The main story of the week was the cut by China in the reference rate for its currency. This has taken off 3% of the value of the Yuan against its major trading partners and it occurred a day after Chinese exports fell by 8%. The move took the markets by surprise and although the Chinese central bank said there was “no basis for persistent and substantial devaluation” it has stoked fears of currency wars.
Investors interpreted the move as an attempt to help its exporters. Initially markets and especially emerging markets fell hard but the words of the Chinese central bank seemed to calm the stock markets of the world by the end of the week.
A weaker Yuan will reduce the price of Chinese imports into the US and that could reduce inflation in the world’s largest economy. US inflation is sitting presently at 1.3% with a target of 2. I don’t think a 3% move in the Yuan will have much effect but if the Chinese continue with this program and engineer a larger drop in their currency, then a US rate hike will be certainly postponed.
For years the Chinese policy makers have been the envy of the world. They steered the country to three decades of growth with few blips. The actions of the last few days seem quite agricultural by comparison. Chinas economic growth is stated at 7% but many commentators believe that the real rate is much less and maybe half of the official rate. The possibility of the so called hard landing is very real and a quick look at the Glencore (a mining Ft100 company) supports that view. The rout in commodities looks set to continue.
At a much higher level a very important game is being played between the Chinese and the IMF. This is all about including the Chinese currency in the Special Drawing Rights (SDR). The IMF is due to make a decision of the Chinese currency in the next year but has pointed out that the currency is not liquid and its value not determined by market forces. The devaluation of the Yuan could be seen as an attempt at inclusion in the SDR.
By Friday afternoon the Chinese story was starting to feel like a storm in a China tea pot and the market reacted negatively to US retail sales being much better than expected. This number puts a September hike well in the frame.
The trend situation on the London market as measured by both short and long term trends on the VectorVest Composite are down. The home page on VectorVest says “VectorVest does not advocate buying any stocks at this time”. This is good advice.
My 5 stocks are doing fine and you sleep well at night in stocks that are undervalued and growing earnings aggressively and safely. Even in a choppy market like this. Avon Rubber is a favorite of mine and that share had a really good week and looks set to break new highs soon. I have taken a dividend from Carnival and the share is a tad up from my purchase price. If you look back a few blog issues all my shares are listed and I am 50% invested.
The general market is a worry although the patterns that are setting up remain quite positive to a student of Fibonacci. Some 80 years ago a fellow by the name of Harold McKinley Gartley wrote a book on stock market trading. It’s the only book in my library that I will not lend out. His most famous pattern is the Gartley 222 pattern which comprises of a “thrust” followed by an ABC corrective wave. On both the VectorVest Composite and the DAX cash there is a bullish Gartley in play.
Please pull up a chart of the VectorVest Composite over the last three months. If you cannot find the chart then please call support and they will give you a quick lesson over the phone. The number from the UK is 0800 014 8974 and from SA is 0800 981 891. Locate the recent low on the 7th July and the next high on the 21st July. That’s the thrust. You should then the see the ABC correction from the 21st of July to the 13th of August. The low of the 13th was a 78.6 retracement of the thrust and if you believe in MR Gartleys work that was where you bought. The chart of the VectorVest Composite and the Gartley 222 pattern is shown below.
A similar pattern is easily seen on the Dax cash and I am long of the Dax on a spread bet from the 78.6 level at 10900. I took some profits already and have the stop to entry. I missed getting stopped on Friday by 10 ticks in the volatility that followed after the good retail sales number and which caused markets to fall.
Once again the FIB and Elliott patterns are subjective and the trends are real. I will wait for confirmation from the home page of VectorVest before adding any more “Big Hitter” winners into my portfolio. However the FIB patterns are still telling me that there is more upside to come in the next few weeks.
I seem to be getting more optimistic as I get older. Please watch stops closely and keep a steady eye on the July 7th low. A break below that level would be very bearish.
On the 24th at 130 PM UK time I will be conducting a webcast on the UK market and the outlook for stock, forex and commodity markets worldwide. All VectorVest members should be sent the link. If you haven’t got a link then please call support.
To try VectorVest for 5 weeks for only £5.95 just click here
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