2016 Predictions on Stock Markets, Currencies and Gold by Lawrence Chan
By Lawrence
After having too much fun at dinner parties and alcohol consumption, I am joining the crowded game of making predictions of the financial markets for the coming year 2016. Last time I did sometime similar was way back in 2013. It is going to be fun to see how right (and wrong) I am with these predictions by the end of next year.
Disclaimer: This article is absolutely for entertainment purpose only as market predictability is an inverse function of time – the further away the prediction from the presence, the more likely it is just pure crapshoot. My outrageous predictions here are no better than a drunk mumbling the winning numbers for the lottery in coming few days.
My Approach In Making Market Predictions
I am not an economist nor fundamental analyst who usually proclaim that the future can be forecasted because a straight line can be draw on the graph paper from just a few data points. I will leave that to these professionals. My approach to big picture analysis is much simpler – using my trusted charts, my STOPD principles and common sense. As far as I know, my approach beats these professionals hands down year after year. My newsletters are the proof and my premium members know how precise my real-time analysis can be.
My main disagreement with some of these professionals is that they pick and choose their arguments all the time. Without consistency in the analysis approach, we cannot expect consistency in performance from their projections. Maybe they are goal seeking to support predetermined expectations. Maybe they are pressured by their firms. Since I will never learn the truth from them, I will not waste time to speculate their intentions any further.
Time to stop boasting. Let’s get started with my market predictions for year 2016.
US Stock Markets Will Continue Its Sideway Downward Pattern
Several things go in favour of a strong rally in the US stock markets but I say those factors do not matter.
The main issue is that the third year after last US Presidential Election, which is year 2015, is a wash so far. This outcome alone has very high correlation with another year going nowhere, at least up to the day for which election result is know. This means we can expect the US stock market will be going nowhere into November 2016.
The other factor affecting the stock market is very strong US dollar. This will reduce the profitability of the international companies based in US. That in turn will limit the upside of their stock prices. Remember I am not a fundamental analysts. My reasoning for this is that the strong US dollar will limit the purchasing power of foreigner investors – pure supply demand imbalance at work.
Another factor affecting US stock prices is that these major US companies will have a hard time borrowing more money to launch more stock buyback programs in year 2016 as their average cost of their buybacks up to 2015 has put tremendous pressure on their books.
Now, using my own STOPD principles and core chart patterns to understand the US stock market based on the weekly chart of SPY.
Based on STOPD, it is clear why so far SPY has held up well at the yellow zone. It is the high of year 2013 for which an unstable breakout took place. The breakout managed to reach the normal STOPD target of 50% range expansion off the range of year 2013. Since then, however, failed to gain much ground.
SPY will not likely clear the orange zone above, which coincide with the average year high for election year from the current year close.
Once SPY fails to hold above this year’s midpoint on weekly closing basis, a test of this year’s low will be very likely with 50% expansion to the downside between 165 and 170 also becoming likely.
Channel formation also suggests that once channel mid is breached, SPY will spend more time at the bottom half and likely to expand to the downside. Timing-wise my guess is that it will be second half of the year as the election becoming the theme of all the markets worldwide.
Sorry bulls, the upside is limited with more downside risk for year 2016.
Euro Will Be Forced To Go Lower In A Very Volatile Fashion Consistent With Other Bear Markets
We all know how much trouble European Union is in. Its central bank has done everything to destroy the economies there. Nothing really going on that can do good within the zone. Yet, it is not that easy to play the eventual collapse of Euro.
Following is the weekly chart of Euro.
The blue STOPD levels is based on the 10 year period since year 2000. Notice how the last 50% of the range expansion is really coming from the last 5 years of the decade long timeframe. The 50% boundary highlight in yellow marks this key price level for easy reference.
The directional drop happened back in year 2008 (highlighted in pale green) is the signature “end game” for any bull run. From there it is just a matter time to get back to the starting point of the rally. The starting point of the rally is highlighted in cyan color. The chart pattern there was a dirty bottom which is extremely likely to be retested, even when it is many years later. This pattern happens a lot with penny stocks that eventually going down to nothing.
The minimal downside target of the directional drop is 100% expansion of the drop itself. I have marked that with a second pale green zone at the right side of the chart. It coincide with the dirty bottom range. It will be the likely price level for which the selling in Euro will end and the start of an attempt to bottom out. Remember though, it takes a long time to produce a bottom.
Similar to other bear markets, Euro has demonstrated that it is capable of producing very sharp rally to wipe out the weak shorts in the process. Only if you understand the price time dynamics, or that you are very disciplined in managing risk, would you be able to profit from the downside of the selloff in Euro so far. Hence, casual traders who do not pay attention to proper leverage can be burnt badly with this leg of the bear market.
Euro can shoot up to 1.30 without affecting its weekly and monthly bearish down trend.
Euro can jump up to 1.20 and below 1.25 in a moment and quickly reverse downward to resume the move down to below par.
In other words, Euro can follow the down channel to the T and messes with the minds of both bulls and bears. We are talking about 1000 pips swings here within the channel. Majority of retail traders will be toasted if they have to withstand such swings within days or hours. It will also be nightmare scenario for long term players who are not well prepared for this kind of moves.
Gold, Kind of, Oversold on Monthly Basis
My subscribers know me for years that I am bearish on gold all the way on macro level. That has not changed yet but we do see signs of gold forming chart patterns that warrant a bounce. After spending so much time going lower year after year, gold is finally showing signs of bottoming actions.
Here is the weekly chart of GLD, the gold ETF.
The pattern highlighted in green is a falling wedge. Once the wedge breaks to the upside, we can expect a very volatile rally back up to at least the start of the wedge. This puts 130 area in play.
Until the wedge is broken to the upside, down trend intact with the potential of a breakdown flush down to mid 90s.
If we get the flush and that GLD snaps back up to above 100 on weekly closing basis, it will be a good short term bottom with the same upside target.
Remember, even if we get the rally up to 130, this is just the start of a longer term bottom out process. Hence GLD will still have to prove its strength by retesting the 100 level, which is the 2015 year low, to tell us if a real bottom is in place.
Retail traders should remember one thing about long term bottom – you do not need to buy the absolute low to profit from a commodity market. All you need is riding the way up after a good bottom is confirmed. There are ample upside waiting for you in such situation.
Conclusion – Crazier Trading Environment Ahead
Some of you would think that year 2015 is the wildest market environment you have experienced and that things should get back to normal soon. Think again.
Given the mess European zone is in, the terrorist attacks being on the rise and US Federal Reserve going to raise interest rate with other measures in the card, 2015 is nothing in comparison. Throwing into the mix the actions China is going to take on the economic front and also territorial front with its neighbours, we are likely going to enjoy a ride of our lifetime in all financial markets.
For more information about this report please refer to the Market Bias Informant pageTrading day for Forex symbols start at around 5 pm ET depending on Daylight Saving Time schedule
2016 Predictions on Stock Markets, Currencies and Gold by Lawrence Chan
Disclaimer: This article is absolutely for entertainment purpose only as market predictability is an inverse function of time – the further away the prediction from the presence, the more likely it is just pure crapshoot. My outrageous predictions here are no better than a drunk mumbling the winning numbers for the lottery in coming few days.
My Approach In Making Market Predictions
I am not an economist nor fundamental analyst who usually proclaim that the future can be forecasted because a straight line can be draw on the graph paper from just a few data points. I will leave that to these professionals. My approach to big picture analysis is much simpler – using my trusted charts, my STOPD principles and common sense. As far as I know, my approach beats these professionals hands down year after year. My newsletters are the proof and my premium members know how precise my real-time analysis can be.
My main disagreement with some of these professionals is that they pick and choose their arguments all the time. Without consistency in the analysis approach, we cannot expect consistency in performance from their projections. Maybe they are goal seeking to support predetermined expectations. Maybe they are pressured by their firms. Since I will never learn the truth from them, I will not waste time to speculate their intentions any further.
Time to stop boasting. Let’s get started with my market predictions for year 2016.
US Stock Markets Will Continue Its Sideway Downward Pattern
Several things go in favour of a strong rally in the US stock markets but I say those factors do not matter.
The main issue is that the third year after last US Presidential Election, which is year 2015, is a wash so far. This outcome alone has very high correlation with another year going nowhere, at least up to the day for which election result is know. This means we can expect the US stock market will be going nowhere into November 2016.
The other factor affecting the stock market is very strong US dollar. This will reduce the profitability of the international companies based in US. That in turn will limit the upside of their stock prices. Remember I am not a fundamental analysts. My reasoning for this is that the strong US dollar will limit the purchasing power of foreigner investors – pure supply demand imbalance at work.
Another factor affecting US stock prices is that these major US companies will have a hard time borrowing more money to launch more stock buyback programs in year 2016 as their average cost of their buybacks up to 2015 has put tremendous pressure on their books.
Now, using my own STOPD principles and core chart patterns to understand the US stock market based on the weekly chart of SPY.
Based on STOPD, it is clear why so far SPY has held up well at the yellow zone. It is the high of year 2013 for which an unstable breakout took place. The breakout managed to reach the normal STOPD target of 50% range expansion off the range of year 2013. Since then, however, failed to gain much ground.
SPY will not likely clear the orange zone above, which coincide with the average year high for election year from the current year close.
Once SPY fails to hold above this year’s midpoint on weekly closing basis, a test of this year’s low will be very likely with 50% expansion to the downside between 165 and 170 also becoming likely.
Channel formation also suggests that once channel mid is breached, SPY will spend more time at the bottom half and likely to expand to the downside. Timing-wise my guess is that it will be second half of the year as the election becoming the theme of all the markets worldwide.
Sorry bulls, the upside is limited with more downside risk for year 2016.
Euro Will Be Forced To Go Lower In A Very Volatile Fashion Consistent With Other Bear Markets
We all know how much trouble European Union is in. Its central bank has done everything to destroy the economies there. Nothing really going on that can do good within the zone. Yet, it is not that easy to play the eventual collapse of Euro.
Following is the weekly chart of Euro.
The blue STOPD levels is based on the 10 year period since year 2000. Notice how the last 50% of the range expansion is really coming from the last 5 years of the decade long timeframe. The 50% boundary highlight in yellow marks this key price level for easy reference.
The directional drop happened back in year 2008 (highlighted in pale green) is the signature “end game” for any bull run. From there it is just a matter time to get back to the starting point of the rally. The starting point of the rally is highlighted in cyan color. The chart pattern there was a dirty bottom which is extremely likely to be retested, even when it is many years later. This pattern happens a lot with penny stocks that eventually going down to nothing.
The minimal downside target of the directional drop is 100% expansion of the drop itself. I have marked that with a second pale green zone at the right side of the chart. It coincide with the dirty bottom range. It will be the likely price level for which the selling in Euro will end and the start of an attempt to bottom out. Remember though, it takes a long time to produce a bottom.
Similar to other bear markets, Euro has demonstrated that it is capable of producing very sharp rally to wipe out the weak shorts in the process. Only if you understand the price time dynamics, or that you are very disciplined in managing risk, would you be able to profit from the downside of the selloff in Euro so far. Hence, casual traders who do not pay attention to proper leverage can be burnt badly with this leg of the bear market.
Euro can shoot up to 1.30 without affecting its weekly and monthly bearish down trend.
Euro can jump up to 1.20 and below 1.25 in a moment and quickly reverse downward to resume the move down to below par.
In other words, Euro can follow the down channel to the T and messes with the minds of both bulls and bears. We are talking about 1000 pips swings here within the channel. Majority of retail traders will be toasted if they have to withstand such swings within days or hours. It will also be nightmare scenario for long term players who are not well prepared for this kind of moves.
Gold, Kind of, Oversold on Monthly Basis
My subscribers know me for years that I am bearish on gold all the way on macro level. That has not changed yet but we do see signs of gold forming chart patterns that warrant a bounce. After spending so much time going lower year after year, gold is finally showing signs of bottoming actions.
Here is the weekly chart of GLD, the gold ETF.
The pattern highlighted in green is a falling wedge. Once the wedge breaks to the upside, we can expect a very volatile rally back up to at least the start of the wedge. This puts 130 area in play.
Until the wedge is broken to the upside, down trend intact with the potential of a breakdown flush down to mid 90s.
If we get the flush and that GLD snaps back up to above 100 on weekly closing basis, it will be a good short term bottom with the same upside target.
Remember, even if we get the rally up to 130, this is just the start of a longer term bottom out process. Hence GLD will still have to prove its strength by retesting the 100 level, which is the 2015 year low, to tell us if a real bottom is in place.
Retail traders should remember one thing about long term bottom – you do not need to buy the absolute low to profit from a commodity market. All you need is riding the way up after a good bottom is confirmed. There are ample upside waiting for you in such situation.
Conclusion – Crazier Trading Environment Ahead
Some of you would think that year 2015 is the wildest market environment you have experienced and that things should get back to normal soon. Think again.
Given the mess European zone is in, the terrorist attacks being on the rise and US Federal Reserve going to raise interest rate with other measures in the card, 2015 is nothing in comparison. Throwing into the mix the actions China is going to take on the economic front and also territorial front with its neighbours, we are likely going to enjoy a ride of our lifetime in all financial markets.
I know I am ready for this.
Are you?
Resources
Core chart patterns and what they tell us can be learned from Art of Chart Reading Online.
My years of research results on price behaviour is explained in my book on Special Theory of Price Discovery (STOPD).
My article on US Election Cycle and its effects on the US stock markets is available at Seeking Alpha.
Become a premium member today to gain access to my monthly newsletters to stay on top of the major market moves.
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