Is it time to take profits?

August 20, 2018 11:51 AM

We’ve reached the stretch run for the dog days of August. Once again there is a mixed market. Just an hour into the new week the Dow Jones Industrial Average is up 109 points and the Nasdaq is down about 10.

Here’s where we are at. Going back to the first week of the month, bearish intraday signals started working. We got a good rollover on the E-mini S&P 500 (ES) just as the Turkish Lira crisis surfaced. Then they found a low last Wednesday which propelled us back the other way. That means bullish signals started working again as well. Right now, tech is lagging in this sequence even as the good ES signal from two weeks ago is tested. It will be slightly more bullish if the ES has a thrust up from here.

But we’ve had a similar market to what we’ve had all year. It’s a rotational, divergent market. The good news is Mercury has once again gone direct so a lot of the choppiness we’ve seen across the board during the past three plus weeks can calm down a bit.

So, what is the biggest technical news of the week? They could be working on important reversals in precious metals, which would have implications for the forex market. So far, gold is responding to 144 days down, and silver is responding to 241 days down from the high in September of last year. What is the significance of 241? When we take the orbit of the Earth at 365, Mercury at 88 days we get something called the Mercury ratio, which is 4.14 and the inverse which is .241. The only time I pay attention to this stuff is around the Mercury retrograde period, so precious metals bulls might have received a parting gift from this sequence. Right now, the EUR-USD is off the low and has a blended candle formation on the daily where the bulls are getting the upper hand. The same thing is true of the U.S. Dollar Index, only in reverse.

In terms of the psychology, we talked about “Eyes Wide Shut” last week. The market will go on, until it doesn’t. But you already knew that. In the past three weeks we had a couple of mini black swans with Facebook (FB) and Turkey. We don’t know that we’ve seen the end of the Turkish situation, and hopefully it won’t turn into a contagion. But there are any number of other issues sitting right below the surface. On Saturday President Trump finally tweeted against the censorship and one has to think he is planning the next moves. With the election coming up in less than three months, the risk for antitrust activity has just gone up exponentially.

Here’s the problem for the market. The technocrat companies are the market leaders, which are responsible for the rally named in honor of the President. These are the same players who are being looked at right now. The big question is whether this administration really has the courage to take them on now prior to the election. There are lots of political implications to this type of action but as far as we are concerned, you’ve already seen what happened for Facebook on earnings.

In a hypothetical world, what do you think would happen to the market if there was a screaming headline where antitrust action was initiated or even threatened against one of the tech giants? It would be a disaster and I think we all know that. The reality of the situation I don’t think Trump would do that before the election. But we do know that GOP candidates are not being treated fairly and have been shadow banned in many cases. The most notable case is Matt Gaetz in Florida. That in itself is a form of collusion. The President is stuck between a rock and a hard place. We know September has not been kind to the stock market over the years. If the market were to get hit, GOP candidates would no longer be able to take credit for a booming market, would they? That’s the bad news for the President. The good news is in case the market did get hit, we are now close enough to the election where the economy likely would not be impacted since the market is a leading indicator of 6-9 months. Of course, if there was a serious black swan event everything could change in an instant. With the nature of black swans, we don’t get advance notice of them. What we’ve seen up to this point is two mini swans and odds favor more of them down the road.

In summary, the market still lives. The ES is right now at a key inflection point technically. The precious metals are at a point where we could see an important change of direction. The psychology of the market is still incredibly complacent given the level of domestic and geopolitical risk. If you are long, you don’t want to be the last person standing when the music stops. That being said, stay with what is working as long as possible. Where people get into trouble is when the market reacts negatively, they automatically believe it will always come back. By the time they realize it won’t, they are already down 30 to 40%. We are three years out from the last important correction. We are due for another one. If you’ve greatly benefitted from the Trump rally, make an important decision to draw a line in the sand and protect your winnings. As far as precious metals are concerned, we are getting to the point where longs can take exploratory intraday positions to see if it will lead to something more.

About the Author

Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.