China Recognizes Their Economic Slowdown, Puts Fear in Equity Markets

We saw heavy selling today in the U.S. equity indices. The Dow Jones Industrial Average closed down 392, the NASDAQ closed down 146, the S&P 500 closed down 47, and the Russell 2000 closed down 29.
On November 27th I stated that if the Dow Jones Industrial Average got into the 17800-18400 range I would look to sell and be 100% in cash. In the first week of December the Dow Jones Industrial Average got up near the 17900 level and is now down about 1400 points from that level.
Last night I was teaching a class and at around 8:20pm I saw heavy selling in the S&P futures. China had announced they were further devaluing their currency. China is recognizing the slowdown in their economy, creating the fear that a slowdown could be coming if not already occurring in the U.S. economy. This led to the heavy selling we saw today.
When the Federal Reserve decided to raise interest rates in December part of their reasoning was that they were confident that the U.S. economy would grow. After 7 years of 0% interest rates and 4.5 trillion dollars in quantitative easing the U.S. GDP is only around 2%. This is not a time when the Federal Reserve should be raising interest rates. We are nowhere near the Federal Reserve’s 2% inflation target but they are confident their inflation target will be met sometime in 2016 despite the deflationary pressures seen in natural gas, crude oil, heating oil, and gasoline.
Tomorrow at 8:30am the employment situation for December including the unemployment rate will be released. These numbers could have a large effect on the markets. If the S&P futures close below the 1956 level tomorrow I will have a sell signal on the weekly chart to mirror the sell signals on the daily charts which I got yesterday. If this happens I believe any bounce in the next couple days will be short lived. Even if the jobs number is good and I do not get the sell signal on the weekly chart I still have a sell signal on the daily charts. If the S&P futures get up to the 1980-1990 range that would be the first entry where I would look to get short. If we get a pushdown tomorrow I believe it will be short lived and we will get a reversal sometime midafternoon and the market will close higher.

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Chinese Yuan Devaluation

Last night China announced that they were further devaluing their currency. By devaluing their currency China is hoping to increase exports and boost their economy. Chinese GDP has dropped from around 10% in 2010 to around 6.5% today. There was extremely heavy selling in the Chinese markets when they opened. Within the first hour the Chinese Securities Index had fallen 7% triggering their newly implemented circuit breaker for the second time this week and ending their trading day.

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Gold

Gold has held above the 1040 level. I saw gold catching a strong bid around the 1045-1055 level. My thought was that the heavy buying in gold was a result of the expectation that the Federal Reserve will not raise interest rates in the first 3 months of 2016 which would cause gold prices to increase. I stated that I would look to buy gold in the 1045-1060 range. I stated that I would be looking to exit any long positions in gold in the 1079-1083 range. Today gold traded up to the 1110 level. Yesterday I stated that I had a buy signal on gold. I am looking for gold to get to some sort of an oversold condition on the daily chart in the next 4-5 days. I would be looking to buy gold on a pullback into the 1080-1085 range.

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Crude Oil

I stated that there was a gap in crude oil at the 34.70 level and that I would be looking to buy crude oil in the 32.90-35.50 range using a 31 stop. Crude oil filled that gap at 34.70 and today traded through my range down to 32.10. Crude oil is in a tradable range and I expect crude oil to push up sometime in the next 1-5 days. I am lowering my stop from 31 to 30 and my target from the 37-39 range to the 35.50-37 range. Today crude oil traded up to the 34.20 level and I tweeted that I would look to exit positions in crude oil that had been bought lower.

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