The current state of play

A few charts for those who follow this blog regularly:

Firstly, the U.S. dollar:

The U.S. dollar is butting-up against resistance on the monthly chart. This is obviously a big level and would dictate moves in other markets, depending on the outcome. Breaking through here could lead to further dollar gains.

If we pull-back, I would expect another test towards this level.

Gold:

A rally occurred recently in gold, but seems to have died out (FED/Stocks) a little. $1250 is initial resistance to see if we can continue to $1400. Failure to get above here could see the next leg down for a low.

Oil:

Oil is still weak. A weekly close under $50 and we may see lower 40s soon. A counter-trend rally should come soon in oil, which get all talking about a bottom. $35/40 is a good place for a bottom but we might not see significant oil gains again until 2016, or beyond...

How the market doesn't work

The market is a complex beast-- but in the end -- it all boils down to supply and demand. If the buyers overwhelm the sellers, then the market will rise; and vice-versa.

There is a belief among some market commentators that everything in the market is connected and if only they follow a few correlations then they should make money. Following the beliefs of these people will not only cost you money in the short-term, but will continue to put you on the wrong side of the markets forever.

The sad reality of those who have called a bear market since 2009, is that they were dead wrong; likely have no skin-in-the-game to the short-side; have done nothing to adjust their expectations to the current trends; and worse, don't even have history on their side.

To continue looking for reasons for why a continued bull-or-bear market is false, is simply a childish, loser mentality for investing that too many of us fall for. You are either on the right side or the wrong side of the market move and the longer a trend continues on the medium-to-longer-term time-frame, the harder it is to change that trend. Buying dips -- or selling rallies-- in the direction of the ultimate trend is the safest and easiest way to make money.

Look back on any bull market and you will see areas of exuberant market behaviour. Even when markets have stretched beyond fundamentals and defied correlations, there is still a reason that demand is higher than supply. You can fight this all the way but you won't be fighting it to the bank.

Quit sulking about price action and learn how to use it to your advantage.

Year end closings

As we approach the monthly closings for year-end I will share the charts and my views.

Firstly on the S&P500:

Despite the weakness of the S&P500 this week (likely year-end profit-taking) the monthly chart is setup for further gains. It's likely we will see gains in January through new position building. Greek elections on January 25th may take the wind out of the market but we may be setting up for a bubble move in stocks. Retail involvement is still low but may be limited after previous losses. The market looks set to go through 2100 though, after which a bull move may take us higher. With Japan pushing QE and the ECB looking likely to join them, we are certain to keep pushing higher until we have another structural break (think Tech bubble pop/sub-prime pop).

Euro:

A very weak monthly and yearly close in the EUR/USD assumes a certain test of the 1.20 level. This will probably happen in January as a result of the Greek elections. The results of this election and possible QE from the ECB could see further losses through 1.20.

Oil:

Crude prices are also electing a very bearish monthly/yearly closing, as WTI breaks through $53. Price should test the $40 level in 2015. We may see a counter-trend rally soon but the outlook for oil is bearish.

On the U.S. Dollar:

The U.S. dollar may put a top in soon for a pull-back, however the bullish trend will continue. The BOJ and ECB are going all out to devalue their currencies, whilst the oil price decline is threatening sovereign debt in oil-producing nations. Talk of the dollar's demise is still premature and there is too much risk out there that could see a run to the dollar.

The smart investor's guide to gold

I have just finished writing a new ebook: "The Smart Investor's Guide To Gold".

The book is available in the Amazon Kindle store here: http://www.amazon.com/Smart-Investors-Guide-Gold-ebook/dp/B00RHULU00/ref=sr_1_1?ie=UTF8&qid=1419716433&sr=8-1&keywords=smart+investors+gold

"The Smart Investor's Guide to Gold" is a professional and unbiased look at the investment considerations of gold as an asset, alongside an analysis of the current monetary and financial regime to provide a smart investment strategy for gold.

The book is based on the the same research and analysis that I use throughout the blog. In my opinion, too many writings on gold are based on scare stories and get-rich-quick schemes, which has cost investors a lot of money over recent years. I fully support the use of gold in portfolios, and believe we are nearing a bottom in gold prices, yet we must still observe the cycles and trends in order to invest wisely.

When to use volume

I don't use volume as an indicator too often as it can distract from the trend at hand, or create a bias in your mind when you see an increase.

The following chart on QQQ though, is an example of when volume can be used to assist your decisions on a market's next direction.

The yellow lines I've marked on the chart are highlighting big volume builds in the stock. It's clear looking at these, that the 'smart money' buys heavily into the bottoms. 

If you look at the October bottom, the volume was well above the average: a good sign that large transactions were building and a continuation of the up-trend was likely. We also got a nice bounce off the 200 moving average here.

Anatomy of a low

The following chart highlights the creation of a medium-term low in oil. Price was falling into the end of 2013, where the low was made.

The break of the downward trendline is important and the market usually rallies before retesting the lows (or near to).

The rally in price through the first half of 2014 gave us two important trendlines to gauge the breakdown in price. Note also that the rectangle around the bottom is around two months in length before the final low.

The next chart shows where price went in the second half of 2014.

The key points here are the trendline failures at rectangle A & B. The failure at A was the final attempt to form a low at the year-to-date low around $92.

My thoughts on the 'Black Swan'

Sorry to disappoint any ballet fans out there, but the 'Black Swan' I talk of here, is the metaphor popularized by Nicholas Naseem Taleb, in his excellent book, "Fooled by Randomness", which was used to describe market risk.

The idea was based on early studies on nature, where only white swans had been discovered. When the discovery of black swans was made, it turned previous thought and analysis on its head.

Taleb used the metaphor to describe events that the market does not see coming. One example of a Black Swan would be the Russian default in 1998, whose effects caused a market crash and the collapse of a Wall St hedge fund; complete with bailouts. The sub-prime mortgage debacle of late 2007, is another situation where previous expectations were flipped upside down. Ratios and risk measures that had created a boom in mortgage lending were suddenly irrelevant and the effects were chaotic.

My thoughts in relation to the Black Swan are based on my experience in the market. In mid-2007, the stock markets and housing markets seemed too-good-to-be-true (they were) BUT, until the Black Swan became clear it was only safe to play the current trends, regardless of your thoughts on the market. I use this only to highlight that when the market is showing extreme exuberance, there is still profit to be made going long with tight downside protection. In 2007, the bullish belief was so great, that the market bounced higher following the collapse of Lehman Brothers: one of the largest Wall St banks with extreme contagion risk.

The present action in the stock markets are similar to the markets of 2007, but until we get our 'Lehman moment', it is not advisable to fight the trend. When the Black Swan comes it will be clear.