wmeubank@ocp.kcmo.com
THE WEEKLY RE- LAY
OVERVIEW: “6900/DJIA By November 15th?...” Traders should have had another stellar week as S&P traders were advised to take the second 1/2 of profits on their 953.20-.60/SPZ longs at 981.35 (a gain of $14,000/contract) and reverse to short. These shorts are ahead by $2,300/contract.
Bond traders were advised to sell 117-20 to 25/USZ–a trade which is now ahead by $2,600 per contract. Traders are also long December 116 puts with 100-150% gains in the position.
D-mark traders who are long from 55.80-.87 are ahead by $1,900 per contract while option traders should be long December 5700 calls with about $500 per option gains. 2CR traders should be long the yen from 83.30/JYZ–with open profits of $1,100 per contract.
Silver traders took remaining profits at 520.5/SIZ (with gains of $2,700/contract), while gold traders also took profits at 334.6/GCZ ($1,150/contract).
Crude traders–who were long from 19.94/CLX–took profits at 21.84 (sell stops) for a total gain of $1,900/contract.
STOCK INDEXES: The S&P and DJIA continue to unfold in a fairly predictable manner. The Dow has been hitting subsequent targets with uncanny precision while the S&P has temporarily spiked above objectives while waiting for the DJIA.
Dec. S&P (SPZ) DJIA Weekly Trend: Up Dn/Neut. Weekly Resistance: 989.50-992.25 8158-8177 Weekly Support: 963.75-966.50 7917-7938 Daily Trend: Up Up/Neut. Daily Resistance: 983.15 8080 Daily Support: 970.15 8003
Traders who had bought the recommended 953.20-.60/SPZ on 9/30 were advised on 10/07 to raise sell stops to 981.35 and reverse to short if this price was hit. On Wednesday (10/08), this level was struck–causing traders to reverse to short after taking $14,000/contract from the long side of the S&P.
The resultant short trade is ahead by about 4.50 basis points and needs confirmation in the coming days if it is to follow through on the downside. The first sign of confirmation will be a daily close below 976.10/SPZ, while the most convincing sign will be a daily close below 954.75/SPZ. In between these support points is a third critical level which was tested on Friday.
It is the 10/01 high of 966.50, which will also be the 8-high MARC on Monday (10/13). A daily close below this level would be an initial sign that any intra-month rallying is complete and that a test of the 10/01 low is forthcoming.
Considering that Friday's action saw a test of 966.50, the next 1-3 days are important and should reveal whether a rally to the intra-month preliminary LLR is coming, or whether support will give way and begin a sharp corrective phase. (Another decline is possible beginning Wednesday–based on an aspect of my moving average channel techniques I have not yet discussed.)
I still find it interesting that the beginning of this momentous Jewish year (5758–which began on October 1/2, could also mark a major high in the S&P. However, as was stressed last week–this is not confirmed yet, so patience is required before becoming too aggressively short.
As also previously stated, a close below 954.75 will usher in the projection for a drop to 6900-7100/DJIA. This will be addressed if, and when, the initiating close occurs.
Traders should have taken profits on 953.20-.60/SPZ longs at 981.35 and reversed to short.
INTEREST RATES: Bonds continue to adhere to the technical outlook. I do not know if this means the indicators are great or the bond action. But, it does not matter. Wednesday's action gave another confirmation of this...
After fulfilling intermediate forecasts for a rally into early-October and a test of 117-18 or perhaps a brief spike above 118-00, bonds were projected to rally in the early part of this past week. After this transpired, Tuesday's (10/07) Alert warned and advised traders:
“Bonds are retesting monthly resistance, which is below Friday's high. The ideal situation would be a quick spike above today's high, followed by a 2 close reversal lower (intra- week inverted V). Aggressive traders can sell 117-20 to 25 and place buy stops at 118-13/USZ. Look for a daily close below 117- 06.”
The day following this advice, bonds rallied quickly, hit 117-24/USZ (invoking the recommended short trade), then dropped over 2 full basis points–completing the day with a 2 close reversal confirmation. The ensuing two days extended this decline and perfectly fulfilled last week's scenario.
“The more bearish scenario is that an abrupt drop occurs quickly and takes bonds down to 114-28 to 30 this week, and to 112-30 to 113-01 the following week. If this transpires, I would expect a couple weeks of consolidation to follow...but this will be addressed after we see the next 3-5 days' trading.” (10/04/97 Weekly Re- lay)
Dec. Bonds (USZ) Mar. Euros (EDH) Weekly Trend: Up/Neut. Up Weekly Resistance: 116-15 to 116-21 94.17-94.20 Weekly Support: 113-14 to 113-30 93.94-93.96 Daily Trend: Up/Neut.Up Daily Resistance: 115-25 94.12 Daily Support: 114-08 94.00
Two resistance levels are crucial. One is 115-25 and the other is 116-21. If the market reverses from 115-25 early in the week, I expect a drop to 113-25 by Friday and to 112-30 to 113-01 soon after. If 115-25 is exceeded, I look for a rally into mid-week and a peak around 116-21/USZ. (At the same time, I could see an S&P rally to 983.70 on Monday and a spike high and reversal lower from 985.50/SPZ on Tuesday.)
CURRENCIES: The yen appears poised to take a leading role and could be on the verge of another dramatic move. A daily close above 85.80 or a weekly close above 84.48 will be the first sign of confirmation that this is unfolding.
Dec. D-Mark (DMZ) Dec. Yen (JYZ) Weekly Trend: Up Down Weekly Resistance: 57.90-58.46 85.21-85.71 Weekly Support: 56.44-56.90 82.73-83.17 Daily Trend: Up Down Daily Resistance: 57.66 84.82 Daily Support: 57.14 83.56
It is interesting that this secondary low is coming at the beginning of a period when earth activity is expected to increase (mid-October to late-January) and has begun with several moderate quakes in Japan this past 1-2 weeks. Is this merely coincidence–particularly with the Nikkei nearing a meltdown? Or is it like 1995–when a devastating quake hit Kobe, Japan. (See 9/03 and 10/01 INSIIDE Track for more information on these and other earth cycles.) Regardless of what fundamentals might coincide with a yen rally/Nikkei collapse, this was the technical outlook conveyed on Tuesday:
“The yen...appears poised for a spike down to 81.90-82.05/JYZ. If this level holds, and spurs a reversal higher, the yen could rocket higher. Leading into this support, 82.13 is the monthly SPS while 82.38 is the intra-month preliminary HHS...The yen just held the daily HLS and tomorrow's LLS (likely level for an ensuing low) is 81.97/JYZ...Intermediate traders can buy 81.90-82.05/JYZ...looking for a subsequent close higher.” (10/07/97 Alert)
This support range (81.90-82.38/JYZ) was stronger than anticipated and the yen did not reach the lower extreme. It hit 82.31/JYZ and gave a 2 close reversal higher–triggering traders long at 83.30 rather than at the ideal support. Friday's close above the 10/01 high, and its weekly 2 close reversal buy signal, confirmed this daily signal and should usher in additional buying over the next couple weeks.
The mark continues to rally, but needs to break out soon or suffer a quick correction (testing 56.40-56.55/DMZ). It spiked lower on 10/08–as expected–and gave a 2 close reversal higher...which has since followed through. However, the 10/09 high held an LHR level–which could be signaling a minor top.
PRECIOUS METALS/ENERGY: Gold/Silver–Gold and silver gave additional signs that early-October would actually be a high and lead to one final decline before the start of a major bull market (see the excerpt from INSIIDE Track for a complete overview of what could ultimately propel gold higher). Silver could drop as low as 482-484.0, while gold is still in a position to see another low if a close below 326.0 materializes in the coming week.
Dec. Gold (GCZ) Dec. Silver (SIZ) Weekly Trend: Down Up Weekly Resistance: 336.2-336.9 530.0-531.5 Weekly Support: 325.7-326.2 507.0//484.0 Daily Trend: Down Up Daily Resistance: 332.9 523.5 Daily Support: 329.5 515.5 Nov. Crude (CLX) Weekly Trend: Up Weekly Resistance: 22.76-22.91 Weekly Support: 21.33-21.41 Daily Trend: Up Daily Resistance: 22.34 Daily Support: 21.77
The CRB and grain markets are beginning to show strength, so traders should be prepared to re-enter the long side at any time–regardless of whether a new low occurs.
Gold and silver traders should have taken profits on all long positions on Monday's close.
January soybeans broke out to the upside–reinstating a minor uptrend and confirming the intermediate and long-term outlook. Friday's highs tested the monthly LHR in November and January beans–and gave a second weekly trend neutral signal (from a prevailing downtrend).
This means that another bullish week is necessary to confirm a major low and a Friday close above 707½/SF is also necessary. No new trades for now.
Crude–Is it just another coincidence that Iran has announced it will conduct naval exercises at the same time the USS Nimitz is entering the Persian Gulf?...which just happens to coincide with the beginning of the fateful year of 5758?
I have read some of the requirements for the U.S. naval fleet–all of which are severely compromised by the relatively cramped conditions in this Gulf. Is the U.S. being suckered into an ultimate ambush (now or later)...or is this all random coincidence?
Crude seems to think that something is up, although further retracement is possible before the next surge.
2CR traders should have taken profits on 19.94/CLX longs at 21.84.
...End 10/11/97 Weekly Re-Lay.
Beginning of excerpt from 10/01/97 INSIIDE Track...
Gold Is King...
Over the last several months, I have discussed the convergence of cycles which align in gold in early October. For several years, I have researched the unique coincidence of earth-related cycles which begins in 1997/98 and extends through 2001.
And, for more than a decade, I have focused on the Jewish year (5758) which begins in October 1997 and encompasses most of 1998...and what it could mean for Israel and the entire Middle East. Each of these seemingly independent cycles I have treated as such. I do not like to correlate analysis until it is so obviously linked that it cannot be avoided (see Hadik's Axiom #5 on Correlations).
However, the implications of each, combined with the Maastricht Treaty deadlines of January 1, 1998 and January 1, 1999 (for qualification and implementation of European Monetary Union) begin to paint a picture of instability on the horizon. What is king during a currency crisis? Gold!
Now, add in the Y2K Millennium Bug–which should gain mainstream recognition by mid-1998 when some states have set the deadline for all corrections to be made–and you have the makings for a serious financial crisis. What is king during political crisis? Gold!
With war–or at least a conflict like in 1990–becoming much more likely in the next year (not assured, but much greater chance of it), what would benefit? And, what is king during war time? Gold!
Don't get me wrong. Gold has not always rallied during wars, but it has been a consistent haven during political and monetary crisis. Again, it is the synergy of events which spurs me to conclude that gold will be the investment of 1998. Most of all, it is my technical analysis–which would conclude the same thing even if all of the aforementioned fundamentals were not already revealing themselves.
Throughout history, the most consistent factor in bullishly impacting gold is monetary instability or crisis. Typically, at least one currency is favored by investors and this is where they keep their money. However, when a transition is taking place, or when all currencies lose favor at once (particularly when they are all fiat currencies with no gold backing)–gold takes over as a safe haven.
With this as the premise for the ensuing discussion, there are two factors which could have a very negative impact on currencies and a very bullish impact on gold in the coming 1-2 years. If so, it makes sense that a significant bottom would precede this (since news or fundamentals almost always hit after the market has turned and completed at least part of its move).
So, my ongoing forecast for a gold reversal by early-October may soon have some fundamental support. The interesting thing about these factors is that I can guarantee that one of the two occurs (although I cannot guarantee that the market reaction will be exactly as I describe).
The first factor is that European Monetary Union goes ahead as planned. The second factor is that it does not. One of the two must transpire.
European central banks have been selling gold and stockpiling dollars in an attempt to maintain the illusion of low inflation and keep their own equity markets propped up (to assure entry into EMU by meeting deficit and inflation criteria). If EMU takes place as planned, these banks will begin to sell dollars with a vengeance in order to buy Euros (and perhaps, buy back some gold).
Both of these factors would have a very destabilizing affect on the dollar and world-wide equity markets. As a result, at least a temporary run into gold should transpire. (It may even be a case of gold remaining stable against the new Euro, while surging against the dollar. In either case, gold futures, priced in dollars, will benefit if this is true.)
The other alternative is that EMU collapses, or at least hits some serious snags. As a result, central banks–which had been selling gold to prepare for integration–would scramble to buy back at least some of those holdings. Panic could grip the gold market and propel it higher in a very short amount of time.
Regardless of which takes place, the technicals still need to confirm this to be the case. Gold has begun to reverse and I will be looking for additional signs of a bottom in the coming months. Since this is such a momentous time frame, traders should adapt to the market and not mistake minor deviations for major invalidations.
A few factors which have already indicated a bottom reinforce this conclusion. For starters, silver has acted in a very predictable fashion and done almost everything that has been expected of it...including reversing its weekly trend to up. After this took place, Weekly Re-Lay readers were advised (on 9/20/97) to buy 464-466.5/SIZ.
On 9/22/97, December silver hit 466.0. On 9/23/97, it hit 465.0 and reversed higher. And, on 9/24/97, December silver confirmed a 2 close reversal higher–which confirmed the long positions traders had already entered. Three days later, silver was catapulting through the highs and adding more credence to the “developing bull market” scenario. (What this could also be showing is that silver will spend the next three months working progressively higher, while gold struggles under the threat of more central bank selling. When this weight is lifted, look out!)
Another technical factor is the XAU (Philadelphia Gold/Silver Index) which is attempting to lead the way. This index is known for preceding moves in gold and appears to have put in a solid bottom in July. With all these factors, traders continue to ask why gold has not rallied more than it has. Which brings us back to EMU...
The Central Banks of Europe are killing two birds with one stone. Each time they sell gold, they are raising more cash and preparing for the transition to the Euro. At the same time, they are discrediting gold and setting up the ultimate dependency on the Euro as investors become convinced that gold will never rally again.
Most of you should be familiar with the emphasis I have placed on Belgium within the coming European empire. With this in mind, an intriguing article appeared in the 9/16/97 Wall Street Journal. It stated:
“New reports of central-bank selling pushed gold prices lower yesterday...traders pointed to renewed apprehension that central banks could accelerate sales programs. Announcements of central-bank sales of gold to Belgium from the Netherlands have pressured the market in recent months.
“The market is awash with stories of fresh central-bank disposals...Since central banks hold about 25% of the world's gold, the market has been preoccupied with their activity for months...
European countries have been under pressure to cut deficits in a frantic rush to meet European Monetary Union requirements, and gold sales, while not an acceptable method according to the European Monetary Institute, are increasingly viewed as an option to increase returns on bank reserves...since no bank has claimed responsibility for selling, the program may be continuing. Central banks usually announce gold sales after the program has been completed.”
The article went on to emphasize again and again the “psychological impact” that this selling has and concluded that:
“The 220 metric tonnes sold by central banks during the first half of the year fell only 19 tons short of net sales for the entire year of 1996.”
Let me stop for a minute and paint a picture of some possibilities for the very near future. I am not saying that all of these factors will take place, or that the chronology or timing will be precise. I am merely attempting to convey how a little snowball could turn into an avalanche like in 1979-80. This is all hypothetical (for now)...
Suppose that a Middle East “skirmish” is seen–which sends up a yellow flag to investors. The astute, informed investors begin to park their capital (which has already been pulled out of the bond and stock markets) in gold to weather any potential storm.
Soon after this occurs (since it could commence as early as Yom Kippur on October 10/11th if similarities to 1973 continue), a few glitches occur with European Monetary Union. Germany and France do not meet the Maastricht criteria and a sharp rift opens up over who should be allowed in and who should not. Regardless of the outcome, the uncertainty sends more investors out of the financial markets and into gold.
As a result of these and other (technical) factors, the stock market begins to dive on its own momentum and is quickly exceeding a 20-25% “correction.” More investors head for the sidelines and into gold (some into bonds and bills as well). As this plays out over the next 3-6 months, word begins to hit the markets that the Y2K dilemma is bigger than originally thought...or at least than revealed.
Now the exodus from stocks begins to accelerate and the gold rush accelerates. In the midst of all this, the U.S. is hit with even greater troubles as investigations into our top leaders also gain momentum and upset the cozy investment atmosphere which has prevailed in the '90's. Out of stocks, into gold.
As a result of the ongoing effects of El Nino (which is already confirmed and likely to be worse than 1982-83) and La Nina (which follows El Nino), crop production is severely curtailed in 1998–and complicates already depleted carryover stocks–and price inflation takes hold with a vengeance. Out of stocks and bonds, into gold!
If I may venture into the less predictable, but still very probable events, 1 or 2 strategic earthquakes or volcanoes could add to the instability and further complicate matters. As a result of a major volcano (Montserrat?, NW U.S.?, Japan?, Italy?), more crop production problems could occur–not just in grains but in many of the exotics (coffee, cocoa, OJ, etc.) . Result: More inflation and more incentive to buy gold.
Seeing all these distractions as a perfect opportunity to strike (or unconsciously responding to an ungrounded environment), more Middle East skirmishes could occur and perhaps new terrorism around the globe...Out of financial assets, into gold.
I think I have conveyed my point. I will stop there, since many of you are already thinking “Gee, this guy's getting a little extreme” or “He's another one of the Chicken Little types that thinks the sky is falling.” Before jumping to that conclusion, let me reiterate my purpose for this exercise. It is not to scare, although a little fear can be healthy. It is not to proclaim the end of the world (which would only be a transition, anyway).
It is simply to point out that each of these events is building momentum (yes, even the earthquake/volcano potential) and is soon to hit a parabolic stage.
As always, it is not the individual events which have meaning. It is the potential synergy which exists over the next 12-24 months that is startling. The combination of 6- 8 events all reaching the acceleration phase at approximately the same time could be terrifying...unless you are informed.
Until this stage is hit, few investors will notice. Once it is, the masses will panic and overdo their reaction. Would you rather wait until the panic, or take precautionary steps, as the technical picture warrants, before chaos hits?
As I always emphasize, timing is everything. I could have discussed these issues months or even years ago, but 1998 was still too distant. Now, I am willing to get a little more dogmatic since the time to act is approaching...and the masses have been lulled into apathy and complacency.
...End of excerpt from 10/01/97 INSIIDE Track.
Beginning 10/15/97 Alert...
“Silver–The Next Low...”
I still believe silver is capable of testing 480-485.0/SIZ before the next low is intact, but that could happen in a matter of days or underlying strength could force a reversal from these levels. This could be spurred by the fact that gold and silver have set mid-week lows, with silver holding the daily HLS yesterday, while gold tested the weekly SPS and LLS today...and closed on the monthly SPS.
Whichever the case, I am looking to buy this dip and see intermediate cycles aligning in the next two days. October 16/17th is the anniversary (30/90 day cycles) of the September 16/17th and July 16/17th lows. Last week I stated,
“Gold and silver triggered sell stops on Monday's close–completing successful long trades. A drop to 500-505.0/SIZ and 329.0/GCZ is probable in the coming days.”
This has taken place, but it still appears that a little more downside is possible. Minor and intermediate traders should buy 482-485.5/SIZ and place sell stops at 454.0.
Meanwhile, the S&P gave the necessary daily close below 976.10 and is likely to head straight for 954.75–which is now also the last two days' HLS levels and will be the 21-low MARC on Friday. As projected last weekend, this decline was likely to begin on Wednesday (today) and this appears to be the case.
Traders should lower buy stops on 981.35/SPZ shorts to 982.30 OCO 977.60 SCO. Traders who have not yet entered this market on the short side might have a chance if an early bounce occurs. Sell 976.05- 977.50/SPZ and use the same stops.
(Yesterday saw a 2 close reversal with little confirming support–which conflicted the minor outlook and came the day before a decline was expected. If traders took this signal–despite these conflicts–I would recommend exiting on a bounce or on new daily lows.)
Bonds rallied a little beyond 115-25/USZ and traders could be out of shorts or still holding on depending on which stop (intra-day or closing) was used. Traders who are using the 116-07 intra-day stop should continue to use this level and look for a close below 115-01 to re-confirm these shorts.
The market could bounce to 115-28 early on, but should not go much farther, if another leg down is imminent. 114-13/USZ is the last two days' HLS levels and a few ticks below recent lows, so this will become a likely target for the next decline. If this level is tested by Friday, a final low is expected around 10/27.
Currencies are in no-man's land and the mark needs to accelerate higher (and close above 57.90/DMZ) or risk a quick drop to 56.40, and ultimately to 55.70-.80/DMZ.
Raise sell stops on December mark long positions to 56.98 OCO 57.25 SCO. If 57.80-.90/DMZ is tested, raise stops again to 57.27 OCO 57.48 SCO. Yen traders were stopped out of longs on Tuesday and should remain on the sidelines for now. If the daily trend turns down (which can not happen until Friday at the earliest), another leg down could extend into mid-late November. More on this later.
Crude traders should have bought call options on Monday, but should reevaluate the risk on these. 20.12-20.15/CLX is the monthly SPS and weekly HLS, and thus a likely target for the next two days. With this in mind, I would lower the stop to a daily close below 20.00 as the trigger to exit these call options.
With the Dow poised to go into a tailspin and the S&P zeroing in on 954.75–where it will decide whether to immediately accelerate lower or hesitate for a few days–the window of opportunity is closing quickly.
The next issue will further discuss these critical support levels and this ominous time frame–which could usher in the largest decline in over 7 years.
...End 10/15/97 Alert
October 15, 1997Eric S. Hadik, Editor
Jeneric Trading Corporation
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