Weekend Strategy Review July 31, 2016
Posted by OMS at July 31st, 2016
The Dow fell 24 points on Friday, closing at 18,432. It was down 139 points for the week. The NASDAQ finished up 7 points on Friday and up 62 points for the week.
We have a tale of two markets. The VTI on the Dow continues to fall, while the same indicator on the tech heavy NASDAQ continues to rise. The Tide remains neutral while most of the other cockpit indicators remain positive.
The patterns on both the Dow and NASDAQ suggest both markets are getting very close to a significant top, but the momentum has still not shifted to the downside.
Friday’s trading action was all about the GDP numbers. They were horrible! The data showed that the U.S economy only grew at 1.2 percent in the second quarter. This combined with a downward revision to the first three months of the year to produce an average growth rate of just 1 percent. Wall Street expected a 2.6 percent increase, so you have to wonder about what the Fed was saying earlier in the week when they expressed confidence in the economy. No Virginia, the economy is not growing. It’s barely limping along, trying to avoid recession. With interest rates near zero, we should be growing at 3-4 percent minimum. But we’re NOT. No matter what you think about the current administration on other issues, when you look at the economic numbers, they have failed miserably. And as long as GDP growth remains low, you can forget about wage increases and more good jobs. They’re NOT gonna happen.
One thing that did happen on Friday, caused by the release of the weak GDP number, was a significant drop in the dollar. UUP gaped down 0.34 cents causing it to drop off the Dean’s List. So once again, the stars are aligned between the dollar and gold. If you recall, when the Brexit vote was going on, I mentioned that we could see a period when BOTH gold and the Dollar would rise. But this would be a very unusual event, caused by money looking for safe havens. After Friday’s horrible GDP numbers, I don’t think investors will look at the Dollar as a safe haven anymore. They flocked to the dollar because they thought the Fed would raise interest rates later this year, producing a stronger dollar. But after seeing Friday’s numbers, the chance of that happening is near zero.
So when the dollar dropped, gold rallied. The VTI on gold (GLD) turned positive three trading days ago, and remains positive but still not in the Trend Zone. With a current reading near 65, the indicator is getting very close to entering the Trend Zone. And now with UUP off the Dean’s List and UDN back on, as long as the VTI on GLD continues to move up, I’m going to hold my gold shares. As I mentioned in my last Update webinar, I feel very comfortable holding gold when UDN is on the Dean’s List.
BTW, my longer term chart for the Dollar is pretty negative. Right now with the dollar near 97, there’s a long term Hockey Stick Pattern going back to 2008 that projects a move down to the 75 level next year, with an eventual decline to about 60. That’s a pretty big decline for the Dollar and if it happens, does not bode well for interest rates or the economy. So if the Dollar is about to start a major decline, gold could be a very nice place to be.
If the dollar starts to decline, my short term target for GLD is near the 135+ level. For GDX it’s near 33-34. The gold bugs index (HUI) should approach 300 short term, then pullback to under 250 later this year (wave 2 down), before rising to 700-800 in 2018.
I’m spending a lot of time talking about the dollar and gold this weekend. That’s because these sectors have the most clarity at this time. With mixed signals coming from the equity markets, especially between the Dow and the NASDAQ, I’m not ready to take a major position in equities. I want to see more indicators to line up before I put my money at risk.
But right now, I do see a short-term opportunity in gold and the dollar. Also, the fact that UDN is now on the Dean’s List could offer several other dollar based trading opportunities.
I talked about many of these opportunities during my last Update webinar. Remember, besides gold and silver, a falling dollar also impacts many other areas, including Bonds, currencies, mining countries, and emerging markets. So this weekend, please take some time to note that Bond ETFs, like TMF and TLT are on the Dean’s List. Same for the ETFs of gold mining countries like EWC (Canada) and EWA (Australia). A falling dollar makes Emerging Market ETFs (EEM) more attractive, as these countries can now pay off their debt in cheaper dollars. BTW, the VTI has turned up on all of the ETF mentioned.
Again, please take some time to think about the dollar-gold relationship. Then take some time to think about the sectors you might want to trade now that UDN has replaced UUP on the Dean’s List. Remember, everything financial starts with the Dollar. It’s ALWAYS about the dollar. And this weekend, The Dean is telling us that many financial relationships based on the dollar could be in the process of changing.
Have a great weekend.
That’s what I’m doing,
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