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Global Market Outlook

Global Markets Bullish but Near the Brink

November 30, 1998

Summary: The global equities markets have enjoyed and extremely bullish rise from early October to the present, with many market indexes retracing 100% of their previous losses or more. This is surely a positive sign for the still-expanding domestic economy and improving international markets. Or is it?

After reading our analysis of the global investing scene you can come to your own conclusion. Commodities are in a much less enviable position, both here and abroad. The growing deflationary trend that was first in evidence at this time last year in most commodity sectors, after abating somewhat during a late summer commodities rally, is back again and with a vengeance. In fact, most commodities are at major crossroads and where they decide to move from here will literally determine the economic destiny of the domestic and international economy for the next few years. The month of December promises to be a decisive one in the way of deciding which way our economy and the economies overseas will head into 1999. So get ready for and exciting ride.

Stocks

The Japanese Nikkei 225 stock market index is at a critical juncture right now, in our opinion. Take a look at the chart below. It shows yet another of those ubiquitous "ascending wedge" patterns we have written about so much lately. This particular chart pattern—a pattern with bearish implications—is normally uncommon. Yet it has occurred with amazing regularity in stock market indices in the U.S. and around the world over the past few months. To us, this reflects the extreme emotionalism accompanying this latest bullishness in the markets. The wedge pattern itself is the product of extreme emotion, and this certainly is the case here in the Nikkei which has witnessed tremendous volatility over the past four months. The Nikkei appeared to have bottomed out at the 13000 level in October and by November many analysts were calling for the beginning of a new bull market in the Nikkei. Closer scrutiny of the chart, however, does not confirm this assertion. The ascending wedge we've labeled on the chart below, while a relatively small one, looks quite mature and is forecasting a turndown in the Nikkei that could begin at any time. In fact, it may already have started as the past couple of sessions have been bearish. Wedge patterns usually forecast a retracement to at least the base of the wedge (in this case the 13500 level) but they often travel far further. We have been calling for at least one last spike low in the Nikkei to wash out the last of the bad debts and "correct" the last of the past excesses once and for all. We would not be surprised at all to see a new bull beginning in the Nikkei sometime in 1999, but we do not believe we have arrived at that point yet. Some believe a bullish head and shoulders bottom is forming in the Nikkei. For this interpretation to remain valid, a break of the 15000 level by at least 3% must occur and be followed by a sustained uptrend (15000, by the way, represents the Fibonacci 50% retracement level so perhaps this will be the level that will send the Nikkei plummeting once again). Until this happens we continue to call the Nikkei's latest rise a bear market correction and one rapidly nearing completion.

Hong Kong's Hang Seng index has been the bell of the bulls so far as it has retraced nearly all of its decline from March until September. It now stands at the 10750 level and is pointing even higher. The bullish flag formation in its chart points to a minimum target of 11926—the level of the last top in the Hang Seng in March. Any movement past 11926 would be extremely bullish for the Hang Seng and would likely see the index continue its sustained uptrend well into 1999.

China's SSE Composite has also looked bullish of late but its uptrend could be abating. The Fibonacci 62% retracement level—a resistance level of great psychological significance and one typical of bear market rallies—is only points away at 1277 from the current 1245. If this level is overcome, the next major level of resistance lies at 1422.

The Toronto Stock Exchange (TSE) 300 index is also approaching an important Fibonacci retracement level. As of this writing, the index was at 6468 but is nearing 6580, the Fibonacci 50% retracement level from its May top at 7835. If this level is exceeded, look for a rise to the next resistance at 6876—the Fibonacci 62% retracement level.

Brazil's stock market appears to us to be in a blow-off bear market corrective rise, much like other international indices. It currently stands at 9094. The Fibonacci 50% retracement level is at 9290. However, this index may not make it this far. Its chart shows yet another ascending wedge pattern which looks quite mature. If this pattern remains valid, this forecasts a move to at least the 6000 support level.

Germany's DAX index is nearing the Fibonacci 62% retracement level from its July top. That major resistance level is at 5306. The DAX currently stands at 5121.

Finally, the Moscow Times index looks like it may be nearing the end of what we interpret to be a bear market correction. The index now stands at 416 but is nearing the Fibonacci 38% retracement resistance level of 426. Beyond this lies the Fibonacci 50% retracement level at 507. Based on the ascending wedge pattern in its chart, 426 sounds about right for a top to this rally. It could be another cold, hard winter in Russia.

Bonds

The U.S. Treasury bond needs to rally above 131 in order to keep its previous bull market alive. Otherwise, we see this as nothing more than a corrective rally in an incipient bear market. A bearish ascending wedge is clearly forming in the T-bond futures chart from the November low to the present. We advise investors to enter positions in the Rydex Juno Fund (inversely correlated to the U.S. T-bond—a way to sell T-bonds short) if the 131 resistance level cannot be penetrated to the upside.

Currencies

The U.S. dollar technically remains in an uptrend. Some are calling it the resumption of the dollar bull, while others are calling it a bear market correction that will soon end. We are undecided. All we can do is examine the technicals. The dollar index (futures) currently stands at 9635. Fibonacci 50% retracement from the August peak lies just ahead at 9662. This also happens to be congestion resistance on the chart and should prove to be a formidable obstacle for the dollar to overcome. If it can penetrate this level—especially without struggling—this paves the way for a sustained uptrend perhaps to the previous high of 10200 or even higher. Therefore, traders should be bearish against 9662 and bullish above it.

The Canadian dollar has surprised us. It looked for a while that a bottom had been seen in this index in early September as a classic "V-bottom" pattern emerged. It also had the characteristics of a head and shoulders reversal pattern with a perfectly level "neckline" at 6650. Since that time, however, the C-dollar has been in a rather tight trading range between 6400 and 6600. In order for a buy signal to be given for the C-dollar, a penetration of the neckline at 6650 by at least 3% must occur. This has not happened yet—in fact, no attempts at attacking 6650 have even been made. This is bearish. In retrospect, it appears the C-dollar merely experienced a corrective rise along with commodities in late summer since the C-dollar is commodity-based. This interpretation will take on even more credence if commodities continue falling and the C-dollar still cannot break out of its current trading range. Traders should be neutral the C-dollar until a clearer signal is give. We suspect, however, that the currency is heading lower.

One currency that is giving a clear bullish signal is the Japanese Yen. Talk about your impressive upmoves! Since exploding upward in late August the Yen has soared to new heights and, while currently correcting, shows every sign of heading even higher. We spy what looks to be a bullish flag pattern on the Yen chart. If this proves accurate, look for a move to 9250 based on the minimum measuring implications of the flag's "mast," which extends from 7500 to 8750. A formidable "gap support" at 8000 has so far contained the latest correction and as long as this level holds the Yen should begin yet another uptrend soon. If the "window" that formed on the chart in October between 7750 and 8000 is not broken, traders should stay bullish the Yen (a "window" occurs when a gap between two consecutive trading days appears on the daily bar or candlestick chart. The window is the space between the two trading days).

The Swiss Franc, much like the Yen, is in a bullish position. It also shows what could be a bullish flag in its chart. For this interpretation to be valid, 7102 must hold on the chart. This represents the Fibonacci 62% retracement level from the August low to the October high. In fact, this level was hit on its latest day of trade before bouncing back to close at 7119. This is a positive sign and shows this support level is valid. If this level holds and the SF heads higher, look for a minimum upside target of 8227 (based on measurements of the "mast").

Commodities

The Bridge CRB commodities index is at a critical juncture. It currently lies at 196—one point away from its 21-year low of 195 (last seen in August). If 195 is penetrated, chart support is not for a long way down and this would mean certain deflationary collapse. Goodbye, global economy if this happens. It is utterly amazing the mainstream media are ignoring this extremely important index right now. Perhaps this is why the Dow is being so heavily hyped (if not manipulated) as it races to over-inflated levels: in order to distract Americans away from this disturbing development. We do not exaggerate in saying the fate of the U.S. and international economies literally hinges on this index holding above 195. Will Christmas 1998 be merry? Only if 195 holds in the CRB. Watch it closely.

Crude oil's chart looks nasty, plain and simple. If this deflationary downtrend continues, it will do more than anything else to destroy the economies of the world. This alone could decide the fate of the global economy (and oil is heavily weighted in the CRB). At these low levels, crude oil production becomes unprofitable, yet drilling continues among the major oil companies and oil production and refining among the major oil countries continues at an almost maddening pace. Until current high inventories are depleted the oil bear will continue. Have the world's oil magnates gone mad?

Gold

The yellow metal is still showing signs of life but the weakness continues in the gold market. A potential head and shoulders bottom is forming in both the daily and weekly gold charts with a neckline at 301. This is positive, but don't call a bottom in gold yet. In order for the H&S interpretation to hold, a 3% penetration of the 301 "neckline" must occur. This hasn't come close to happening yet. It is very disconcerting to see so many failed attempts at breaking the crucial 300 resistance level. In short, gold MUST overcome the 300 level soon if it is to have any hope of seeing higher levels before the year ends. Otherwise, we see one last spike low in the gold market (along with the rest of the commodities sector) developing sometime between now and mid-1999. After this, however, we expect to see gold leading the other commodities into a new bull market as we approach the new millennium.

Conclusion

With so many exciting developments taking place in equities and commodities markets in the U.S. and abroad, 1999 should prove to be an even more fateful and exciting time. While the masses of investors continue to believe we have entered a new global market, we remain highly skeptical of this claim and see a turnaround at hand. In fact, the month of December could witness the beginning of this turnaround even though it traditionally is associated with seasonal bullishness. This would be an ideal time for the bear to strike once again.

In closing, we quote from an excerpt in the November 19 The Reaper newsletter (P.O. Box 84901, Phoenix, AZ 85071) that could prove to be highly portentous: "…in Fortune, Kim Clark presents the views of Geoffrey H. Moore, the 'grand old man of American economists and one of the few economists to predict the 1990 recession.' Moore is one of the guys, who, 50 years ago, put together the economic indicators that the U.S. government uses. These days, Moore, 82, is watching just one simple statistic: banks' prime interest rate. His theory: simply count the number of months after the trough of a recession during which the economy grows while banks' prime rates decline or stay flat…Multiply that number by 1.57, then add 14.6 to the total…that's the number of months an expansion will last. Moore's formula has worked for every business cycle since 1954. The current expansion started in March 1991. Moore's formula calculates that it will end 69.6 months later. Therefore, the recession will begin in December…December 18 to be precise."

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.


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