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BISHOP’S
MARKET
OUTLOOK, 9-6-02 CRB:
Up
from 195 at the April low to 225 (cash) today,
this 15% inflation-sensitive rally is bound to
pressure interest rates, consistent with at least
a short-term top in Bonds which we are forecasting
for other reasons (see Bonds).
Prior to the two spike-up days of 9-05 and
9-06, the CRB was perfectly poised to cap its
rally from the October major bottom with a classic
wave 5 top. Given the strength of those past two days, however, the
likelihood has increased that we will see a
re-test of the highs after any short-term CRB
pullback.
Such re-test may target the 2000 highs
in the 230-235 range. The fact that much of this
CRB surge is grain and energy-driven dampens this
outlook slightly as many grain contracts are now
extremely toppy.
We find the inter-market picture
believable: a strong CRB rally caps the Bond rally
short-term, Bonds selloff, the CRB subsides, Bonds
then setup for a final rally in late Sept/Oct,
accompanied by a final stock plunge. The
then-softening interest rates in turn eventually
stimulate stocks heading into seasonally-strong
Dec/Jan and the upward re-test in the CRB ensues.
This is a crude summary of our Fall / Early
winter outlook. ENERGY:
Crude and distillates are very toppy in
this peak season. An energy selloff would take short-term pressure off the CRB
as well. CL:
Technically
we may have one further upside pop but position
traders should keep very tight trailing stops
above the support line connecting the Aug &
Sep low pivot points.
This stop is now at 28.50 and rising.
Declining backwardation since mid-Aug says
a top is likely.
Also note the rising net commercial short
position as crude peaks in seasonally toppy
Aug/Sep. As
a sign of the top, look for the sleepy option
volatility to turn up first. HO:
HO is peaking in seasonally toppy Aug / Sep as
commercials are building a huge net short position
ahead of bearish Nov / Dec / Jan.
By taking out the Mar / Apr highs, HO is
completing a wave 5 move from the Dec. ’01 low. Longs should keep the tightest of stops. Nice short setups
will have great risk/ reward here.
Another negative: option volatility, which
has declined from the Dec. price lows, definitely
looks to have bottomed. We would expect any HO
selloff to be characterized by rising volatility. HU:
Gasoline is technically putting in a wave 5 top
early in the peak Sep / Oct season. Commercials
are mildly net short and option volatility is on
the floor. Meanwhile
backwardation is softening. These are all
early-top warning signs. Keep extremely tight stops on any longs.
Note: a decline in energies would be
consistent with a top in the CRB, a final upside
pop in bonds, and a final stock selloff, all of
which we are expecting for independent reasons in
the late Sept/ Oct timeframe. NG:
Commercials
who were net long at the recent Aug. bottom now
are moving aggressively to net short and
approaching rally-capping levels. Nonetheless, we
like the short-term upside prospects for NG to
takeout its 8-27 (3.7070 basis Oct) high and
target May’s “sideways box channel high” in
the 3.82 to 4.00 range by late Sept METALS:
A mixed situation. GC:
Short-term, should our forecast for rallying forex
hold, we would look for GC to rally also, aiming
for technical targets between the Jun 4th
high (332.60 Dec.) and 340+ by late Oct.
Note also the promising ascending triangle
developing since the Aug. 1st low.
Gold has recently been flat or declining
vs. most global forex, confirming that this
year’s gold action remains primarily fx-driven
rather than being based on any supply / demand
issues. Also
note the flat contango and cresting option
volatility, further evidence that GC is at the
mercy of the currency markets right now. SI:
Commercials that were hugely short at the
silver top in July are approaching but not quite
at levels consistent with prior bottoming /
rallying points.
Option volatility is also not yet at an
extreme. Our
best chart interpretation is for a downside test
of the 8/23 close (441.50 cash), targeting 436 by
late Sept. Thereafter,
commercials may be sufficiently net long to launch
a tradable rally into seasonally strong Jan / Feb.
SI is still plummeting in all forex, a sign
of no supply / demand pressure.
Increasing contango most likely also points
to near-term softness, consistent with a test of
the 8-23 cash low. HG:
By testing its 8-05 low, HG is setting up for at
least a blip rally.
Shorts should keep extremely tight stops
below 69.75 and look to stop and reverse to long
if hit. The
very net long commercials indicate this rally is
at least tradable and may turn out to be a major
bottom. The
post-peak declining option volatility and the Sept
/ Oct bottoming season are two other positives
longer-term.
Note also copper stock PD approaching a
plausible rally point in an otherwise somewhat
murky pattern. PA:
We’re standing aside, waiting for greater chart
clarity. See platinum comments. PL:
Technically
a favorite short to test the 7-23 low (509.90
basis Oct), targeting 505.
The still net-short commercial position
confirms this view while option volatility is
unclear and increasing backwardation is contrarily
bullish. Regarding
platinum companies: AAPTY looks like a downside
test of its 8-05 low.
Ditto for IMPAY likely to test its 8-01
low. SWC looks close to bottoming while LNMIY and PAL are unclear.
PL bulls should wait for AAPTY and IMPAY to
improve. BONDS/
NOTES: While
we expect a short-term selloff, a final rally in
late Sept / Oct is still our favored outlook. As a
new development, the commercial bond market behavior may be revealing early signs of
yield curve flattening.
Note that the most bearish commercial
positions are now at the front end of the curve!! While 30/10 is still steepening, the 10/2 has been flat since
peaking out in early August.
We’ve correctly forecast a steepening
yield curve since our 1-05-02 Cornerstone
presentation.
Now it looks like this trend may be
reversing. A
gradual flattening would be consistent with
IMPROVING economic conditions, an increasing real
demand for credit, and upward pressures on
interest rates.
More than one indicator is necessary to
confirm this but it’s an intriguing development. US:
The current wave 3 rally from the 3-15 bottom
is very close to a short-term top.
In fact, we view 9-05 as a plausible
short-term pivot high.
From this forecast top we look for a
counter-trend pullback into mid-Sept., likely to
hold above 106 (basis Dec.) and set up for a final
upside test in late Sept / early Oct.
The commercial net short position is
currently very consistent with a short-term top as
are the cresting option volatility and easing
backwardation. TY:
Our US comments apply also to TY.
Assuming 9-05 put in a short-term wave 3
top, we expect a counter-trend pullback into late
Sept. which is likely to hold above 108.
Thereafter we would look for a final blow-off
rally in Oct.
Commercials are currently at levels
consistent with prior selloffs.
Declining Sep/ Dec backwardation and
cresting option volatility also support this view. TU,
FV: Extremely
toppy short-term. Commercials are very net short and option volatility is
peaking. We
also view 9-05 as a likely wave 3 top in FV.
If so, look for a serious pullback followed
by a topside retest along with TY and US as
described above.
STOCKS:
All the indices look destined to test their
July / Aug lows in the weeks ahead.
While the blue chips (SP500, OEX, Dow)
appear most able to hold their lows, the broader
and smaller-cap indices (OTC, NDX100, RU2000, and
Value Line) look quite vulnerable.
Such a re-test would be consistent with
re-tests on the high side in bonds and many
currencies. In
fact our technical outlooks for the U.S. dollar,
the CRB, U.S. notes and bonds, energy, and forex
are all consistent with a selloff in U.S. stock
indices bottoming in late September or more
likely, mid October. The declining Nikkei is a huge issue at this point.
Prior to 9-11-01, the outlook for the
Japanese economy and stock market was the primary
concern of global finance.
The Nikkei hitting new lows recently
indicates: 1) No bottom in sight for the Japan
economy and 2)
A weaker-than-anticipated global economy.
Contrarians see the new Nikkei low as the
first step in putting in an important bottom.
Also note that the premium in the Japanese
WEBS (EWJ) has held up and kept that issue above
its low set in February along with the bottom in
the Yen which also holds comfortably today.
It’s entirely plausible that we have
bottoms in the currency and the ETF premium before
the final bottom in the Nikkei.
Regardless, the Nikkei turned sharply down
on 8-15, leading the 8-22/ 23 tops in most U.S.
indices by a week.
Similarly, we’ll look for it to bottom
BEFORE U.S. stocks. OTC/ NDX: With
the NDX (Nasdaq 100) at 922.22 cash, we expect a
selloff to test the 9-05 low targeting 855-875 by
week’s end.
After any ensuing blip rallies we see a
final major bottom being put in during seasonally
bearish late Sept / Oct in the 750 – 810 zone.
The 8-05 low (856.35 cash) is likely to be
taken out at this point.
Note the recent huge blip in open interest
with commercials net short and predictive of lower
prices. The
increasing contango is also short-term bearish.
We see a similar short-term selloff as
likely for the OTC composite also.
We’re targeting 1220 very short term and
1090 to 1140 by early to mid Oct. SPX/ OEX: The
7-24 SPX (SP 500) cash low (775.68) is likely to
be tested in the weeks ahead but looks more likely
to hold than the 8-05 OTC and NDX lows.
Ditto for the OEX (SP 100) which looks
slightly stronger yet than the SPX.
SP commercials are moving to constructive
net long levels and option volatility is subsiding
somewhat after peaking at the 7-24 price low. DOW: Somewhat
less than 50-50 odds of taking out the 7-24 low
(7532.66 cash). RUT:
The Russell 2000 has somewhat greater than 50-50 odds to
takeout the 7-24 low (354.11 cash) and target
335-340 by mid October. VALUE LINE: This important broad and un-weighted index appears likely to
re-test and even money to take out it’s 7-24 low
(905.45 cash).
If 7-24 fails to hold, we are targeting
down to the 845-870 area by mid October. DOW TRANS:
Slightly better than 50-50 odds that the 7-24 low
(2090) will hold. If not, we’re targeting
1980-2030 by mid October. DOW UTILS: Our
best guess is a break below 200 to re-test the
7-24 low (186.49 cash). FOREX:
The U.S. dollar is likely to continue its
selloff and challenge recent lows. DX:
After
making a wave 3 technical bottom on 7-19, the
dollar index made a picture perfect rally to fail
just under the historically important 110 area. The selloff from the 8-06 high looks distinctly 5-wave and
destined to take out the 7-19 low.
Now at 106.94 (basis Sep), we’re
targeting the lower 102 area before this move is
over. Note
also the slight uptick in contango which had
softened somewhat during the blip rally from 7-19.
The bottom re-test hypothesis for the DX is
also consistent with high re-tests in numerous
other currencies as described below. Euro:
A favorite long-side setup.
Position traders have stops above .9800
cash. Now
at .9932, we’re targeting a takeout of the 7-19
high (1.0156) to hit 1.0250 – 1.039 by early
Oct. We see this move as part of the “fall
re-testing trio”: a topside test in FX & US
bonds and a downside re-test of U.S. stock
indices. BP:
A ditto of EC & SF. Now at 1.5678 cash, we expect on-going upside to test the
7-25 high (1.5811) and target 1.5900 to 1.6100 by
early to mid Oct. SF:
On
a likely final rally in the uptrend from the July
’01 and Jan ’02 lows.
Long position traders have stops currently
near 6690 cash.
Short-term we’re targeting a takeout of
the July 19 high, to hit 7020 to 7120 by mid Oct.
The technical wave counts, net short
commercial position, and increasing contango all
reflect toppiness.
JY:
Commercials are supportive only of an upside blip
from here. If
JY re-tests its 7-19 high (.8660 cash),
commercials are likely to move to net short
extremes and set up for a substantial selloff into
Nov / Dec. Option
volatility has likely not yet peaked and is also
consistent with a 7-19 retest.
On the other hand, the increasing contango,
which bottomed in mid-August, is an early sign of
approaching toppiness. ME:
The peso is likely very close to a tradable
rallying point.
Note the 5-wave completion from the 4-02
high and the substantial net long commercial
position. Shorts
should keep extremely tight stops and look to
reverse and go long if hit. AD:
The AD looks least likely of the major FX to
re-test its high. Weak technicals and supportive
commercials contribute to a mixed picture. We’re
standing aside & watching for a more
definitive pattern to develop. CD:
Reasonably
likely to re-test at least the 8-05 lows
near-term. This would be consistent with a weakening DX (vs. JY and
European FX) over the same period. GRAINS:
A near-term top in grain prices is consistent with
a pullback in the CRB which would help set the
stage for a final bond rally in late Sept/Oct. W:
Massively net short commercials are a clear
warning that the wheat parabola has reached
short-term blowoff peak levels.
Long position traders should keep the
tightest of trailing stops at 384 or higher (basis
Dec) to lock in profits.
After any pullback, however, wheat may
attempt a final re-test as Sept / Oct is often a
seasonal peak and the current parabola looks more
like an intermediate wave 3 move than a final wave
5 rally.
As clues to an impending top, watch option
volatility and contango closely. Volatility is likely to turn down and contango increase just
prior to the top. S/
SM/ BO: Beans
stand a slightly better than 50-50 chance of
taking out the 8-15 high (579.50 basis Nov.),
targeting 590-595 by late Sept.
However, S is becoming toppy to the
extreme. Position longs should keep tight stops
above 544 and look to reverse and go short if hit.
The peak May / June season is well past and
reliably bearish Nov / Dec lies ahead.
The deeply net short commercial position
and backwardation declining from the mid-Aug highs
are further signs of toppiness.
Meal, like Beans, may be on a final rally
to test its 8-15 high, but Dec. BO appears to have
peaked on 8-15. C:
Corn is
technically on it’s final blip wave 5 rally to
take out the 8-15 wave 3 high (288.5 Dec),
targeting 292 – 296 by late Sept.
However, this picture is an awesome bearish
setup. Seasonally
weak Sept / Oct lie just ahead and commercials are
moving to 3 year record net short levels.
Option volatility has crested and contango
has flattened from mid-August after softening
during the rally from the May lows.
Position longs should keep the tightest of
stops above 274 and look to stop and reverse to
short if taken out. RR:
While
rice may be approaching a short-term rallying
point, such a rally is probably better viewed as a
short re-entry setup.
Longer-term we expect somewhat lower lows,
targeting 3.450 – 3.500 (basis Nov), in the area
of the Nov. 01, Mar 02, and May 02 lows. MEATS: LC:
An erratic chart
with mixed factoids. Short-term our best guess is
a blip to take out the 8-09 high (69.15 Oct),
targeting 70.00 by late Sept.
Option volatility continues to decline
after peaking at the 4-25 price bottom and also
supports the short-term blip thesis.
But increasing contango and super-short
commercials warn to keep very tight stops on any
longs and reverse to short if hit.
The bearish Oct / Nov season lies ahead. LH:
Now at 33.70
(Oct), while we expect a short-term advance to the
37.00 area, it’s likely only a sucker rally in
an on-going downtrend.
We expect LH to eventually take out the
9-03 low (29.40) before this selloff is over.
Look for a short-side setup to present
itself should the current blip rally follow
through for a few more days. SOFTS
/ FIBERS: CO:
Mixed factoids.
We’re standing aside.
Position longs should adjust trailing stops
to the low of the 9-03 bar (19.25 Dec.). SB:
As of it’s June 21st lows, sugar
likely made a major bottom in the selloff from the
Oct ’00 and Jan ’02 highs.
The satisfactory wave-5 bottom was put in
during the Jul / Aug bearish season and has since
formed the right shoulder of a near-textbook
H&S bottom.
Also note the increasing backwardation.
However, net buying has shifted to
speculative hands now as the commercials head to
2-year net short levels likely to cap this rally
very soon. Longs
keep very tight stops.
Given the long-term bullish pattern, we’d
move to the sidelines and look for long-side
re-entry setups if our stops are hit. OJ:
Longer-term,
further downside is likely as OJ heads into the
bearish Dec / Jan timeperiod.
A major top was likely put in at the Aug 13
high. Option
volatility is expanding with the selloff and
commercials are still at net short levels, both
bearish signs. KC:
Now at
57.55 (basis Dec), coffee looks destined to test
the Apr highs (64.15) over the next month or so.
We would expect a bit of backing and
filling in the next few days before a resumption
of this uptrend.
Commercials are moving off net long
positions but are still at levels consistent with
rising prices. After bottoming with price in the
seasonally weak Jun / Jul timeframe, rising option
volatility is also supportive.
Lastly note the bullish softening contango CT:
Commercials are coming off the net short extremes
reached at the July high but are still at bearish
levels. Resuming
contango is also short-term bearish as is option
volatility, still falling from the June price and
volatility highs.
Cotton is at an interesting VITAL support
area in the 45 zone.
This level has seen no less than 9 key
highs and lows in the past 12 months.
Which way CT breaks from here will be
predictive of the ensuing 4-6 weeks of price
action. For CT to maintain a plausible final W5 rallying opportunity,
the 8-27 wave 4 hypothetical pivot low (44.35 Dec)
must hold. All-in-all,
a breakdown to the 40 area is distinctly possible.
Given the plausible dual chart
interpretations, the current setup offers an
interesting “either way breakout” type setup.
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