In my last edition, I mentioned, “On Monday 7/1/19, “Fibonacci Queen”, Carolyn Boroden predicted that the market could take a small dip on 7/3/19 and/or 7/5/19 and then according to technical analysis the market could go up very strongly” –which happened. Then again, around 7/26/19, Carolyn did it again and this time it was truly amazing! To paraphrase Carolyn, “As we enter the month of August, the market could go down in a significant manner”. Exactly on 7/30/19,
The market started to go down rapidly. On 7/30/19 the Dow was at 27,198 and on 8/5/19, the Dow was at 25,717! For the past 35 years I have been amazed by market technicians. They do not consider “fundamentals” (earnings, economic conditions, valuations. Tweets, trade wars etc).Most of them just analyze the charts. The same methods could be used for the stock market, Individual stocks, bond market, foreign exchange market, commodity market etc. In commodities, technical analysis is the primary method used to trade. Fibonacci numbers are named after the Italian mathematician Leonard In his 1202 book Liber Abaci, Fibonacci introduced the sequence to Western European mathematics of Pisa, later known as Fibonacci. Fibonacci numbers are strongly related to the golden ratio. There are many technical analysts and it is difficult to find a good one that is reliable. I would consider Ralph Acampora to be the world’s best in the field. He did not do his degree in mathematics, statistics, economics or business; he did his degree in theology!! In the 1980s religiously I followed Robert Prechter and that is why I knew that the market would crash on 10/19/1987.
However technical analysis can only give some conditional outcomes if the current “trends’ in certain chart patterns continue or if they change in an expected manner. Things could change so dramatically one who was bearish yesterday could become bullish today. I tend to ignore what they say about the long term. At the present, what the technicians say about the long term is very negative. They expect the market to make a top in 2019 and start going down for years-at least during 2020.
Now let us look at some fundamentals. We are in a trade war with China. Most of the world is in a deep economic downturn. Thanks to Trump, for the first time in 35 years, China’s economic growth slowed to 6.5%! For many years it was around 8 to 9%. We are at full employment so there is no need for an interest rate cut to stimulate the economy but the Federal Reserve gave another interest cut as “insurance” so that we do not fall in to a recession like most other countries. Since Martin Zweig published his PhD thesis, it has been the “golden rule” , “not to fight the feds”; in other words, when the Feds are increasing rates, get out of the market and when the Feds are lowering rates, get in to the market. However looking at history, there is an exception to that rule.when the Feds are lowering rates when we are headed towards a recession, then the market goes up a year or two after the start of rate cuts. Now the number one question is “Are we heading towards a recession?”. Most experts are undecided as it all depend on Trump and his tweets. China and most US experts believe that Trump will not want the trade when after 2020 Spring so close the election so there will be a minor agreement prior to that and the final solution will come after the 2020 elections. What will happen to the market till then? The tariffs announced by Trump for September 2019 for the first time hit consumer items. Even Trump admits that it is the consumer that has been holding up the economy (about 70% of the GDP). If this Trump move brings down consumer spending, the probability of us going in to a recession is very high. Prior tariffs were mainly directed at ‘cap spending”. The bond market has been dictating what the Federal Reserve should do with interest rates-they have to match rates in the bond market. Due to the dollar being strong and with chaos in the world (negative rates in most countries, political turmoil), trillions of dollars are coming in to the US and in to treasuries which has driven down the yield of the 10 year to about 1.745% (as of 8/10/19); which in turn makes mortgage rates sink to new lows and create economic growth for us in that manner. While “tariff related” stocks may go down, we could see a boom in housing and some other sectors- a basically a sector rotation.
As the market was taking a dive, I thought to myself that it would rise soon and then go down again. This too is a part of technical analysis. I was looking into buying a put option on the market index that would go up when the market takes another dive again. I was focusing more on the NASDAQ market. The ticker symbol for the ETF for NASDAQ is QQQ. On 8/9/19, QQQ ended at 186.49. On 8/5/19, put option on QQQ, with a strike price of 160 was at $3.11. On 8/9/19, QQQ at 186.49, this 160 put option was at $1.71. On the morning of 8/9/19, I placed an order for $1.15 but it did not get filled, naturally. My intention was to buy it around $1.15 and triple my investment in a few weeks when the market takes another dive. It is normal for the market to test previous lows.
We all love to have that opportunity to make a fast killing in the market so I want to share this idea with you. Trump does not care what other Presidents have done since day one and Trump does not listen to his advisors and as he says, he rely on his “gut feelings” which has served him well (from his perspective). Trump keeps threatening to do a very dangerous thing; even though he does not have the legal right to do so. He keeps threatening to fire the Fed Chairman so he can dictate the direction of monetary policy. The reason we have the “central bank” independent is because we do not want the creation of money in the hands of politicians. All developed and developing countries do this or else they will have a difficult time selling their government bonds to borrow money. Even in some poor countries they are giving more independence to their “central banks”. If the time comes where Trump is close to firing the Fed Chair, I will short sell the market (any market-stocks, bonds, foreign exchange). We are sure to see the biggest market crash in global history! This will create so many buying opportunities that we have never seen before!
On the oil front, price of oil has been sinking and oil stock prices have performed even worse; and that is because the debt burden carried by most oil producers who are in to hydraulic fracking in the US. Now that interest rates have gone down, those companies would be able to reduce their debt level. Crude oil prices have been down for many reasons and mainly due to the economic slowdown in most countries. For anyone who is not in the stock market, this is a bad time to get in.
This is the mistake most people make. They get in when they should get out and stay our when they should get in to the market. When it comes to the oil market, as I write this, everyone is bearish and see no end to the decline. It was the exact same story in early 2016. The ETF for US oil (WTI or West Texas Intermediate) was around $10 and I wondered to myself, “how far can it go down?”. If I buy 5 shares at $10, 10 at $9, 20 at $8, 30 at $7, one day I will make some good money so I started “nibbling”. On 2/8/16, it bottomed out at $8.33 and by 5/31/16, it was at $11.62. Now we are in the same kind of a situation with USO at $11.48 and on 12/24/19, it was at a long term bottom of $9.57. The previous bottom was at 6/19/17 at $9.50. “Technically speaking”, we can assume that It is very unlikely that USO will go below $9.50 (“floor”) and if it does, it should not go below $8.33 (“previous floor”). I am going to take advantage of this ‘golden opportunity” by getting in to ‘call options” where I can make more money than in the underlying stock (ETF, USO). The United States Oil Fund was founded in April 2006 by Victoria Bay Asset Management, now known as United States Commodity Funds, and the American Stock Exchange. The fund opened on its first day of trading at about $70 per share. By early 2007, it was at approximately $50 per share. In mid-2008, it peaked at $119 per share. Then in early 2009, it set a low of $24 per share. In late 2013, it was at about $34. The price slid in the second half of 2014, and went below $10 per share in early 2016(Wikipedia)
Currently USO is at $11.28 and on 8/9/19, it rose by 2.92%. A call option with the strike price over $11.28 would be considered out of the money, more risky but more to gain too. I want to buy a call options with an expiry date of 1/15/2021 (plenty of time) with a strike price of $12.50 which is trading at $1.02. In other words, I can buy 1 contract for $102 that controls 100 shares of USO. If the underlying ETF (USO) moves from $11.28 to $12.50, looking at other current prices, I could double my money. When was USO at $12.50 prior to coming to $11.28? On 7/8/19 (about 34 days ago), it was at $12.52! By the way, in 2016 February, when oil bottomed, so did the stock market. What could raise global crude oil prices? If Trump takes military action against Iran, that would raise prices. More so, if there is news that the global economy is improving that would raise oil prices. After all, most central banks have been lowering interest rates to stimulate the global economy.