Equities: An Overview

Global Stock Markets

We cover the S&P500 (SPY) extensively on we will move on to a market we usually don’t, the Russell 2000 ETF (IWM).

We often look for a trend to unwind in the same way it began, giving rise to equality targets where wave 5 is equal in length to wave 1. IWM is particularly interesting, as not only is wave 5 comparable in size to wave 1, but the structures are similar too (shown by the pink outlines). This suggests it should continue higher to the $156-159 area, but it also warns this trend is mature and should complete soon.

The continuation/midway gap (circled) occurred just where it should, in the middle of wave iii of 3 and the strongest part of the trend. Using this as our midway point projects a high in the same area, $159-$160.

Leading stocks also help form a view of the broader market. Here is Apple (AAPL), which is reaching for the $180 equality target. And Amazon (AMZN), which is again late cycle and poking through the top of the trend channel. Netflix (NFLX) has a clear trend which will complete on the next highs. Alphabet (GOOGL) has an interesting fractal where the price action following each earnings gap repeats (on a smaller scale). This suggests a period of consolidation before another small rally. The main takeaway from these charts is they are late cycle. Swing trades are still very rewarding, but this is certainly not the time to buy and hold as when these trends complete there will be a large correction.

Precious Metals
Gold (GLD) and silver (SLV) have gone to sleep, but the question is, which way will they jolt when they wake up? We are still looking for a significant move higher, although the price action is very messy in this range. The gold miners ETF (GDX) probably has the clearest view, and may be setting up a bullish triangle. We wouldn’t want to say the low is definitely in, but as a general guide, the next significant move should be higher, and break the $25.6 highs.

Oil (USO)
Oil got to within a dollar of the $60 target and should now pull back to $55 again. We would buy the dip if it looks ‘right’ (we will try and leave a comment when/if price tests this area), but as it would be the second re-test of the $55 break-out area, we have to be careful as a failure could get bearish very quickly. The bigger picture shows stiff resistance at $59-60 with dual channel highs and the 161.8* Fib extension.

Natural Gas (UNG)
Natural gas continues to trade very erratically, at least from a technical perspective. The breakout of the triangle was textbook, as was the re-test. but then it all failed completely, only to recover again.
Actually the price action reminds us a lot of this time last year. First there is a sideways range over summer, then a fake break higher, before a much larger rally. It suggests NG could continue higher until the end of the year before making a top.

The Dollar (UUP)
The dollar reversed from 94.9 to re-test the broken trend channel. It should now recover to a lower high (below 94.9) before resuming lower. EURUSD (FXE) has a bullish pattern, but this will probably only lead to erratic moves around the 1.185 levels rather than a high probability trade.

Conclusions
The above charts map what we think are the most likely scenarios in various markets and are based on our interpretation of probabilities. Combined with other analysis, and good money management, they can help frame profitable trades.

Fitch Matthews: Update for the Week

FM Wealth Management News Letter

Update for the Week

 
Equities
Looking back we can say nothing very significant happened last week. The S&P 500 (SPY) did dip and of course as expected there was buying on the dip. What is most interesting is when we look at the weekly chart we see a lower high, a lower low and a lower close. We are seeing some signs of weakness and decent reversal pattern, which is exactly what we have been waiting for since we broke through 2510. There is a topping pattern on the Dow Jones (DIA), although the down channel is perhaps wishful thinking at this early stage The structure of the decline is not what we would consider a clear trend sequence, but it can still be c viewed as the first leg of something larger. This becomes much clearer in other indices such as the German DAX and FTSE in London.

GOLD
Gold (GLD) had a good week, finishing with a strong session on Friday. Hopefully, you caught our comment in our last article calling a buy in the $1262-72 range. We should break $1305 next week, and we remain fairly certain the low is in for a significant rally back toward $1350-60. We still remain cautious, as the path to those levels is still a little unclear as the price action has been very choppy. Should there be a Monday gap higher it should keep going. Otherwise, a move above $1305 may fade out to a higher low in the $1290s. Even so, we are long again from $1271, which is $50 lower than where sold it back in late August. We continue will hold for the next 1-3 months.

Oil (USO)
Oil did pull back to and has set up a decent buying opportunity. We actually missed it by 10 points, but there will be more buying opportunities at $60, particularly if the trend sequence follows the expected path. We will be in awe if it plays out quite as clean and predictable as above, but we will make adjustments and react to what price is telling us. We will leave it for now comment if and when another buy set-up unfolds.

Natural Gas
Natural gas (UNG) did the same and set up a decent buying opportunity at the trend-line re-test and gap window. Holding here is certainly bullish, but new highs are required, especially above last week’s $3.23 high as the move from the low on 19th October has only completed three waves so far. A new high should create a trend line that opens up more bullish possibilities. 

Bonds
Bonds (TLT) held the re-test highlighted last week and will continue higher.

Dollar
The Dollar (UUP) we have been writing about the EUR/USD ‘head-and-shoulders pattern” for some time. This implied to us that it was a good set up for a short squeeze and last week it that scenario finally played out. Ideally, there should be one more high above 1.19 in this rally from the November low to complete a trend wave.

Your Take-Away
The dollar and Equities are in the early stages of potentially a significant decline. Gold and Bonds have already bottomed out and should rally further. Oil and gas have broken out and should also move higher.

Australia's Santos spurns $7.2 billion takeover approach

Australian Stock Markets

Australian gas producer Santos Ltd (STO.AX) said on Thursday it rejected a A$9.5 billion (5.48 billion pounds) takeover approach in August, sending its shares up 13 percent on speculation another offer was likely to emerge.

Santos, Australia’s no.2 independent oil and gas company, said it rebuffed the approach from private equity-backed Harbour Energy as too cheap and has not received any further proposal.

It confirmed the August approach after a newspaper reported that Harbour, led by a former executive director of Royal Dutch Shell Plc (RDSa.L), Linda Cook, was set to make a bid worth around A$11 billion.

The Australian Financial Review on Thursday reported that Harbour was lining up a bid of around A$5.30 a share, well above analysts’ average price target of A$4.26, according to Thomson Reuters data.

The interest in Santos comes at a time when gas demand is expected to soar in China, and a global LNG glut is expected to turn to a shortfall within five years as few new LNG projects are set to open after 2020.

Santos shares rose to a 15-month high of A$4.95.

Santos also rejected a A$7.1 billion proposal in Oct 2015 from a fund backed by the ruling families of Brunei and the United Arab Emirates, at a time when the company was saddled with nearly A$9 billion in debt.

It has since slashed debt and cut costs, positioning itself to benefit from rising oil and gas prices at its Gladstone liquefied natural gas (LNG) project, and gas assets in Papua New Guinea, Australia’s Cooper Basin and offshore northern Australia.

Santos expects to hold its gas output steady over the next several years, with growth to kick off in 2023 from projects in northern Australia and Papua New Guinea.

Harbour Energy was formed in 2014 by private equity firm EIG Global Energy Partners to make investments outside the United States.

Earlier this year Harbour bought Shell’s UK North Sea assets with Chrysaor Holdings Ltd for $3 billion, making it the largest independent oil and gas producer in the North Sea.

Its backer EIG has already invested in Australia, funding Senex Energy (SXY.AX) on a coal seam gas project and taking a 12 percent stake in the junior producer in a market that faces a gas supply crunch and soaring prices.

Santos’ biggest shareholder is China’s ENN Ecological Holdings Co (600803.SS), which together with private equity partner Hony Capital holds 15.1 percent of the group.

Everything Except Equities, a Market Update

Today we are going to look at everything except equities.  Since there is a lot to cover we are going to jump right into it.

Precious Metals: 

Gold (GLD) had a pretty good run at breaking out last week, but the NFP reversal put the move in doubt.

Continuing to go up after 3 weekly high closes is a tough ask and with a down week it is actually healthy and gives buyers an opportunity to get in. The next break should come now and take price through $1,295 for the buy stops and  $1,330 to $1335 our next target price.

Silver (SLV) is still very volatile and hard to analyze with any confidence. We think it’s best to just rely on solid set-ups, and there may be one when the trend-line below breaks on the next wave up. If the break comes in the wave of 3 position (we noted above), we know there are very high odds price will keep running up.
 
Oil (USO)

There are two likely scenarios in the short term.

Bullish: This targets $52.5-53.2 as long as the $47.5 breakout holds.

Bearish: This will flush out late bulls (we are noticing a few) and go sub $45 before the next leg of the rally. When there is this lack of a clear direction we recommend waiting until we see a cleat trend start. We are trading the time frame evidenced above and have long term target north of $60.

 Natural Gas (UNG)

Here we had back to the drawing board on natural gas, as the length of time it went sideways in July was far too long to see where it was likely to break out. We have therefore had to label the decline as an ABC correction, currently finishing on wave C.

This won’t (as you might expect) change much in the longer term, or even in the short term, but we are looking for a reversal at the end of wave C. It is interesting to see how the first 5 waves down (look at wave A) are contained in a channel and this channel broke; this is why we first thought that NG had bottomed in June, but unfortunately, we were wrong (it doesn’t happen often but we are only human) about the formation started another wave down for wave C.

We are looking for some sort move higher to confirm we have seen the bottom. At the moment, the last wave looks a bit small so it may still lead the price lower, but shouldn’t get lower than $2.6. We are still looking for a run to $4 and in the longer term, but the best way to play the reversal is probably long dated calls.