wmeubank@ocp.kcmo.com
FORTUCAST
Currencies
JUNE U.S. DOLLAR INDEX: The G-7 meeting that concluded April 27 did not yield much new information. The G-7 finance ministers agreed that exchange rates should reflect economic fundamentals and excess volatility is undesirable. This rather neutral statement does not give a new direction to the dollar. Secretary Rubin was optimistic that growth will continue in the U.S. without inflation. He vowed that he would cooperate with Japan if the yen continued to fall, but, as usual, no rate guidelines were agreed upon. Currency exports expect that the yen could still fall to 130, which is approximately .7692 on the Mercantile futures. Secretary Rubin's nebulous tone means that FOREX traders will continue to rely on his previous assertion that a strong dollar is good for the economy.
Our longer-term cycles suggest that the downtrend in foreign currencies will continue until at least September. With a rate hike in the U.S. likely May 20 and continued weakening economies in Japan and Germany, a higher dollar is likely. Longer-term analysis of the dollar points to a collapse in the spring of 1998, but we do not know why this would happen at this time. We could see a minor 4th wave manifest on the weekly chart, and foreign currencies could rally in June into early July. But overall, that would be a minor "blip" in a major bear market.
Trading Strategy--Consult daily service for updates. We are approaching a bottoming phase for foreign currencies, and we are likely to start a minor 4th wave weekly chart correction to the upside.
Weekly Chart Trend--Higher to 100.20.
Daily Chart Trend--Consolidating between 93.90-93.70.
Turning Points--Major Dates: May 9, May 19, June 9, June 26.
JUNE JAPANESE YEN: At the G-7 meeting that ended April 27, Secretary Rubin offered Japan support to prevent further weakening of the yen. Most economists anticipate that the yen will fall to the 130.00 level, which is close to our first target of 7671. Our longer-term cyclical target is 7076 into the November time window. Fundamentally, the Bank of Japan would like to support the yen because further declines would add to their current account surplus and damage trade relations. But bank officials have yet to find a workable policy to bolster the yen. Estimated economic data projects a 2nd quarter GDP of about 2%, suggesting that the Bank of Japan will have to continue lowering interest rates.
Technically, a 740-point bounce is likely from the upcoming cycle low, with a recovery into June 26th likely. If we fall to the 7671 region, rallies are likely to stall in the 8400 region. Pinpointing a cycle low for the yen is difficult, and in fact it may already be in. Because the yen is in a transitional phase, we will be cautious about selling it and look to sell a 740-point rally into late June, looking for a fall toward the 7100 region into November. We would start taking profits in long-term June puts.
Major Dates: May 13, June 26.
Minor Dates: May 9, May 13, May 16, May 27, June 2.
JUNE DEUTSCHEMARK: The Deutschemark has been struggling lately and the April 27 G-7 meeting did little to help it. Fundamental value for the mark now rests at the 175.00 level or 5715, with lower prices already longer term. Prices appear to be headed to the 5200 region as late as August or September, with some consolidation possible in May-June. Weekly charts still could allow for a minor 4th wave bounce up to the 6150 region, but it will be largely insignificant.
Fundamentals are still bearish for the DM. The German economy continues to look sluggish, and only cheaper exports are propping it up. Unemployment is at a record high of 11.2% and wage growth is subdued.
Cyclical indicators are mixed for the DM into May 27, with a minor rally into the second week of July followed by lower prices.
Fundamentally, the May target low should hold the 5550 region, but rallies into July may have trouble getting through the 6100-6150 region. As we get closer to a minor cycle low, we need to be tightening stops and taking profits. At this point, it looks like the next best position trade may set up on July 2.
Major Dates: May 25.
Minor Dates: May 9, May 19, June 5, June 17.
JUNE BRITISH POUND: Cycles suggest lower prices into September for the British Pound with sideways or upward action in the near term. Fundamentally, recent economic data--including upward pressure on wages--suggests an improving economy. Even Britain's 15% appreciation against European currencies has not curbed exports. With elections scheduled for May 1, a new rate hike is likely to follow shortly thereafter.
Technical patterns suggest support in the 161.16 region, with a 29% chance of a rally to 167.90. Cycles seem neutral-to-supportive into June 23-25. Sideways action is likely to dominate until then.
JUNE CANADIAN DOLLAR: The Canadian Dollar has continued to free- fall. The Bank of Canada (BOC) does not want to raise rates, which is likely to be a long-term bearish posture that suggests lower prices into September. Fundamentally, Canada's economy has been strengthening, and 1st quarter GDP could hit 4%. Their trade surplus seems healthy, but the BOC is not likely to raise rates given low inflation and a downdrifting economy. First major weekly support is at the 70.95 region and then at the 68.31 region. Rallies are not likely to go above the 72.50 region, and the next important cycle high is due May 8-9. Position traders should add new shorts into highs into May 8-9, looking to hold into September. Consult daily service for updates.
Major Dates: May 9 (high), May 27 (low), June 10 (low).
Stocks
Stocks have recovered on schedule and cycles are still positive into May 16. Our longer-term work still suggests a major negative cycle between May 19-August 15 and a recovery into mid-November.
Our stock market analogue cycles point to the 1973-1974 bear market decline, and that cycle will be condensed into the May-August time window. If the primary cycle is accurate, then the May 16 cycle high is equivalent to the new high made in January, 1973 when the Dow topped above 1000. That still could imply a slightly higher high on the Dow to 7225 and the June S&P to the 838-840 region, but realistically it may only have a 20% chance of occurring. Because the 1973-1974 analogue cycle low led to a 55% fall during Watergate, we are concerned about the potential for a summer swoon as Whitewater takes on more Watergate similarities. We would expect a decline to at least 605 on the S&P futures to the downside.
Stock market internals are starting to act more sickly, with the new highs to new lows measurement deteriorating and the advancing volume/declining volume indicators also in ill health. The Dow continues to be stronger than S&P and NASDAQ indicating a flight to quality in gains concentrated in the blue chips. The lack of broad market coverage on the recovery is disturbing as strong gains in Microsoft, IBM, Phillip Morris, Exxon, and Proctor & Gamble have skewed the recovery and masked underlying weakness.
One can see this underlying weakness by examining the 200-day moving averages. Only 52% of stocks were above their 200-day moving average as of April 20th, whereas last July, when the Dow was 1400 points lower, only 38% of all stocks were above their moving average.
At publication, recent economic data is finally showing some slowdown in the economy. The key wage index, released on April 29, showed only a .6% increase leading to a strong advance in stocks. Still, the NAPA Index remained at record highs and first quarter GDP came in at 5.6%, the highest level in ten years.
The chances of a move to 838-840 are much stronger into May 10. We cannot rule out a double top on the S&P or slightly higher high on the Dow. If economic data continues to be soft, T-bonds could recover higher and pull stocks higher.
Our longer-term work on the stock market looks at the 120-year cycle, which goes back to 1877-1885. The 1877 cycle low was steep and significant, but it recovered with a rally into 1881. We are less friendly about the stock market as we see a major collapse in the dollar next year, and we suspect that we are starting a longer- term bear market into 2003-2004. We need to complete more research on this and we will be in a better position to comment once we hit the August 15, 1997 cycle low.
Portfolios should be hedged with September put options or 1997 leap puts and profits should be taken as the chances of a fall to at least 605 are high.
While we have proclaimed the beginning of a major bear market, we are going to have to close below 717 on the S&P cash to really nail the lid on the coffin. Monthly charts are suggesting that we could fall to a minimum of 670 or a maximum of 575 and still make new highs over the next few years. We are recommending that longs be liquidated before May 16 as we have noted in previous issues. We have too many parallels to 1929 developing to be comfortable in long stock positions.
Trading Strategy--Accumulate September put options and leap put on rallies into May 16 looking to hold into August 15.
Weekly Chart Trend--Topping and lower into August 15.
Daily Chart Trend--Higher into May 16.
Support/Resistance--Breakout: Buy June 828.70 stop with a 826.70 stop.
Breakdown: Sell June 769.80 stop with a 772.80 stop.
Turning Points--Major Entry/Exit Dates: May 16 (high), August 16 (low), November 12 (high), January 24 (low).
Interest Rates
JUNE T-BONDS AND DECEMBER EURODOLLARS: T-bonds fell according to our projected time window but have held major support. We are now due for a bounce into the week of May 5, probably on or around May 9. Our best guess for a trading range during this period is consolidation between 106.15-110.04, with a smaller chance of higher numbers to 111.05. The negative cycles that pushed T-bonds sharply lower have ended and supportive energy will prevent a major free-fall. However we are inclined to expect declines to at least 100.24 or 102.18 into the August low.
Patterns are difficult to read at this time, but if we complete 5 waves lower on the weekly chart, we would still need one more push lower to confirm a bottom. If we do not take out the April low, then a 10% chance exists for a rally to the 117.00 region into the November cycle high.
Fundamentals are so overwhelmingly bearish that if the Fed does tighten one more time, it could spark a rally in the bond market as higher interest rates would slow the economy. We do not want to rule this out as T-bond cycles are mixed and we are at major support and the weekly chart is oversold.
The general feeling in the trade is that the Fed will have to continue tightening the next few meetings as wage sector inflation is evident. The March job report indicated a .4% gain in hourly earnings, suggesting a 4% increase for the year. The next report could show further increases.
While some analysts expect a 1994-type rate increase, that situation is not really comparable to the present one. Still, Fed funds are likely to rise to 6.5% into 1998 despite earlier, more moderate guesses of 5.75-6%. We probably will not see a significant slowdown in the economy until we reach the 6.5% level. The long- term T-bond is likely to fall to the 7.85-7.9% level this year and we expect 8.75% by spring of 1998. Our cycle works suggests a major dollar collapse next spring, and that could fuel a much steeper fall.
Longer term, cycles for Eurodollars point to a cycle high in May and a fall into October. Position traders in Eurodollars should buy December Eurodollar puts or sell futures on rallied into the May 9th time window, or by the latest on May 16th. Weekly chart projects a 19% chance of a fall to the 9230 region. Rallies are likely to stall in the 9364 or 9374 region, with first support at 9320.
Trading Strategy--Position traders can consider September 107 or 108 puts from rallies into May 9 and May 16, looking to hold into the August low.
Monthly Chart Trend--Lower into May 1998.
Weekly Chart Trend--Lower to 100.24 or at least 102.18 into August 1997.
Daily Chart Trend--Bottoming and higher into May 9. Support/Resistance--Breakout: Buy 111.01 stop with a 109.28 stop. Breakdown: Sell 105.21 stop with a 106.21 stop.
Turning Points--Major Entry/Exit Dates: May 9, August 18-25.
Metals
JUNE GOLD: Our longer-term work on gold is still bearish, with cycles weaker into the week of June 23. The first downside pattern suggests 333.70, with lower targets of 317-320 possible. Our lowest possible target is the 292 region. Monthly cycles could allow gold to fall into the October-November time window, so we are going to hold off on any major buying until then.
Technically, if we were to base and bottom in the 333 region or the 317-320 region into June, we could have a 4th wave on the weekly chart and rally back to 370 into August with the peak in interest rates and low in the stock market. If we fail to rally on gold, then a 5th wave weekly chart low to 292 could develop into October- November, when stocks are due to rally to their high.
Fundamentally, metals continue to remain out of favor as investors turn
to equities and bonds. Positive news such as strong retail sales and the
rising PPI on April 11 failed to move the market higher. Even after indications
of a stronger economy demonstrated by the April 15 CPI, gold fell sharply.
The only positive note is that mining stocks are experiencing increased
short-covering. Bottom Line--The downside is limited, but the market does
not appear very likely to rally until late June or July. Speculators can
focus on adding shorts on rallies. Position traders can consider October
call options when gold bottoms in the 317-320 region into late June, then
look to exit into the August high.
Trading Strategy--Follow daily service recommendations, adding new
shorts into May 2 and May 9. Consider October 340 call options from the
June cycle low.
Monthly Chart Trend--Lower to 292 as early as November 1997.
Weekly Chart Trend--Bottoming to the 317-320 region into late June.
Daily Chart Trend--Consolidating between 340-360.
Support/Resistance--Breakout: Buy 372.20 stop with a 365.30 stop. Breakdown: Sell 331.10 stop with a 338.10 stop. Exit 320. Turning Points--Major Entry/Exit Dates: May 12, May 19, June 9, June 28.
JULY SILVER: Silver has been more bearish than we expected and current short-term patterns suggest congestion between 466 and 496 into May 9, followed by another fall to at least the 446 region. The weekly chart is projecting even lower levels to the 4.31 region. The 12-, 22-, and 68-month cycle lows dominate into May, with worst downside cycles centering on May 19, bottoming and basing action should continue into the end of May as cycles appear generally mixed.
New fundamentals have not developed significantly since our last report. The most constructive factor is higher interest rates in the futures. However, higher interest rates can have an initial negative effect as it shifts investors attention to interest- bearing instruments. Declining gold production in Russia and South Africa is one piece of potentially bullish news. Russia is particularly vulnerable because their lack of hard currency makes it more difficult for them to buy spare parts and pay their labor force.
On the bearish side, silver is being hit by massive commercial selling, and commercials tend to be on the right side of the market more often than not. Silver would certainly have great value if we hit our weekly chart target of 4.31. We see the May 19 cycle low as the best time window to accumulate September and December call options. Our long-term technical analysis still suggests a major bull market for silver into cycle highs in May and June of 1998. Trading Strategy--Accumulate December call options on breaks into the May cycle low, looking to take profits into the early October cycle high.
Monthly Chart Trend--Sharply higher into 2003.
Weekly Chart Trend--Higher into October to at least 5.80-6.00. Daily Chart Trend--Bottoming into May 19 to a maximum of 4.31 basis May silver.
Support/Resistance--Breakout: Buy 5.07 stop with a 4.99 stop.
Breakdown: Sell 4.19 stop with a 4.29 stop. Exit 3.65.
Turning Points--Major Entry/Exit Dates: May 2, May 9, May 19.
JULY PLATINUM NOTES: Supply problems have pushed platinum sharply higher on the heels of oversold conditions. Chart patterns are indicative of a consolidation triangle pattern between 353 and 403, with the next high suggesting 394-395, followed by a pullback to 370, and then a rally to 388. That consolidation could take until the May 16 time window, and then a break to 333 could occur into August when the stock market is due for a low.
Underlying fundamentals are bullish due to potential mining problems in the former Soviet Union, but these difficulties may take some time to affect the market. The next important swing to the upside is probably September 1997-April 1998. If platinum does fall to the 330-335 region, it would be an excellent long-term accumulation buy as we are expecting to be sharply higher with the approach of a 6-year bull market in metals.
Major Dates--May 16, May 28 (secondary high).
Energies
MAY CRUDE AND GASOLINE: At publication, the short-term verdict is out for crude, but oversold conditions on weekly stochastics and basing action are positive indicators. Cycles are mixed but generally look supportive into August. Worst downside would be a fall to the 18.43 region, and that would complete 5 waves lower on the weekly chart. That would push June gas to the 5780 region. Once we break the 2040 region, we would quickly accelerate to 2112 and then 2218.
Fundamentals remain bearish and inventories are likely to rise. Only possible refinery snags and Middle East tensions with Iran are potentially bullish. The Venezuelan strike is not likely to have a major impact. The next OPEC meeting is scheduled for May 6-7, with next full meeting set for June 25. Overproduction is again an issue, and Venezuela is not abiding by OPEC recommendations.
European refineries are into their maintenance season, and more imported crude is likely to pressure prices when U.S. refineries hit full capacity.
Strong refinery operations in the U.S. are also reducing the gasoline deficit. Additional refineries like Tosco Corp. coming on line will add supplies. Moreover, gasoline imports from the Caribbean and Europe are reaching the U.S. While gasoline consumption is up from 1996 levels by 5%, it is well below anticipated levels. Fundamentals justify 5760.
We have too many mixed indicators to recommend a major position. Accumulating
long-term call options on dips should be successful, but we need a good
technical rally to confirm bottoming action.
Trading Strategy--Consult daily service for updates and accumulate
September call options on breaks.
Monthly Chart Trend--Sharply higher into 1998.
Weekly Chart Trend--Bottoming and higher.
Daily Chart Trend--Bottoming and basing.
Support/Resistance--Breakout: Buy 20.50 stop with a 19.85 stop.
Exit 22.18.
Breakdown: Sell 19.70 stop with a 20.05 stop. Exit 18.50. Turning Points--Major Entry/Exit Dates: May 1, May 20, June 9.
May 2, 1997
Barry Rosen
Fortucast Market Timing, Inc. P.O. Box 2066,
Fairfield, Iowa
Added to the WWW 05-10-97
Last updated on 05-10-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com