The impact of world stock markets on the U.S. has become very apparent in the past few months. Economic turmoil in Southeast Asia, and more importantly Latin America, is starting to create a domino effect on the U.S. stock market. Trading this market has become more and more difficult, with sharp gaps higher then lower.

Over longer-term work still suggests lower prices into January 20. The most friendly interpretation would suggest a large and extended consolidation occurring in a 4th wave weekly chart triangle between 844-980. However, we are inclined to think that we will break to much lower levels.

In our analogue cycle, we fell from Dow 1024 in 1976 to Dow 746 into 1978. We think that a fall to S&P 781 or even 715.50 is possible given the fact that the market is acting more like it has completed a pattern from the 1994 low. If it has not, we will probably hold above the 803 or 830 region and then make a new high into July 1998. In the analogue recovery cycle, we recovered back to Dow 1008 into 1981.

How does this translate? As best we can see, we would at least recover back toward the 980 region into the spring or early summer.

From an Elliott Wave perspective, we are finishing off a 3-3-5 pattern from the october 28 low that could move as high as 975 or 9880, with a primary high in the November 12-14 time window and a secondary high into November 26. We see sideways congestion in early December, and if we breakdown, it would appear to start accelerating from December 15 into January 20 to complete a “C” wave. Major cycle lows for the stock market are centered into January 20, 1998, August 1998 and into 1999, but I suspect it will be safe to be in this market until at least April or July 1998 once the dust settles in January.

Economic turmoil in Southeast Asia is more likely to impact the earnings of multinational companies while continued strength in the domestic economy should support favorable corporate earnings. The potential for a strong Christmas shopping season exists, providing stocks do not tumble.

But given the domino effect and two volatile minor cycles peaking in December and early January, we do not see much upside potential until after the January cycle low.

Our longer-term work into 1998 suggests continued congestion between the November high and the January low into July 1998. Because our dollar cycles suggest a major crisis in April 1998, when metals bottom, we have reservations about holding beyond that point.

Our broader concerns with the bull market are connected with a minor 29-year cycle that kicks in for 3 years starting around April 1998, and we expect this cycle will greatly increase fear about long-term investment and lead to profit-taking. Our major 120-year cycle would suggest higher prices over the next 3 years, but we think the millennium cycle will be more dominant, and we suspect increased earthquake, volcanic action, and a potential global-war cycle could create a 1929-type meltdown at some point over the coming years.

The biggest potential threat is computer gridlock and major electromagnetic disturbances from sun flares that scientists are already detecting. These solar flares could totally disturb our electric infrastructure, according to some scientists. One solar flare last summer knocked out a Canadian power plant for days. As these flares increase in intensity, they will seriously impact our lifestyle.

Trading Strategy–Take profits of at least 30-50% on your portfolio by November 26 at the latest or hedge your portfolio with January put options or leap puts. Switch some mutual funds into bear protectors like Rydex Ursa fund.

Monthly Chart Trend–Higher into April 1998.

Weekly Chart Trend–Lower toward 803-781 into January 20.

Daily Chart Trend–Topping and lower.

Turning Points–Major Entry/Exit Dates: November 12 (high), November 12 (divergent double top), January 20 (low).

Recent economic data has been mixed, but has not given the Fed much ammunition to raise rates.

With inflation at its lowest level in 33 years and unemployment at the lowest level in 24 years, the Fed will have a hard time politically in justifying a rate increase based solely on an increase in wages. An increase in earnings is not necessarily indicative of an inflation problem.

Weak construction spending in August was bullish factor, although this data was later revised upward. The October ECRI Future Inflation gauge fell for the third straight month–also bullish.

On the bearish side, construction spending in August was down 1.1%, although private and residential spending rose 1.0% as the housing sector is showing signs of stabilizing at a relatively high rate of activity. The NAPM expressed an optimistic view of their markets for the remainder of the year based on stronger data for production, new orders and employment. The August ILE was up for the fifth straight month, lead by a big drop in jobless claims and expansion in the money supply. Negative factors included a decline in new orders for consumer goods and improved vendor delivery times.

Other bearish factors included an unexpected rise in September factory orders for the fourth straight month and large job creation that reduced the jobless rate to 4.7%. October non-farm payrolls were up to 284,000.

Data for September wholesale inventories was mixed as stocks rose despite a large jump in sales.

Trading Strategy–Position traders should consider March 1998 put options from rallies into November 14 and November 27, looking for a fall into around January 20.

Monthly Chart Trend–Lower into 2001.

Weekly Chart Trend–Lower into January 1998, possibly to 103.12.

Daily Chart Trend–Consolidating between 114-117.16.

Support/Resistance–Breakout: Buy March 121.05 stop with a 120.05 stop. Exit 122.00.

Breakdown: Sell 110.15 stop with a 111.16 stop. Exit 106.15.

Turning Points–Major Entry/Exit Dates: November 27, December 9.

U.S. DOLLAR: The dollar has been effected greatly by the Asian currency crisis and the crisis has spilled over into the Canadian and Australian Dollars. Many developing Asian countries made loans that were dollar-denominated to questionable construction and investment projects and thus they are at risk to sudden rises in the dollar's value. This has forced Asian countries into an attack mode on the dollar as many Asian banks could be threatened with bankruptcy if the dollar were to rise substantially. The contagion of Asian currencies in the West is likely to continue as the devaluations of Asian currencies is causing an unfair export and trade advantage and a continuation could lead to an unfair competitive advantage for Asian firms.

With spillover now effecting Korea and Latin America, continued effects on the U.S. Dollar are likely to last a few more months. The only remedy to this will be raising rates around the world, which ultimately will hurt bonds.

Events of the past few weeks suggest that asset markets have more of an influence on currencies than do interest rates. Given that we see continued weakness in the U.S. stock market into January 20, the dollar is likely to follow suit. Our weekly chart target for the DM at 6078 does have a chance of manifesting. We also see higher a yen on the horizon into February 1998, although it is not really logical based on current conditions. And if the Japanese start selling their 300 billion U.S. Treasuries to deal with the devaluation crisis, it will pressure the dollar. The dollar needs to stay above the 8900 region to remain in a bullish mode on the weekly and monthly charts. We expect that it will probably hold but at this point, we will focus on a cycle low for the dollar in January.

Monthly Chart Trend–Higher to 107.35 into 1999.

Weekly Chart Trend–Lower to 93.60 or 91.60 into 1998.

Daily Chart Trend–Congesting between 94.00-98.00.

Turning Points–Major Dates: December 1, December 8, December 15, December 22, January 20.

DECEMBER JAPANESE YEN: The yen is likely to continue to be the biggest victim of the Asian currency crisis. Still, our cycle work suggests bottoming action and higher prices into February. Still, the Japanese economy remains in the doldrums with significant asset price deflation. Continued deterioration in the economy is likely, and even exports, the one bright spot, may be falling. Unemployment is at near-record levels of 3-4% and investment in real estate has fallen sharply. Forty percent of Japanese exports go to Asian countries, and these will likely fall with the Asian currency crisis. Moreover, Japan holds 4% of the debt of troubled Asian nations, a situation that will further weaken their economy. If the Nikkei falls too far, it will lead to a broad-based repatriation from Japanese banks, which will hurt the dollar.

Technically, major support is now at the 7925 region, with a break of that level leading to the 7000 region. Our cycle work points sideways to higher over the next few months, and I suspect that we will be in a tight trading range between 7925-8450. If we can close above the 8600 region, there would be a minor chance for a rally to 9500, but we see nothing in the fundamental environment to justify such levels. We would ease off shorts and look to be a seller by the February cycle high as weekly charts could even fall as low as the 6400 level if the crisis continued to deepen.

Major Dates–November 17, December 22.

DECEMBER DEUTSCHEMARK: We are at our earliest cycle time window for the DM to top and turn lower. While our weekly chart patterns could allow 6078, we have come close to the minimum upside near the 5945 region. That leaves us in somewhat of a quandary as to what to do.

Longer term, charts point to 4600 on the monthly chart, but we are almost inclined to observe the next two months as a trading range between 5500-5900 is likely to develop and short swing trades will be more beneficial.

The Germans have less reliance on Latin American and Asian economies and have not been hurt by the economic crisis in those regions. Recent data also shows more strength in Germany, especially greater domestic growth.

We will stand aside a position orientation but watch swings from key dates for light plays. We may have a major sale setting up from the December 22 time window if we see consolidation for the next month.

Major Dates–November 14, December 15, December 22, January 20.

DECEMBER CANADIAN DOLLAR: The Canadian Dollar continues to be sensitive to falls in U.S. stocks and the Asian crisis–and for good reason as Canada is much more tied to Asian business than many other countries. Moreover, the low level of Canadian interest rates makes the CD unattractive.

Canada continues to stage a robust recovery with GDP for the 3rd quarter at 4.1%. We do expect a Canadian rate hike soon and this, coupled with a major cycle low by December 8, should give the CD a rally until at least into the middle of February. Weekly chart patterns would allow a fall to the 6985 region, but we expect that the CD will bottom and hold in the 7050-7070 region, with an earliest cycle low around November 19.

Consider accumulating March calls during the week of December 1-5.

Major Dates–November 19, December 8, December 29.

FEBRUARY GOLD: Gold appears to want to break toward the 300 region into about December 5 and then we will probably see a rally into January 20. Max. upside for the January rally is probably the 338 region with a more likely upside target of 326. New lows into April 1998 will finally take us lower to our long-term target of 280-290.

Gold does appear to be due for a recovery into January 20 at the next stock market low but then should continue lower into April 1998. Weekly charts are going to need a close above 385 to change the trend, otherwise we are likely to continue to fade toward the 280-290 level into 1998.

Fundamentally, gold prices declined sharply in late October on reports of a Swiss proposal to sell 1,400 tonnes from its reserves, reducing gold backing for its currency to 25% from 40%. Although such a measure probably would not be authorized before 1999, it underscored again the shrinking commitment to gold on the part of central banks.

On the bullish side, currency and stock market chaos in Southeast Asia has increased buying interest in gold as an alternative investment. Europeans have begun to buy gold as a hedge against uncertainties regarding the move to a single European currency.

Trading Strategy–Consider February calls or futures from the 300 region into December 5 in case we rally more than expected into the January cycle high. Major accumulation of gold mining stocks and gold coins can probably wait until the March-April 1998 time window, but we are going to be close enough to bottom in the 300 region to start accumulating.

Monthly Chart Trend–Lower to 290 into April 1998.

Weekly Chart Trend–Bottoming at 300 and recovering into January.

Daily Chart Trend–Lower into December 5.

Support/Resistance–Breakout: Buy February 341.50 stop with a 336 stop.

Breakdown: Sell February 297.00 stop with a 303 stop. Exit 291.00.

Turning Points–Major Entry/Exit Dates: December 5, January 20.

DECEMBER SILVER: Silver fell to the lower level of our suggested trading band at the 4.63 region, and from there the worst downside would probably be the 4.54 region. The most likely chart pattern would suggest a 4th wave consolidation triangle pattern on the weekly chart between 5.40-4.54 and then make a 5th wave high into February 1998 toward the 5.69 region. A breakout above the 5.40 region would be key and would lead to 5.59 and possibly 6.80, but we are skeptical that we will see continued upside action here. Because silver has better fundamentals than gold, even the spring cycle low is not likely to get below 4.25, although we may revise that forecast. (Note: Add 7 cents for basis March.) The alternate technical pattern suggest that December silver will stall under 5.00 and then fall to a new low to 4.34 basis March and 4.27 basis December.

Fundamentals are mostly bullish, as deflation favors higher prices for precious metals, particularly during a time of monetary chaos. In addition, with silver warehouse stocks are at a 12-year low, if demand picks up, prices should soar.

Strong fabrication demand from India continues to be supportive, with January-August imports nearly matching the 1996 full-year total, thanks to a further liberalization of import policies.

Falling London silver stocks have also been supportive, as stocks now stand at 137 million ounces versus 145.8 million at the end of 1996 and 159.1 million at the end of 1995.

Rumors have been circulating that large funds and aggressive U.S. bullion houses are accumulating quality physical silver in an attempt to run up the market. Some reports suggest that the goal of this alleged buying syndicate is $9 spot London silver next year! These reports have not been substantiated. Are we heading for another Year of the Hunt?

Trading Strategy–If you are short the market, look to cover by December 5 and buy March calls and futures, looking to hold into the February cycle high.

Monthly Chart Trend–Lower into April 1998.

Weekly Chart Trend–Higher into February 1998 toward 569.

Daily Chart Trend–Lower into December 5.

Support/Resistance–Breakout: Buy 5.43 stop with a 5.29 stop. Exit 5.56. Buy 5.63 stop with a 5.39 stop. Exit 6.20.

Breakdown: Sell 4.11 stop with a 4.25 stop.

Turning Points–Major Entry/Exit Dates: December 5, January 20.

JANUARY CRUDE AND PRODUCTS: Crude has remained volatile, with verbal wars between the U.S. and Iraq stirring the pot. Technicals and cycles do not suggest a major breakout to the upside and fundamentals do not support prices above the 22.00 region. Our earliest cycle low for this market is due around December 5, with out latest cycle low due into the first week of January. The lowest potential price would be the 18.00 region on the January contract. Rallies on January are likely to stay under the 21.60 region and continue consolidating between 20.50-21.60 and eventually break to a new low.

Longer term, we remain very friendly to this market and investing in energy mutual funds may be the best way to play it. We may be able to time the moment this market takes off at some point, but it still remains somewhat tricky.

With heating oil fundamentals weak and a 79% chance of a weekly chart target of 47.20, June and July heating oil puts may be the safest play, especially since seasonals and linear cycles point to a July cycle low.

Fundamentally, record refinery activity in the third quarter has carried into the fourth quarter in response to robust product demand. Moreover, strong demand has prevented global inventories from rising significantly. In fact, U.S. crude stocks have declined to a fairly tight 300 million barrels. Imports for the first nine months of the year were up 6% from last year's levels, but imports typically decline in November even though demand is expected to remain strong and thus keep inventories at lower-than-normal levels. If heavy refinery activity continues, it will eventually weaken product values and pull crude prices down to a trading range of 1900-2100 unless Middle East tensions erupt.

Given tight U.S. stocks, any supply disruption would lead to soaring energy prices. But under normal conditions, global supply has the potential to outstrip demand for at least the rest of the year as supply gains are likely, especially from OPEC, which continues to produce more than their assigned quota even if Iraq is taken out of the equation.

Nonetheless, high global demand, reduced production from non-OPEC sources, and lower-than-expected inventory increases have largely absorbed these supply increases. Once tensions ease, regular fundamentals will return to the market and create sideways to lower prices. El Nino also promises a warmer Northeast weather pattern and therefore heating oil probably will not come to life.

Trading Strategy–Use rallies to accumulate June and July heating oil puts.

Weekly Chart Trend–Consolidating and lower into December 1997 for crude. Lower prices for heat to the 47.50 into spring 1998.

Daily Chart Trend–Consolidating and lower to 1800.

Support/Resistance–Buy January 22.10 stop with a 21.45 stop.

Breakdown: Sell 18.88 stop with a 19.25 stop.

Turning Points–Major Entry/Exit Dates: November 17, December 5, December 29, January 5.

November 12, 1997 Barry Rosen

Fortucast Market Timing, Inc.

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