The Nikkei Makes an About-Face

November 10, 2017


VIX rose from its Master Cycle low to close above Long-term support/resistance at 11.11. VIX is now on a buy signal. The inverted Head & Shoulders formation now has a completed right shoulder giving a potential target for the next move higher.

(Bloomberg) Volatility roared back into the U.S. equity market as fresh concern about the prospects for tax reform sent the Cboe VIX Index to its biggest surge since August.

In a year that’s been characterized by record calm, Thursday’s two-point intraday jump in the VIX was enough to push it above the average level for 2017. The gauge, which uses options-trading data to measure implied volatility of S&P 500 stocks, still sits below the bull-market average of 18.3.

SPX makes a new high, then consolidates.


SPX made a new high on Monday, but spent the rest of the week consolidating above weekly support. A decline beneath weekly Short-term support and the upper Diagonal trendline at 2541.22 may signal an end to the rally. A further decline beneath the lower Diagonal trendline at 2500.00 gives a probable sell signal and suggests a much deeper decline may follow.

(Reuters) – Wall Street declined on Friday as the markets grappled with concerns over delays in corporate tax cuts but a rise in media stocks helped limit the slide.

Walt Disney rose 2.9 percent as the promise of a new film trilogy overshadowed weak quarterly results and struggles at the media company. The stock was the biggest boost on the Dow.

Senate Republicans have unveiled a tax-cut plan that would delay lowering corporate rate to 20 percent by a year and provide small-business owners with a deduction rather than a special business rate.

NDX stalls near the high.


NDX peaked on Wednesday, then made a key reversal on Thursday. The Cycle Top is at 6232.21 while the lower Diagonal trendline and Short-term support are at 6109.29. A decline beneath that trendline may produce a sell signal.

(TumblrNo 52-week high in the Nasdaq 100 has ever been accompanied by as few advancing stocks as today’s.

As most readers know, we are big proponents of strong breadth, or participation, in signifying healthy markets. When rallies are accompanied by a large swathe of advancing stocks, it is more likely to go further and last longer than those coming on the back of just a relatively few stocks. As such, it was encouraging to see the significant level of participation during the August-October stock market rally. Recent efforts, however, have not been so robust.

High Yield Bond Index closes above Short-term support.


The High Yield Bond Index eased down towards Short-term support at 181.75. A break of the upper Diagonal trendline and Short-term support may tell us the rally is over.

(Bloomberg) Mounting warnings from Wall Street about the aging business cycle in recent weeks are unanimous: downgrade high-yield bonds.

The shift out of junk bonds by investors this week has been getting underway for weeks on the sell side in the form of allocation calls from Goldman Sachs Group Inc., JPMorgan Chase & Co., and Morgan Stanley. Their advice? Pare high-yield corporate debt, an asset class that, unlike growth stocks, is more likely to unravel in the winter of bull markets.

USB falls through Long-term support.


The Long Bond rally was stopped at Intermediate-term resistance at 153.61, after which it sold off beneath Long-term support/resistance at 152.57. The rally attempt appears to have failed, leaving USB to decline through the end of the month. Should it break beneath the neckline of the Head & Shoulders formation, the decline may accelerate quickly. .

(CNBCU.S. government debt yields rose on Friday, after fresh consumer sentiment data missed expectations; tax reform remained in focus.

The yield on the benchmark 10-year Treasury note climbed to 2.398 percent at 2:08 p.m. ET, while the yield on the 30-year Treasury bond was higher at 2.88 percent. Bond yields move inversely to prices.

Earlier, the 30-year Treasury yield hit a high of 2.868 percent, its highest level since Nov. 1 when the 30-year yielded as high as 2.899 percent.

The Euro consolidates …may go lower.


The Euro continues in a sideways consolidation off its low made on Tuesday. It appears to be aiming toward Long-term support at 112.91 or possibly mid-Cycle support at 111.19. Any residual strength it may have had appears to have evaporated as it goes into a Master Cycle low in the next week.

(Bloomberg) With the euro-area economy in the best shape in almost 20 years, now is the time to prepare for future slumps, according to European Central Bank policy maker Benoit Coeure.

The region’s expansion is proving increasingly balanced and robust, much like its upturn in 1999, the ECB Executive Board member said on Thursday. But while current monetary stimulus will continue as long as necessary, the success must also be nurtured by structural reforms that will better equip the region for the next shock, he said.

EuroStoxx reverses from its Cycle Top.


The EuroStoxx 50 Index declined abruptly, closing just above weekly Short-term support at 3584.94. A decline beneath that level may put STOXX on a sell signal.  A stumble here has the potential to set off a cascading decline into motion over the next two months.

(Reuters) – European shares suffered their worst week in three months on Friday, as a slowdown in earnings growth and jitters in bond markets spurred profit-taking in a market that remains close to two-year highs.

Leonardo (LDOF.MI) was the biggest loser on Friday, falling 21.6 percent after the Italian defense contractor cut its guidance.

The STOXX 600 fell 0.4 percent, weighed down by weaker industrials, one day after suffering its biggest one-day loss since the end of June.

The pan-European index ended the week down 1.9 percent, its biggest weekly loss since mid-August, but remains up 7.5 percent for the year to date.

The Yen retests its retracement low.


While the Yen continues to consolidate for a third week near the low. Since the breakout did not occur, we may anticipate further weakness for the next week or longer. A possible retest of the trendline may be in order before the Yen begins its rally.

(NikkeiAsianReview) Major Japanese companies, already poised for record profits in the year ending March 2018, are assuming a yen stronger than current levels for the second half and so could do even better if the currency stays weak.

Big players have pegged the yen at about 109 to the dollar and around 125 to the euro on average for the half. The actual rates now stand at roughly 113 and 131.

Nikkei makes an abrupt reversal.


While the Nikkei closed higher for the week, it is down 3% from its peak after its reversal on Thursday. The Cycles Model is very stretched. In fact, it suggests a major low may be anticipated in the next two weeks.

(ZeroHedge) Something snapped in Japan today. (Thursday)

With Asian stocks finally breaking out a decade-long doldrum, and hitting record highs earlier in the session, and with Japanese equities starting off the session on the right foot and continuing their recent ascent which until Wednesday had seen them rise on 23 of the past 25 days, Japanese shares suddenly lurched on Thursday, plunging sharply lower after dramatic intraday swings took the Nikkei and Topix indexes to multi-decade highs only to drop in the afternoon on futures-driven trading ahead of the following day’s options settlement. All told, in a little over an hour, what had been another solid rally in Japanese stocks turned into some rather sharp clear-air turbulence, with the Nikkei 225 Stock Average plunging about 3.6% from the afternoon-session high to its low for the day.

U.S. Dollar begins its decline.

US Dollar

USD made a nominal new high on Wednesday, then reversed back down. A decline beneath Short-term support at 93.19 activates a sell signal that may lead to a panic decline. The lower trendline of the Orthodox Broadening Top at 89.80 may be the next attractor, but the Orthodox Broadening Top formation calls for a breakout beneath the trendline, as indicated by “point 6.” .

(Reuters) – The dollar has moved from a supporting role to a featured player this earnings season, a boon to U.S. multinationals which have benefited from the biggest quarterly year-on-year decline in the greenback in three years.

Since the start of October, at least 35 U.S. companies have cited currency “benefits” or “tailwinds” and “weaker dollar” for boosting quarterly earnings, compared with few mentions a year ago, and some see that extending to the fourth quarter, a Reuters analysis shows.

.Gold remains on a sell signal.


Gold retested Intermediate-term resistance this week, but closed near its consolidation lows. A further break of Long-term support at 1262.12 indicates that the decline may proceed beneath the lower trendline of the Broadening Wedge and possibly trigger that formation.

(CNBC) Trading volume also picked up during the selling activity.

Gold futures for December delivery were down 0.9 percent at $1,275.60 per ounce as of 2:22 p.m. in New York after stabilizing following the sudden decline.

It was not immediately clear what caused the drop.

Gold was set for a weekly gain as stocks fell and uncertainty about the timing of the U.S. tax reform plan increased, pushing investors into the arms of the safe-haven trade.

Crude reaches its Cycle Top.


Crude reached its Cycle Top at 58.29 on Wednesday. A sell signal may be made by crossing the support cluster between 49.88 and 52.34. We may see the price of oil decline through the end of the year..

(CNBC) U.S. crude oil production hit an all-time high last week, according to preliminary government data, in another sign of the resilience of American shale drillers.

The United States produced 9.62 million barrels of oil a day in the week through Nov. 3, the U.S. Energy Information Administration reported on Wednesday. That just slightly topped a high struck in June 2015, just before the oil price crash sparked a more than one-year decline that sent U.S. output to about 8.4 million barrels a day.

Shanghai Index marches higher.

Shanghai Index

The Shanghai Index regained its foothold above weekly Short-term support at 3378.97. The period of strength may now be over. The potential for a sharp sell-off rises as Intermediate-term support at 3327.20 is breached.

(ZeroHedge) There is a certain, and very tangible, irony in the central banks’ response to the Global Financial Crisis, which was first and foremost the result of unprecedented amounts of debt: it was to unleash an even greater amount of debt, or as BofA’s credit strategist Barnaby Martin says, “the irony in today’s world is that central banks are maintaining loose monetary policies to generate inflation…in order to ease the pain of a debt “supercycle”…that itself was partly a result of too easy (and predictable) monetary policies in prior times.

The Banking Index makes a hard reversal.


— BKX reversed down from Cycle Top resistance at 106.59, closing beneath weekly Short-term support at 98.30. If the Orthodox Broadening Top formation is correctly identified, the next level of support may be beneath the mid-cycle line at 80.59.

(ZeroHedgeBanks have started to tighten lending standards for prime and subprime borrowers, and it shows…

Banks are further tightening their lending standards for prime and subprime auto loans. This process started in Q2 2016, when auto lending had reached the apogee of loosey-goosey underwriting that had boosted sales of new and used vehicles to record levels and had ballooned auto loan-balances outstanding to the $1-trillion mark. It also boosted risks for lenders. Inevitably, subprime auto loans started running into trouble in 2016, and it was time to not throw the last trace of prudence into the wind entirely.

(ZeroHedge) That was quick.

Trump leaves China (only to go back on the offensive about unfair trade practices in his APEC speech) and just hours later Trump’s new Beijing friends announce that foreign firms will be permitted to take majority ownership in Chinese financial firms… well capped at 51% for now anyway. We doubt that this occurred out of the blue and was surely being worked on in the run-up to Trump’s visit. Furthermore, we suspect that Bloomberg’s Chief Asia Economist, Tom Orlik, had got wind of it ahead of time. In our preview of Trump’s visit (see “Will Xi Offer Trump A Small Victory On Trade As Cover For His Longer-Term Ambitions”), we noted this comment of his.

“In an optimistic scenario, Trump’s appetite for tweetable wins and China’s longer-term focus could coalesce around financial market opening — a boon for the U.S. investment banks, and a support for China as it attempts to tame its credit boom,” Orlik said.

(ZeroHedge“We had a banking crisis, a fiscal crisis and we spent lot of the tax-payers’ money – in the wrong way, in my opinion – to save the banks” outgoing Eurogroup head Jeroen Dijsselbloem said adding “so that the people criticizing us and saying that everything was being done for the benefit of the banks were to some extent right.”

As reports, Dijsselbloem was responding to a question posed by leftist MEP Nikos Chountis during a session at the European Parliament’s Employment and Social Affairs Committee on Thursday.

“This is valid for the banks of all our countries. Everywhere in Europe banks were saved at taxpayers’ cost,” he underlined.

“This was the reason for banking union and the introduction of higher standards, better supervision and a reform and rescue framework when banks have losses,” he said stressing  “precisely so that we don’t find ourselves in that situation again.”

Have a great weekend!

Anthony M. Cherniawski

The Practical Investor, LLC

2205 Hopkins Avenue

Lansing, MI 48912

Office: (517) 331-5200 

Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model.  At no time shall a reader be justified in inferring that personal investment advice is intended.  Investing carries certain risks of losses and leveraged products and futures may be especially volatile.  Information provided by TPI is expressed in good faith, but is not guaranteed.  A perfect market service does not exist.  Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment.  Please consult your financial advisor to explain all risks before making any investment decision.  It is not possible to invest in any index. 

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