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Thursday, 17 January 2019
Melbourne, Australia
By Murray Dawes

  • Hands up who wants Deutsche Bank
  • Is it time for gold to shine once more?

The biggest question that has to be on every investor’s mind at the moment is whether or not the huge sell-off over the last few months was a precursor of more downside to come, or yet another buying opportunity in the never-ending bull market since the crash in 2008.

So today I am going to spend my time trying to answer that question for you using my own model of market behaviour. I won’t even begin to act like I know what the future holds because no one knows the future.

Instead I will approach the problem by analysing data over the past few decades to see whether the current situation is a canary in the coalmine.  Do we need to batten down the hatches or is it time to go shopping?

The answer is hidden in plain sight

chart image

Source: CQG Integrated Client
Click to enlarge

The chart above is a quarterly chart of the S&P 500 over the past 20 years. So each candle shows you three months of trading. It is a great chart to use for analysis because it cuts out a huge amount of noise. Most large fund managers can only change their portfolios once every quarter as well, so the quarterly charts reflect the buying and selling at the big end of town.

I find this chart particularly fascinating (yes, I need to get out more).  One of the cornerstones of my approach is to focus on the most recent buy or sell pivots.  A buy pivot occurs when prices have been in a downtrend and then we see a close above the high of the lowest price candle. Conversely, when prices are heading up, if we see a close below the low of the highest price candle, it is a sell pivot. More on pivots after the markets…


Overnight, the Dow Jones Industrial Average closed up 141.57 points, or 0.59.

The S&P 500 rose 5.8 points, or 0.22%.

In Europe, the Euro Stoxx 50 index finished up 9.17 points, or 0.30%. Meanwhile, the FTSE 100 lost 0.47%, and Germany’s DAX closed up 39.45 points, or 0.36%.

In Asian markets, Japan’s Nikkei 225 is down 10.26 points, or 0.050%. China’s CSI 300 is up 0.40%.

In Australia, the S&P/ASX 200 is up 12.5 points, or 0.21%.

On the commodities markets, West Texas Intermediate crude oil is US$52.04 per barrel. Brent crude is US$61.05 per barrel.

Turning to gold, the yellow metal is trading for US$1,291.51 (AU$1,805.22) per troy ounce. Silver is US$15.57 (AU$21.76) per troy ounce.

One bitcoin is worth US$3,588.21.

The Aussie dollar is worth 71.55 US cents.

Buy and sell pivots

chart image

Source: Port Phillip Publishing
Click to enlarge

On smaller time frames you will see them all over the place and they can’t be used to trade on their own. I combine them with my theory on where prices often reverse in trends or ranges to establish an edge when trading. But on the very large time frames, such as the quarterly charts, it’s quite uncanny to see how useful the buy and sell pivots can be in tracing out the different waves in bull and bear markets.

In the S&P 500 quarterly chart above I have traced out each and every buy and sell pivot that occurred over the past 20 years. In that whole time there has only been five sell pivots and four buy pivots.  I find that amazing.  There, hidden in plain sight, is a tool to give you plenty of warning about a shift in momentum. 

Of the four sell pivots that have already seen their corresponding buy pivots (Marked out as ‘1’ and ‘1A’ on the chart), two of them occurred just before a crash! When looking at the other two occurrences during the bull market of the last decade, only one was a complete dummy.  In mid-2011 we saw a quarterly sell pivot, but the buying returned straight away, and a buy pivot was created at a higher level a couple of quarters later.

The one that occurred in mid-2015 may have ended up getting negated without seeing a huge sell-off, but if you look closely you can see that there was six months of weakness before turning back up again. In other words, if you had been a seller on the rally that occurred after the sell pivot was confirmed, you had plenty of time to take some profits on the ensuing sell-off when prices returned to the bottom of the sell pivot candle to retest the low.

So, when looking at this data, there were three out of four instances when you could have made money from the warning signs that the sell pivot gave you, and in two out of four instances you were given a warning of a coming crash. I’d say that is data worth sitting up and taking notice of.

Another way to look at the data is to imagine that you were bullish when the most recent pivot was a buy pivot, and bearish when the most recent pivot was a sell pivot.  Look at how well you would have done over the past 20 years if you had just trusted those pivots. 

I have written about this scenario before and I apologise if you feel I’m repeating myself, but I think the current situation is now flashing red, and that this current rally should be used to offload risk or actively search for shorting opportunities.

Until we see a corresponding buy pivot, you have to remain on alert to the potential for further downside.

None of the above analysis relies on me making sweeping statements about what the future will hold. There’s no need.  All that’s needed is a clear-eyed look at how the market has behaved in the past. The basis of the analysis is the very logical idea that a market can’t rally or sell off very far unless a buy or sell pivot has been created in whatever timeframe you are looking at.

All of this hinges on the actions of the various central bankers around the world of course.  They have proven how adept they are at reversing any weakness with various policy tools, and the speech by Jerome Powell a few weeks ago was THE reason for the market reversing course and creating the huge short squeeze that we have seen over the past few weeks.

If the market comes to the conclusion that there will only be one or two more rate rises, and then the US Fed pauses, there is no telling what the market might do in response.  The game of cat and mouse will continue for years to come and it’s impossible to read the tea leaves from what they say in their speeches, which is why I would prefer to trust what the charts are saying and then adjust course if they tell me to.

Hands up who wants Deutsche Bank

Deutsche Bank was up nearly 8% last night on news that a possible tie up with another European (not German) bank could occur, and the most likely suitor is UBS.  Whether or not anything will come of this is extremely uncertain.  Deutsche Bank is now the hottest of hot potatoes. Who knows what lurks beneath the surface of this behemoth.  If the direction of the chart over the last few years tells us anything it is that there is plenty to be worried about.

Will any other bank be prepared to take on the whole business or will there need to be backroom deals involving governments (read: taxpayers) stepping up and taking over the bad assets?  Hmm. I think we all know the answer to that question.

If this whole process gets out of control, there is no doubt that Deutsche Bank could be a catalyst for a crisis over in Europe. When I look at the situation over there, I wonder how they manage to keep the whole thing together.  I keep asking myself, with the ECB stepping back from soaking up every bond they can find, who will take over from them? How on earth can the rates of the peripheral nations remain so low under such circumstances? And with each nation’s banks full up to the gills with sovereign bonds, because they don’t need to hold any capital against them, what will happen to their balance sheets if peripheral bonds start selling off aggressively?

It seems like a tinder box to me. 

Is it time for gold to shine once more?

I’ve had very little interest in gold for years.  After the huge smashing it received between 2012 and 2015, with gold stocks plummeting up to 90% or more, I decided not to play too heavily in the sector. But over the last few years we have seen a slow grinding rally that has built a nice base for a possible launch to higher prices.  When I look at the situation in the world and contemplate what could benefit under most scenarios, gold actually sticks out.  If the US Fed completely takes fright at the market’s weakness, and backs off from rate rises or even starts printing money again, the US dollar should weaken substantially and gold should benefit from that and lower rates.

But if the Fed holds its course and continues to raise rates to the point where the equity markets tumble again, gold should benefit from safe haven buying despite the higher rates.

Gold looking good

chart image

Click to enlarge

I can make a case that gold should perform fairly well whatever happens from here over the next year or so.

We have seen a monthly buy pivot last month from the buy zone of the previous up-wave so from a technical viewpoint it’s all systems go for gold until we see a monthly sell pivot. 

All the best,