There are several things to keep in mind this week as we are trading which will have some impact on decisions we make. I am going to start out with the Dollar. Tonight the dollar has broken the intermediate cycle trend line to form a failed intermediate cycle. This tells us the dollar is in a yearly cycle decline.
This was only week 12 for the intermediate cycle, so we could still see the dollar trend lower over the next 3-10 weeks before it finally reaches its intermediate cycle low. This could have enormous consequences for our stock and soon to be metals trades.
Breaking below the previous intermediate cycle low could potentially trigger a bloodbath phase. Weakness in the dollar is good for stocks and commodities. This drop should help halt the blood bath happening right now in gold and silver and create a buying opportunity. Metals blood baths typically last 5-7 days and today is day 4, so I think we see gold bottom any day, probably in the 1700-1750 range and silver near the 200 DMA around 20.50 level sometime this week. We will likely be buying gold and silver later this week and Platinum as soon as tomorrow.
Once the dollar bottoms, it will likely coincide with a short term peak in commodities near the 168 resistance level on the CRB index some time maybe in January or February.
So to summarize, my expectation is that we will see the dollar drop into an intermediate cycle low over the next 3 to 10 weeks. This will help the stock market continue higher and will help usher in a new intermediate cycle with gold. These will be the areas where we will focus our trading.
The Commodity Research Bureau (CRB) Index acts as a representative indicator of today's global commodity markets. It measures the aggregated price direction of various commodity sectors. The index comprises a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture, 7% to precious metals, and 13% to industrial metals. The CRB is designed to isolate and reveal the directional movement of prices in overall commodity trades. The CRB is to commodities what the Dow Jones index is to stocks.
This is a weekly chart of the CRB index. The previous commodity bull market was capped by $150 crude oil back in 2008 which brought on the great recession. Commodities have been in a bear market ever since. Notice how the 200 Week Moving Average has been turned lower. I do believe however that all this changed when the commodities markets bottomed back in April. I think we are in the early stage of a new commodity bull market.
It is plain to see that since April the CRB has soared much higher. In many ways it had no where to go but up. Remember how crude oil was below $0 for a day or two? Since then, not only have we seen energy prices come back, but we have also seen agricultural commodities and lumber make some pretty ridiculous moves. These moves will soon turn the 200 day moving average back up and usher in a new bull market which should last several years. The chart below is the daily chart zoomed into this past year.
The stock market has been on a bull run since 2009. As commodity prices turn higher, the increased costs will soon begin encroaching on company earnings. This process is happening now and it will ultimately hurt stock prices. Commodity bull markets usually happen at the expense of stocks as liquidity flows from one asset class to another.
I believe we are beginning this transition period from stocks to commodities again. Those of you who are old enough to remember what happened to the NASDAQ back in 1999 - 2000 will remember that tech stocks soared into a bubble that was fueled by internet stocks. They called it the Dot Com bubble as stocks rose to ridiculous heights despite virtually no earnings.
The bubble was fueled by a speculative frenzy of people who wanted to get rich quick and were pouring every dime they had into companies with no earnings. Today's bubble is being fueled by trillions of dollars of stimulus that was literally printed out of thin air.
The following chart shows what the stock market did over a 3 year period. The bubble began with a sling shot move out of a low like we had in March of this year. The market consolidated a while just as the market today has for the past 3 months. Then the bubble began in earnest for another 5 months or so. Once the bubble popped, the market fell back to the same level that it was to begin with.
It took almost 18 years for the NASDAQ to recover the Dot Com highs but in less than 3 years the NASDAQ has already more than doubled in market value.
To replicate something like this today, the following chart shows the current NASDAQ chart. A breakout out of consolidation will usually double the previous move. The previous move from the March low was around 5400 points. That would project the price in the 17,500 area. A more conservative value would have the NASDAQ at the 161.8% Fibonacci extension area. My guess is that the NQ will eventually go somewhere in this zone.
Bubbles typically take decades to recover. The only asset I have seen that has bucked this trend has been the rise, fall and rise again with Bitcoin. I really can't think of another asset bubble that has recovered so quickly. You can see from the chart below that it took nearly 18 years for the NASDAQ to recover from the dot com bubble. Since recovering, it has more than doubled in just over 3 years. The rate of gain is accelerating.
My theory is that we are in a transitional period where stocks will enter a bear market in 2021 and the commodities market will be in a recognizable bull market. I think we will see enormous price appreciation in stocks over the next 4-5 months but we will probably see commodity price appreciation as well.
I see enormous opportunities this next year but it is not going to be easy...it never is. Riding a bubble using the leverage we use in futures will be difficult. Cycles and sentiment don't work well in bubbles. Our best forecasting tool will probably be history as it always repeats itself. When your waiter at your favorite restaurant begins giving you stock tips it will be time to move over to commodities....especially precious metals where the next bubble will occur.
Friday stocks and metals closed above their respective 10 day moving averages. This is usually a very bullish sign. Today stocks gave up early gains all day and gold lost everything it gained last week closing back below the 10 week moving average.
Today's price action with gold indicates that either the September ICL is stretching or that the new Intermediate Cycle just left translated
And nothing has trended in stocks or gold now since the end of August. Everything is trading in a sort of volatility box. No trending move. Just a sideways grind. Here are the stock indexes.
Energy has given us this.
Metals have given us two volatility boxes.
How about some currencies again?
The grain markets are all trending, but that train left the station long ago. Realistically how much higher can grains go near term? Three months into a rally is not the time to be buying anything.
Here are the facts as we know them and they change daily. Today we got word that a vaccine was affective against Covid-19 that should mark the eventual end of these draconian lock downs. We may or may not have a lame duck president. With the election behind us, there is not a lot of interest now for additional stimulus. Stimulus has been the fuel driving the stock market to new all time highs this year.
At any rate, if there are such things as cycles any more the best guess for new daily or intermediate cycles will be in mid to late December. I have not forgotten how to trade, but I am admitting that none of the tools I have are working. In normal election years, the election marks a turning point for new cycles.
Tyler, Conny and I take very seriously the trust you have given us to guide you through the difficult complexities of futures trading. We have not made any recommendations on trading any assets we are not trading ourselves, so we know how painful the past few months have been. We are re-evaluating our strategies and will keep you apprised of changes we make.
We are very near the ICL in various markets. This will be the time to start into positions which should rally in the months ahead. That said, I don't have to point out that there is extreme volatility out there. We have no traders long stocks, energy or metals currently so we will all begin new positions with weak hands, meaning no trading equity to ride out the volatility. The point I am making is that we will need to begin our new positions small. There will be plenty of time to continue adding to our positions as our hands become stronger and we can hang in there through down days.
Of the three big markets that we prefer to trade, Energy appears the most ready to give confirmations of tradeable lows This morning we are seeing exhaustion candles forming in oil and gasoline. We will soon get swing lows and buy signals from the CCI. Once we have these we need to be buying into the energy space.
In the current political and virus infected environment we will have a lot of volatility. As important as it will be that you step in and buy, it will be just as important to keep your positions small. Just be prepared for when we broadcast when to buy. Plan your trades now so that you won't have an emotional decision to make once you get the call. The margin requirements for the various energy contracts are listed here.
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