Bull Trap on the US Stock Market…

By | Market Analysis

Are we looking at a BULL TRAP on the US stock market?

Isn’t it bizarre how the US stock market is trading at record highs yet there are over 12 million US citizens unemployed? More major retailers have filed for bankruptcy in the first nine months of this year compared to the whole of 2019.

Furthermore, US mortgage delinquencies have jumped by nearly 4% which is the largest jump since the MBA’s (Mortgage Bankers Association) survey began. An estimated 4.2 million homeowners were on forbearance plans, as of June 28th.

You may have heard the saying, there is a disconnect between the economy and the stock market, and you would be correct in agreeing with the statement.

Markets are trading at record highs based on hopes of a second stimulus package. The mass stimulus from the FED and US government is resulting in a devaluation of the USD. The US printed more money in one month than in two centuries.

We are now questioning the strength of the recent recovery in the US stock market. 

Are we in a counter-rally/bull trap?

SP500 – Daily Charts

The SP500 is showing a rising channel formation/bear flag, keep in mind these ALWAYS break at some point. The new high is also setting up a potential bearish divergence on the RSI. The bearish divergence is generally what we look for when trading reversal opportunities.

DOW JONES – Daily Charts

There is a similar story being painted on the Dow Jones. A possible bearish divergence setting up along with a bear flag structure. Retail traders are being brought into the market on hopes of more stimulus. Technical patterns are always broken at some point, what we tend to find initially is a move higher beyond what the market is expecting. Which results in capitulation and a breakdown. Classic bull trap scenario.

The question we have to ask is how high will this go before the opportunity presents itself.

Next week there is a blockbuster week!

VIX Options/ Futures expiration on the 21st October

US Government vote on the next stimulus bill.

Presidential debate on the 22nd October

 

Firstly, the VIX is a measure of volatility. Leading into the expiration date traders will be looking to sell their positions or face cash delivery. This can increase volatility on the day. The market, which is hanging on stimulus hopes, will find out on Thursday if they receive any stimulus prior to the US elections and to top it all off, President Trump and Joe Biden face off again for another comical viewing.

The stimulus will have a direct impact on the USD and US indices.

DXY Index

We have been tracking the USD reversal pattern for some time, as you all have seen previous analysis.

There has been an inverted head and shoulders formation at the bottom of a 5 wave structure. The DXY is now setting up a potential bull flag structure. There is a clear inverse correlation between the US stock market and the DXY.

If the stimulus talks breakdown, we could see an explosion on the VIX, consequently pushing traders into the USD and sell US indices.

The technicals are there for everyone to see.

We just need the catalyst to start the movement. Technicals are ALWAYS broken, it is just a question of when.

Our sole focus in the trading floor is to take advantage of these setups over the coming week!

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GOLD Bear Flag Pending

By | Uncategorized
Market Update – 14th October

The US equity market is holding the FED/ US Government hostage, craving more and more stimulus to support the US economy. Whether the money being printed is supporting the US economy in a positive matter is an interesting question. For US citizens and USD holders, their cash is becoming worthless. Gold is currently up roughly 25%-30% as investors piled in buying protection against the oncoming inflationary pressure.

There are a number of events taking place that will likely impact the next move on gold.

With the Democrats taking the lead in the US Presidential Election Polls the devaluation of the USD may continue. According to CNN, Joe Bidden is in a better position at this point in the campaigns compared to any challenger since 1936. Biden is reportedly ahead in the polls, 55% to 43% among likely voters. If the Democrats do take office, we should expect even more stimulus than what has already been provided by the US Government. With the polls at the current levels, the market is beginning to price in an even weaker USD, which may support higher gold prices. However, this all rests on the second stimulus check clearing, and soon.

Any sign of the US Government putting a stop to the stimulus and free money, they US stock market crumbles. Last week we all witnessed this first hand during Trump’s twitter antics. The US government is set to vote on the next stimulus bill on October the 19th. McConnel, the Senate majority leader, said the first order of business is to vote on a smaller stimulus bill worth roughly $500 billion. Therefore it puts the questions forward on whether a bill will be past prior to the US elections. It all hangs in the balance.

 

GOLD – Daily Charts

The past month trading gold has been difficult with the choppy movements. Taking a look at the longer term picture we can see a pennant breakdown and a move back into an inclining channel formation. Gold has been teasing a potential breakout to the upside of the channel formation.

GOLD 4 Hour Charts

The 4 hour charts are showing a rising channel formation or a bear flag. The question is what news event will result in weaker gold prices. A resurgence into the USD is the most likely scenario.

Yesterday news coming from Johnson and Johnson reported they had stoped clinical trials on their covid-19 vaccine. This resulted in a run higher on the USD, and gold consequently fell over night. Additionally, news broke about the stimulus package not coming into effect until 2021.

Goldman Sachs strategists have suggested to sell the USD on positive Biden news and vaccine hopes. On the other hand, buy USD and SELL gold on negative stimulus and vaccine news.

Traders will be watching for a break below the bear flag formation to confirm a move lower, or a rally above the negative pennant trend line to enter long positions.

As always we will keep you posted in the trading floor on any set ups we take.

 

Let’s see how this plays out.

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