weak, as shown by low volume and decreasing advance-decline ratios. On the other hand, we have the NASDAQ market that has taken out the August highs as of Friday’s close. The NASDAQ has been up 6% this week, which makes it the strongest week in over two years. The Dow Jones transports and the Russell index were incredibly weak and could not even attempt last week’s size. The Dow Jones Industrial Average and S&P 500 both were able to retrace to the 78% retracement of the highs of last week. This sets up a move to the downside that should start immediately this coming week. The market has gone nowhere since August 9. Should we take out the August 9 lows we will be looking at a very severe correction taking us down through the October or later December cycle lows. Bear market rallies are very fast and do not last very long. If we have a strong up week in stocks this week then this analysis would be highly suspect.
There was a comparable period in 2008 right after the Lehman Brothers bankruptcy when the market went sideways for 18 trading days. This is what has been occurring recently and whether it has the same downward characteristics as that move is well worth watching. Going below 1100 in the S&P 500 futures would be an indication that we are ready for another down move. This market continues to look bearish to us and is overbought on a short-term basis.
There is a new moon coming on September 27, which have usually been associated with highs, so if the market is making a high on September 27 it would most probably be a chance to get short for the coming week.

Treasury bonds

Treasury bonds continue to hover in the 140 area with a potential target taking it to 151. It’s hard to believe that 30 years ago these same bonds sold for 46 which made a $46,000 investment in $100,000 treasury bonds yielding 8% the best investment of the 1980s. For the past 30 years interest rates have been dropping. Credit cards are available to anyone that can sign his name or make an X. These debts are going to have to be repaid or massive defaults could arise. Destruction of the US dollar is also possible but it appears when push comes to shove the rest of the world sort of likes dollars when the rest of the world is being attacked financially. We are still waiting for an entry signal on the TBT which would get us short the treasury bonds. It will take some time for this pattern to unfold but we are watching it on a daily basis. If I had to pick a trade of the decade for the rest of the 2010-2020 period, this would be the one I’d choose.

Gold

The Gold Bug Index that we featured in last week’s letter has so far shown that the 98% bullish consensus was a little too high. Gold has since corrected over $120 an ounce and is in the process now of recovering a bit. Silver, on the other hand, still looks incredibly bearish and cannot get out of its own way. No matter how much gold rallies, silver does not follow along in the same percentage. The Gold Silver Index is also showing signs of a major top so at this point it is prudent to stay away from long positions in these markets. Even copper was able to rally with the stocks this week which is highly unusual as it has a better than 85% correlation to stocks
These markets look like they want to go lower and not higher.

Foreign exchange

The key to the foreign exchange market is to watch the euro/usd. All the financial press seems to think that the euro is going to hold up and maintain its positions of prominence across the European Community. There is also a small faction that think the euro will dissolve because of the different number of countries it is trying to represent with no common thread to prevent one country from cascading down its debt onto another country. They talk about Greece, Italy, Iceland, and Portugal, but there are other countries that are also wavering on the brink. The world is awash in debt. This debt is what is dragging us down. Not only on a country by country basis but on a global basis. No one is immune from China to the US and Norway to Argentina. We’ve all been borrowing too much money for too long a time and we are going to pay debts eventually. The real sleeper in the currency market in my opinion is to go short the Japanese yen versus the US dollar. The pattern is very similar to what happened with the Swiss Franc / US Dollar when the Swiss dropped the value by 10% overnight making Swiss deposits 10% less for those that just put their money into their bank for safekeeping. Foreign exchange trading is not for the faint of heart and when governments do these types of things it causes havoc, but usually for a short-term basis and then we go back to our daily lives. The US dollar has continued to hold and has rallied strongly from the 73 level. Watch the euro because if the euro drops below 134 it is going to signal that there is much more to go to the downside. This past week the euro rallied over 300 pips but that was coming after a 10 day down move that saw more than 1000 pips evaporate from that currency.

Crude oil

Strong resistance still remains in crude oil at the $90 per barrel level. The 61% level on the daily chart has turned back prices six times in the past several weeks. It will take a strong move above $90 per barrel to get this market moving on the bullish side. I see no reason to be extremely bearish or bullish on crude oil as it seems to be in a trading range between $90 on the upside and $75 on the downside, which happened to be the culmination of the final pattern of the AB=CD pattern.

Technical corner

In my office I have a 4×4 oil painting done by a very famous artist from California who passed away many years ago. Her husband used to come into my office and see all of my little handwritten notes on note pads on my rules and patterns. For Christmas in 1976 I got this lovely oil painting that I treasure most dearly. At the top of the painting is a statement that says “he who knows not what he risks — risks all”.

The following are the 10 Commandments of trading that I try to follow religiously-

1 – never add to a losing position
2 – when in doubt, get out and stay out
3 – plan your trading and stick to it
4 – take equity out for rainy days and those less fortunate
5 – never close a trade without a reason
6 – stops are placed to protect you — make sure you use them
7 – the only true facts in commodity trading are fear and greed
8 – never allow a substantial profit to turn into a loss
9 – distribute your risk equally over several markets
10 – never hedge a losing position

Trade of the week

Last week we suggested that possibly taking a short position in the gold bug index was the right thing to do for highly speculative accounts and so far that has worked. This week the trade of the week is going to be patience – holding no position but waiting to enter the short treasury bond trade. We will live through this one together folks as I think it could be one that will be able to tell our grandchildren about, hopefully, if they’re still speaking to us. The chart pattern is certainly there but the entry pattern is not. We need a correction and then a quick retest to enter the market. I watch this one each day religiously and when we see it we will be ready.

Final thoughts

This week a very famous hedge fund manager, Bill Ackerman, came out and said that the best trading seen in years was to go long the Hong Kong dollar against the US dollar. Currently the Hong Kong dollar is pegged at $7.75 to the US dollar. He feels that the market is going to go to a level where the Hong Kong dollar will appreciate to the US dollar. Keep in mind that China took over Hong Kong in 1997 from the United Kingdom. Nothing really changed politically or financially during that time and Hong Kong has now become the Switzerland of the Far East. Make no mistake about it, the Chinese have a lot of power there and at any time they could do something to upset the apple cart. However, this is a very unlikely event. What is interesting about Mr. Ackerman’s comments is the fact that he was so adamant about it and is willing to share with everyone why he was doing it and what a great trade it was. This reminds me of some comments made by one of the greatest traders ever, Amos Barr Hostetter, who single-handedly trained many of the market wizards and great traders during his tenure at Commodities Corp. which he started in the early 60s. Amos said keep your own counsel. Do not tell everyone what you are doing or why because then you become attached to the outcome and that is a very dangerous situation. Lose your opinion instead of your money which is a famous quote from Paul Tudor Jones.

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