Another overall summary – but first a couple of housekeeping matters. I have been asked why I put so much emphasis on the SPX rather than the Dow. Well the SPX covers the five hundred biggest companies in the US whereas the Dow only covers 30 so that the move by any one stock can distort the picture for the remaining 29. I actually run charts on the Dow but I put more emphasis on the Russell 2000 which covers the next layer down from the SPX.
Also been questioned why I don’t put more emphasis on the Australian market. Unfortunately at the moment our market is playing a very minor role and is being buffeted by movements elsewhere. But there have been times when I have found it to be a lead market – just not at the moment.
Have to start with the US dollar again as that seems to be the main controlling factor. In Thursday’s comments, I felt that another bounce was due. Unfortunately it has had the same effect again with virtually everything heading in the other direction. Looks like the dollar will go higher.
The SPX turned down sharply justifying my earlier concern. As we all know the SPX slightly exceeded the high set earlier this month in trading over recent days. I have been having a few hassles over the past month or so in trying to decide just where we were in terms of Elliott Wave. Now for those people who are not familiar with Elliott, its greatest negative is the fact that it is often possible to come up with a number of alternatives – unfortunately it is currently just that situation again. I have one bullish alternative and two particularly negative ones. Other people might well have a number of other alternatives so it is really a case of monitoring markets as we go forward to see which will play out. I really do have a love/hate relationship with Elliott. The most popular alternative and possibly because it is the most bullish is that we have done a series of one, two waves leaving us now at the early stage of Wave 3 which is always the most bullish of all. I hope it wins out but the fact that we just exceeded the last high opens up other more negative alternatives – that we have just completed the E wave of an A B C D E marking the end of a B wave or wave 2 up or it is a double zig-zag. Both these alternatives call for a sharp move down. So that is my picture on Elliott. As I said, every other analyst will have a different picture.
Fortunately there are other ways to carry out analysis and I am always acutely aware of sentiment. I have mentioned before that I thought it was extremely encouraging that Wall Street strategists were recommending their lowest allocation to shares in fifteen years. That suggests to me that there is a lot of money on the sidelines that could be tempted back into the market very quickly. Also that any correction here might well be VERY short lived.
On the other hand, my Genius Index on last week’s figures was at the highest level since the top in the SPX at the end of March/early April. That is a negative.
I mentioned the Russell 2000 above. That turned down sharply along with everything else on Friday night but it was in such a hurry that it actually left a gap. It normally fills gaps but I was not at all impressed with its behaviour particularly as it was unable this week to exceed the early July high. Unfortunately I have to count that as a negative until it can give me a more optimistic signal.
Gold was interesting – this is the first time that it has recently been able to go with the move in the US Dollar. Grains were stronger again which I have been seeing as causing food inflation further out which I thought should have been a plus for gold but up until now the market didn’t seem interested. Something seems to have changed in the latest session. Nothing confirmed yet but at least it is a step in the right direction for gold.
Another thing to keep an eye on is the gold/silver ratio. The figures are posted every day on the Kitco site so I have been plotting them for years. Moves in precious metals are usually led by silver and Friday night saw this ratio right on the downtrend from the March high. This ratio has been in a major downtrend since the high in gold last year. This is a terribly exciting chart. Gold stocks have been underperforming the metal for ages and the charts tend to suggest that stocks might actually do a lot better if gold has another surge. Next few days will be crucial.
Copper was very worrying – One of my indicators on copper is causing me concern. Can I suggest that everyone check the stocks on the LME – not just the past few months but the five year levels. Copper isn’t so bad but some of the other metals have very high levels.
Iron ore prices came off sharply again last week – down $6.50. Coal was a smidgen better.
I cannot begin to emphasise just how important trading this week is going to be as we try and work out where the world is heading.
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