COMMODITY FUTURES FORECAST WEEKLY REPORT Prepared by Commodity Futures Forecast
NASDAQ 100 Busts Support
(November 22, 2000) As the December NASDAQ 100 challenged 2900 again, the downtrend was further defined to project a test below 2800. Now, attention focuses upon the weekly cash chart that forebodes a decline to 2600. This would place the index back to the same consolidation range experienced last year. Essentially, all of the phenomenal progress made during the fourth quarter, 1999 has evaporated. Now, technicians fear the more modest 1998 gains could be tested.
While many blame the current election deadlock, the roots of NASDAQ's problems run much deeper. We are finally seeing the high tech contraction so many analysts expected as long ago as September, 1999! These same individuals fretted over how "they could be so wrong." Witnessing the current retracement, there is an onerous feeling that the last quarter of 1999 was exuberant exhaustion.
Students of past cycles are aware that bull markets can end with remarkable crescendos. The last phase or "wave" is marked by an extraordinarily steep slope and an equally impressive decline. The monthly chart reveals three distinct descending waves. If you believe in a 5-wave or Elliott pattern, there are at least two more rallies and declines before we can seek a bottom. Unfortunately, the final wave using current measurements suggests a move all the way to 1200. In effect, the NASDAQ 100 will have retraced all of 1999 and 1998.
As seen in the monthly cash chart, we are at a critical technical junction. With prices under the support, 2600 territory is, indeed within range. If investors decide to throw in the towel before year-end, the downtrend will rapidly accelerate. In short, it may not be a Merry Christmas for equity investors this year.
The NASDAQ 100 is not the only index to suffer. Announcements by major global automakers indicate that our "core" economy is receding. Year-end incentives have met strong consumer resistance. Behind the scenes, industry experts call attention to saturation, lease cycles, and static model development. The SUV trend was born out of the same demographics seen in the last 1960s through the mid 1970s when station wagons gained popularity. Young families transport "stuff." A lot of stuff needs to fit in a vehicle. Yes, size matters.
But, as children of Baby Boomers grow up, automobile demands change. Parents can downsize and kids look for sporty, not huge. Thus, as Ford and GM battle for the biggest SUV on the block, they may have neglected the natural demographic tendency to move back toward the sports sedan. While I am not an auto industry analyst, these perspectives appear to make common sense.
Equally important is the prevailing feeling that moderation is in order. Consumers are becoming worried. The election flap coupled with plunging stock values paint a less confident picture. And there is more! Consider that natural gas prices have increased 100% in less than a year. Consumers suffer with the highest gasoline and heating oil prices since the Gulf War. In fact, the six-month average price for heating oil, gasoline, jet fuel, and natural gas exceeds August, 1990 through February, 1991...the span of the Gulf War and Operation Desert Storm.
The Federal Reserve is taking energy prices very seriously. The Board of Governors realizes that sparks of inflation are flying. With labor at its tightest levels in more than four decades and energy inflation trickling down into every economic sector (including high tech), the U.S. central bank must weigh a very difficult decision while the country is in the throes of a political crisis.
If ever there was a time to move into cash, this could be it!
Political Idiocy
Both political parties have moved into the realm of idiocy. It is now proven beyond any doubt that the systems upon which our "great democracy" is allegedly based stands upon a clay and crumbling foundation.
For anyone experienced in the vicissitudes of the law is not surprised by the Florida Supreme Court decision to allow the recount to continue. If you believe judges are impartial, wake up. Consider the arguments made by the Democrats that the Federal Supreme Court is in danger of becoming a fortress of conservatism and even radical religious right conviction. As many as three justices will be selected by the next Administration. Woe to us all!
This is not a spurious argument. Despite the fact that the Court deciding Roe versus Wade was a conservative court, we can see how any court can wield enormous power over our daily lives. Assuming the Florida Supreme Court decision stands, it may be our judges who decide our next President.
Regardless of your preference and political persuasion, the rhetoric from both camps is highly destructive and dangerous. I believe it is outrageous that Gore and Bush would allow their spokesmen to raise the election controversy to the level of testing our entire democracy. This is idiocy at its best.
The American people should be evaluating the facts. First, the Florida Secretary of State is partisan...period. Second, the Florida Supreme Court is partisan...period. That's the way the system works. Like it or not, we all must live with human nature and the political influences. Given these obvious facts of life, the system is operating just fine. Both camps are going to use every tool at their disposal to win. Let the best strategist attain his goal. But, stop with the "end of democracy" foolishness.
If the partisan Florida Legislature convenes to overrule the Supreme Court, that's the way the system works, too. It is not dirty politics...It is politics at its very best. Rather than condemn the process, we should take pride in the incredible way we work through this mess. Do we really want our politicians to say that the greatest democracy in mankind's history hangs in the balance of this election? I think not!
Wake Up Gold, Please!
Through financial market turmoil, precious metals proponents are calling for a gold revival. Indeed, this week has seen a mild move off presumed support around $265 in the December expiration. Yet, technicians are skeptical because this pattern could simply represent another continuation flag for a leg down to $240 when examining the weekly chart.
Few would disagree that gold is testing a $265 double bottom indicated by the September 1999 and November 2000 prongs. However, the December daily chart provides a different vantage point that is arguably as valid.
Drawing a longer term trendline From the June/July triple top, the intercept line appears at $272. The consolidation "flag" appearing on the weekly chart views as a "rounded bottom" on the daily with resistance at approximately $270. A breakout above $270 points to a challenge of the $272 trendline intercept. If breached, the next objectives fall in line with four tops made from August through October.
Fundamentally, stock market advocates point out that the 1987 October crash did not move investors into gold. Rather, U.S. debt was the near-term beneficiary. It is true that the 1987 meltdown was so severe that liquidity for holding precious metals diminished to the breakpoint. Indeed, if you do not have the funds to move into gold, gold won't move!
Gold bugs are quick to draw a distinction between the crash of 1987 and today. Back then, there was not a 10-year plus bull market that built liquidity potential to unprecedented levels. The "wealth factor" was proportionally less. Further, the crash was a limited time event that was quickly met by the Federal Reserve's money pumps. This time, the equity decline has been over a more protracted period...albeit equally impressive. Investors have time to weigh options and gold is an alternative to deteriorating paper markets.
The problem is that today's investors are not as familiar with gold and silver as in the past. Even Baby Boomers in their late 40's and mid-50's are not from the gold generation. Consider that gold was legalized in the United States in 1975. An investor who is 45 years old was only 20 when gold became available as an alternative to paper. The "Go-Go" years for precious metals ended in 1980...a very short-lived five-year span. Thus, there is hardly enough history or experience to suspect a mass move into precious metals...gold, in particular.
Still, for the over 60 crowd, gold is fondly remembered as the "Value of last resort." We may not be there yet, but it can't hurt to take a protective stance. Do not be surprised if government divesting slows or halts. A temporary squeeze is not beyond reason under today's intense uncertainty. Further, as energy prices continue impacting inflation perception, gold is bound to get a boost.
The technical downside to $240 represents a $2,600 exposure. If the "rounded bottom" interpretation holds true, gold should rally to meet $272 resistance and test above $282. Thus, the upside to $272 is $600 while the thrust to $282 brings in $4,200. The risk/reward is slightly tipped in favor of trying the rounded bottom as long as we can move the stop to entry as $272 is neared. There is no need to wait for $240 before bailing on a stop.
Cocoa Suffers Multi-Decade Lows
It just goes to show you, there's no such thing as too low unless a raw commodity price approaches zero! This was true for sugar when it tested below 3 cents...true of palladium as is crashed below $60, and true of coffee when Brazil dumped prices down below 50 cents. Of course, what goes down should eventually recover. While cocoa is not an "essential" product, it remains the precursor of the world's favorite luxury edible.
Here, the technical picture shows signs of a consolidation flag at the bottom of the steep decline generated after support below 780 was busted. A case can be made for bottom forming since the slope of the flag is in the downward direction to suggest exhaustion.
The danger that cocoa is making a 50% marker toward a test of 630 is a fundamental stretch. Yet, bottom fisherman have been severely wrong before. I am inclined to try a long position despite the obvious prematurity based upon the 20-day and 40-day moving averages. With cocoa, it is difficult to wait for a recovery to 740 before venturing into the long side. The 40-day average is just below the clear support/resistance line. If tested, I would not be surprised to see 800 back on the chart. Can this objective be made in the December expiration? It would be a spectacular rally. I prefer to give myself some time by moving into March.
November 22, 2000 Philip Gotthelf Commodity Futures Forecast P.O. Box 566, Closter, New Jersey 201-784-1235
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