Stock indexes up a bit on light volume, Gold up again

update1029.pngStock indexes put in a mildly bullish, narrow range, light volume day ahead of the Fed rate decision due out on Halloween afternoon. Gold was up again on anticipation of the never ending decline in the US Dollar. On the chart to the left in the upper graph you can see the same broadening formation I’ve been talking about, with the three day pivot still trending sideways. Obviously price can still take out the upper resistance line and negate the potential pattern. It would be quite bearish for prices to take out the lower blue line. Momentum and trends are still up in this market, so will weight the evidence toward a bullish outcome.
In the lower graph is the S&P with more clearly defined swings, both up, then down, and then back up. The channel lines drawn are a straight linear regression line with parallel lines drawn at 1.5 standard deviations. It forms a bullflag, with two points right at the upper line, although the sell-off of a little over a week ago extended a little lower. The markets seem on hold for the Fed decision. It will most likely be .25, but that’s what I said last time and it came in at .50. At any rate, I would think the market has it well priced in. What I don’t think the markets have priced in is crude oil closing in on $100. Maybe it will start looking at that after the rate cut.
You may have noticed a new feature in the upper left corner of this blog. Since a picture is worth a thousand words, I thought I’d save some typing and put in a single picture to reflect my mood of the overall markets. Currently there is a bubble being blown up. I know there are many sectors of the market that are not in a bubble and are flat or in declines. However, a handful of tech stocks, Chinese stocks, and commodity related stocks are getting all the attention, and appear to be in parabolic, blow-off phases. These phases can last longer than anyone thinks possible, and beyond all reason, even if factoring in “this time it’s different.”
Above is the latest Baltic Dry Freight Index, updated as of today. Since this market is obviously in a parabolic move, I overlaid Welles Wilder’s parabolic stop indicator. It has so far done an excellent job of keeping one on the right side of this index. This is a daily chart going back to about March 1st. This indicator does a poor job in choppy markets, or even in normally trending markets, but is excellent when markets are headed to the moon, and of course, when “this time’s different.” I know part of the rise in this index is due to the weak dollar, rising oil prices, and low availability of ships. Still, it is well worth keeping an eye on. It can give a valuable clue to when the great Chinese bubble will finally burst. I know I said I’d have an article posted on this index soon. I have it almost finished and should be up in a day or so. I was out of town and got behind in my writing.
The above chart shows the weekly closing price of the continuous Gold futures contract. The middle graph has line depicting the Commitment of Traders. The blue line is the net position (long minus short) of the large traders, being mostly hedge fund and commodity pools. The red line is the net position of the commercial, or so-called smart money traders. These are both reportable positions. The white line is the net position of the non-reportable, or small trader. The black and yellow stochastic looking line in the bottom graph is the COT-Index of the large traders, which actually is a stochastic, smoothed with a couple of moving averages. This chart only goes back to about the middle of 2003, when the current bull market had already started. There was a time prior to what is shown on the chart where the commercials were net long as the market was declining. It appears at first glance that the commercials are always on the wrong side of a trend, and the large traders are always on the correct side. This is true during the trend. But there are clues from this information upon close examination. Also, it should be noted that commercials often have other needs of being in the market that to purely speculate on price. But when the markets show the division of traders being at an extreme, reversal can often occur. You can see that the commercials are at their most bearish position in years, whereas the large traders, mostly trend followers, are at their most bullish. The small trader is just muddling along making money on the backs of the large traders. (The dashed line in the middle is the zero line, where long and short positions would be in balance.) The COT-Index in the lowest graph helps to identify overbought and oversold extremes. In this case I have the index on the large traders. It is more common to run it on the commercials, but then you have to view it upside down if you relate it to price. I plan to do an article in the coming weeks on the Commitment of Traders data.

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