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FORTUCAST
Stocks
Many analysts are re-visiting the 10-year anniversary of the 1987
crash and looking for a similar move this year. While we do see
weak cycles from October 20-29, we are expecting only a minor set-
back during that period and a double top into the November 14 time
window. Cycles remain supportive into the close of October 17 and
at this point we will at least retest the 992.50 region with a
chance of moving higher to the 1003 region. If we do not fall too
far into the October 29 cycle low, we are likely to still at least
make a new high or double top or new high to Dow 8500 and December
S&P 1024 into the November higher. Our cycles would suggest that we
will probably not take out the 958-960 region into the October 29
cycle low. We then expect further downside into January 20, and
certain calculations could even allow a move to the 846.30 or 820
region if we finally get our 20% correction into the January cycle
low. Even with that correction, new highs could still manifest into
next spring.
Our long-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.
One pattern would allow for new highs to Dow 10075 or 11221 but we
would have to hold Dow 6500 into the January 1998 cycle low, and
these are monthly chart projections that could easily be changed by
the major disturbances due in 1998. These projections are connected
with a minor 29-year cycle that kicks in for three 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
three 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.
Small cap stocks in the Russell 2000 are likely to lead the way
higher. Given the instability in Asia, we cannot totally rule out
a larger correction occurring during our consolidation-corrective
period that stretches into January 20, 1998.
We are still examining the weekly and monthly S&P cash charts but
we could easily be starting a fourth wave monthly chart correction
after one new high divergent high into October 17 and November 14.
Note- -If we're indeed completing five waves higher off of the
April low into October and November, then a larger correction into
January could be 15-20% or more. One can even make a case that we
are completing more significant patterns off of the 1987 and 1982
lows.
Trading Strategy- -Favor longs from swing lows, following daily
service updates. We could continue to take profits on your
portfolios at the October 17 and November 14 cycle highs. We would
consider some switching to the energy sector but think the metals
and mining sector is not worth entering until the April 1998 cycle
low of metals.
Monthly Chart Trend- -Higher into April 1998.
Weekly Chart Trend- -Consolidating between S&P futures 1008.842.
Daily Chart Trend- -Higher into October 17 and lower into October
29.
Turning Points- -Major Entry/Exit Dates: October 17 (high),
November 14 (divergent double top), January 20 (low).
Interest Rates
DECEMBER T-BONDS: Our bearishness about T-bonds in September was
negated by when PPI and CPI data came out friendly and Warren
Buffett bought 10 billion dollars worth of cash T-bonds. The
impressive rally was short-lived and recent comments by Chairman
Greenspan and higher PPI data have the market in a flurry. We
expect Greenspan's comments may actually replace a rate hike as our
cycle work is more supportive into November 24.
If we close under the 113.21 region, we would say that a top is in
and that we are starting a move lower into January 1998. We would
expect to at least see a double top in the 118.18 region or a new
high to 119.03 or 120.09, but we will need to get a number of new
fundamentals out to push prices higher to those levels. Our latest
cycle high for T-bonds is November 24 and it would be the worst of
the cycle lows would be over at major support in the 114.06-114.16
region. We cannot rule out a breakdown and a move lower into the
October 27-28 time window, when stocks have a cycle low.
If would appear that the Fed is likely to raise rates by the
November 12 meeting. A larger-than-expected increase in the
September PPI (0.5%) weighed on bonds and European currencies,
reflecting the market's sensitivity to inflation following
Greenspan's testimony on October 8. Bulls contend that the market
may have over-reacted to the PPI increase, as most of the price
increase was confined to tobacco and autos.
Our longer-term work is bearish into about January 20 and one
patter would allow a fall to the 103.12 region. We currently do not
have fundamentals to support that deep a move but a break of the
110.15 region would confirm that we are in trouble and would lend
to at least the 106.00-106.15 region.
Short term, our best guess is consolidation between 114-117.15 and
we see a secondary high for the U.S. stock market into October 17
and November 14, and that would suggest T-bond consolidation until
then.
Trading Strategy- -Position traders should consider March 1998
put options from rallies into November 14 and 27, looking fora 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.
Support/Resistance- -Breakout: Buy 117.05 stop with a 116.31
stop. Exit 120.00
Breakdown: Sell 110.15 stop with a 111.16 stop. Exit 106.15.
Turning Points- -Major Entry/Exit Dates: October 27, November 27,
December 9.
Currencies
Given that U.S. stocks are vulnerable to a correction into about
January 20, 1998, we expect that the dollar may remain weak until
then. We then look for a second wave correction of the June 1995
low, which could take longer to manifest next year and possibly
last into as late as August 1998.
The dollar is likely to find support and trade in a range for a
couple months between 9600-10000 although the possibility of higher
rates still looms as a potential negative factor. Should the trade
again correlate higher U.S. rates with a higher dollar, then cycles
could invert and we could have a strong rally to the 103.50 region
if T-bonds falls sharply. This could happen as Deutschemark cycles
could peak in late November. Fundamentally, the dollar is not
likely to move lower given that continued growth in Europe and Asia
are export-related, and therefore reliant on cheap currencies. Even
so, the dollar is not likely to gain much against the European
currencies as they tighter monetary policy in Germany could signal
higher rates in other European countries, which would cause
investors to dump U.S. stocks and dollars.
Current fundamentals generally support a stronger dollar but
comments by monetary officials, trade figures, and the strength of
world equity markets are creating uncertainty about the direction
of the dollar in relation to the mark and the yen.
The Japanese trade surplus and the decline of U.S. equities have
also been worrisome. But weak economies in Germany and Japan, along
with Asian instability, will probably not allow additional rate
hikes in Germany or a rate hike in Japan. We would be surprised to
see the dollar go much lower than 95.52 short term, but the chances
of it taking out the 100.50 region are not very strong near term
either. Cycles for the Deutschemark do support the continuation of
the uptrend there are like the Canadian with the yen being a little
weaker.
The next few months should see the dollar consolidating between
96.00 and 100.00 and then we could be starting a deeper sell-off to
the 90.00 region, possibly starting in January but more likely not
until August 1998, according to our cycle work. For the next few
months, we would trade swings.
Monthly Chart Trend- -Higher to 107.35 into 1999.
Weekly Chart Trend- -Lower to 90.00 or 91.30 into 1998.
Daily Chart Trend- -Consolidating between 95.52 and 100.00 and
then lower into 1998.
Turning Points- -Major Dates: October 13, January 20.
DECEMBER JAPANESE YEN: The G-7 did decide to support the yen, but
how long it can do so with a weak Japanese economy is unclear. The
impact of the April 1 tax hike is still depressing their economy
and economists around the world are scratching their heads trying
to understand how a tax hike could ever have helped jump start the
Japanese economy. Industrial activity remains sluggish and
inventories continue to rise. Most world economists are worried
about the rising trade surplus and whether this will lead to a
replay of 1994-1995. However, sending the yen higher would only
lead to a recession and slower imports. Rallies are likely to stall
in the 8577 region but fundamental and Central Bank support is
strong in the 125 yen level, or about 8018.
Linear cycles could suggest higher prices into December and January
although technical indicators are suggesting a longer-term fall.
Maximum upside is probably the 86.68 region although a breakout
would occur on a close above the 89.00 region projecting the 95.00
region. The next important turn is due on the 17th and it may be a
low with higher prices into October 27. We are likely to have
choppy action and will need to trade major swings here.
Our longer-term work still suggests lower prices to the 64.00-64.17
region, and cycles appear bearish to September 1998. Strong support
is now at the 8180 and the 8027 region is likely to hold the
market.
Weekly charts may be complete both with pattern and price and a
strong bounce back to 95.05 may emerge into early 1998 if the
Japanese raise rates then.
Trading Strategy- -Consult daily service concerning trading from
key dates with the next entry low from October 17.
Major Dates- -October 17, November 24.
DECEMBER DEUTSCHEMARK: Germany finally did raise interest rates,
making good on the Bundesbank's recent declaration that it would
take any steps necessary to prevent the Deutschemark from falling
against major currencies. Officials cited a rising trend in
wholesale inflation due to a jump in import prices. Improved
economic data also seems to support a rate hike, especially
positive signs in the industrial sector that may eventually lift
the domestic economy from its doldrums.
At this point, cycles for the Deutschemark point higher into about
November 21, but a buy-the-rumor and sell-the-fact mentality may
create consolidation until we start breaking after late November.
Weekly chart patterns would suggest a rally to a maximum of 6150.
We think that this is only a fourth wave on the weekly chart and
that new lows will manifest next year, although a trading range
between 5170 and 6150 is likely to be in place for a while.
Consolidation toward the highs in the 5600-6100 region may continue
after the momentum high into January, but if our longer-term work
on the dollar is correct, the dollar may be vulnerable to a fall
into August 1998, and that would allow a bigger rally on the
Deutschemark. Short-term cycles suggest a pullback into October 21
and a rally into October 29 and then lower prices into November 14
and a recovery into November 21.
Trading Strategy- -Consider swing trades from major dates with
the next long from the October 20-21 time window.
Major Dates- -October 21, November 20-22.
DECEMBER CANADIAN DOLLAR: If the Canadian Dollar continues to
follow the U.S. stock market, then we think there is still some
potential life in it. Chances are we will make a high into the
October 16-17 time window and then pullback October 27-19 with
sideways congestion likely into November 14. We are stalling at key
resistance at 7350, and if we break the 7250 region, we would
expect the bears to take control again and push prices toward the
6800 region into next year. However, fundamentals are on the side
of the bulls but that could easily change. We would be short
between October 17-28 and see what develops on the downside. If we
break the 7250 region, we would continue to hold shorts into early
December.
Fundamentally, the Canadian Dollar should be showing improvement as
the economy continues to improve. Inflation is down, government
borrowing is lower, and third quarter growth may even exceed the
4.9% pace of the second quarter. Retail sales rose 1.3% in July,
with an increase auto sales leading the way. Annualized retail
sales could exceed the 6.3% rate achieved in the secondary quarter.
However, political concerns regarding Quebec continue to depress
the Canadian Dollar, perhaps unduly. A more legitimate concern has
been falling short-term interest rates. But the prime rate hike
last week put an end to Canada's easing policy.
Major Dates- -October 17, October 28, November 14, November 21.
Metals
DECEMBER GOLD: Gold has come to life due to comments by Chairman
Greenspan and a surprising PPI but we do not expect that much
liveliness from this market. We appear to be in a fourth wave
congestion on the weekly chart that will probably end around
January 20. The current projection on the upside is 351, but the
market could go as high as 360 or 369 if inflation jitters and a
falling U.S. stock market are supportive. Short-term consolidation
is likely between the 340-325 region and at some point the market
may be worth a light buy. Weekly charts data and cycle work still
points to a breakdown to the 290 region into the April 1998 cycle
low.
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
290 level.
Fundamentally, the major bearish influences on gold are reports
that Australian producer selling has resumed and rumors that some
central banks considering the possibility of gold reserve sales.
Australia's production costs rank second only to South Africa's at
$272 per ounce, so they are anxious to seek price protection if
they enter the market.
Central bank officials in Taiwan denied that they are considering
sales from their 400-tonne gold reserves. Moreover, we see no
evidence that central banks are about to abandon gold as a reserve
asset, mainly because it would decrease the value of their
holdings.
On the bullish side, renewed inflation fears increase the
likelihood that investors will include precious metals in their
portfolios and a falling stock market November 20 may increase gold
holding.
Trading Strategy- -Consider February calls or futures from
pullbacks into October 17 and November 14 in case the market
rallies 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.
Monthly Chart Trend- -Lower to 290 into April 1998.
Weekly Chart Trend- -Consolidating between 325-381 into January.
Daily Chart Trend- -Sideways and lower into October 17.
Support/Resistance- -Breakout: Buy 353.50 stop with a 339 stop.
Breakdown: Sell 313.00 stop with a 31.00 stop. Exit 301.00
Turning Points- -Major Entry/Exit Dates: October 20, November 14,
January 20.
DECEMBER SILVER: Silver has had a nice technical breakout, but our
bullish cycles are over at publication and we do see weaker action
into early December of 1997. The most likely chart pattern would
suggest that we are likely to do a fourth wave consolidation
triangle pattern on the weekly chart between 5.40-4.65 and then
make a fifth pattern wave high into February 1998 toward the 5.96
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.
Fundamentally, increased demand has been supportive, especially
from India, where first quarter imports rose to almost 100 tonnes.
Japanese imports have also increased. Reduced supplies have also
helped this market, as COMEX silver stocks have fallen about 20
million ounces since the end of June and are 38 million ounces
lower than January 1, 1997.
Projected demand at 233 million ounces, which is 3% higher than
last year, and increased use of silver for photography has boosted
consumption. Tight supplies of platinum have also caused spillover
support.
With cycles weak into April 1998, weekly and monthly charts would
suggest a maximum fall to the 365 region if gold falls to the 290
region. A weekly close above 540 would probably negate that
possibility and the April 1998 low would be some type of second
wave retest of the 4.20 region.
Trading Strategy- -Short-term position traders can consider a
tight short position into early December, looking to reverse back
to the long-side into the February cycle high.
Monthly Chart Trend- -Lower into April 1998.
Weekly Chart Trend- -Higher into February 1998 toward 569.
Daily Chart Trend- -Topping and lower into early December toward
4.60-4.68.
Support/Resistance- -Breakout: Buy 5.43 stop with a 5.29 stop.
Exit 5.66. Buy 5.63 stop with a 5.39 stop. Exit 5.20.
Breakdown: Sell 4.11 stop with a 4.25 stop.
Turning Points- -Major Entry/Exit Dates: October 13, December 5.
Energy
DECEMBER CRUDE: Middle East saber rattling has finally woken up the
crude market but underlying fundamentals are still more bearish.
Political saber rattling cycles are still fairly strong into early
November and this should prevent any major sell-off from occurring
and longer-term Middle East tension cycles are very bullish for the
market. Unless we blast through the 2234 region, technicals support
short-term consolidation between 2080 and 2300 with major support
in the 2125-2130 region. A breakout could lead to 2380 and 2415 and
even 2500, but it would be harder to justify much higher prices
unless fighting breaks out. December heat is not as friendly and
would only suggest at 31% chance of a new high toward 6525 and
given current fundamentals, new lows to 4720 are possible according
to our weekly chart and they suggest a whopping 79% chance of
manifesting. We have a heating oil sell signal around the week of
November 3rd and we would keep an eye on that as bulls are more
likely to be disappointed.
The demand outlook for heat looks mildly bullish as the API is
forecasting increased usage this winter given normal weather. But
the Northeast U.S. usually sees warmer weather in El Nino years
like this one. Moreover, higher stocks than last year and increased
refinery capacity will probably cause heating oil stocks to be
built more slowly in the fourth quarter of 1997.
Upside cycles are difficult to read here, but heat cycles suggest
higher prices into early November and crude looks supportive into
October 20 and possibly November 10. We would not short this one
and mixed signals will keep us away from any position trade.
Trading Strategy- -We see no great position trades or option
trades setting up.
Weekly Chart Trend- -Higher into January 1998 for crude. Lower
prices for heat to the 47.50 into spring 1998.
Daily Chart Trend- -Volatile and consolidating between 2080-2300.
Support/Resistance- -Breakdown: Sell 18.88 stop with a 19.25
stop.
Turning Points- -Major Entry/Exit Dates: October 28, November 3.
October 13, 1997Barry Rosen
Fortucast Market Timing, Inc.
P.O. Box 2066, Fairfield, Iowa
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