All learning can be reduced to just one simple function; pattern recognition. That goes for both humans, and machines. Artificial intelligence (AI), or machine-learning, is simply a class of algorithm (neural networks) that allows computers to recognize repetitive patterns within a given data-set. Learning a language, learning to count, learning mathematics, learning how to drive, and learning how the stock market works are all dependent on the ability to recognize repetitive patterns.

As our subscribers know, our working hypothesis is that the most enduring and repetitive patterns that occur in the stock market are associated with investor (human) emotions. The stock market, while having some connection to the economy, is not the economy. The stock market is the manifestation of the most powerful human emotion — fear; fear of losing, and fear of losing-out (better known as greed). That has been true since before we came down out of the trees.

What about the fact that, at present, machine-trading (robo-trading) accounts for 70% of trading in the stock market? Doesn’t that disconnect today’s market from human emotion? Doesn’t that psychologically sterilize the market? One would assume so, but the reality is that the machines learned to trade by studying historical patterns which were created by emotional, carbon-based traders. The machines, therefore, trade just like their human teachers, only faster. Fear and greed remain at the heart of the market. That is why we spend our time searching for and analyzing these patterns.

One of the patterns that we have been following for a couple of years now, is the similarity between the tech rally of the late 1990’s-2000, and today’s decades-long bull market. First, there is the similarity between how the SPX and the dollar traded then and now (chart below).

Second, there is the similarity between the late-stage trading of the tech rally, which starts at the double-bottom of 1998 (blue rectangle on chart above), and today’s trading, starting at the double-bottom of 2015–2016 (charts below).

Notice in the charts above, that during both markets, the price-earnings ratio (PE) for the S&P 500 drops during the C2 correction, recovers during the R3 rally, and then drops again during the C3 correction.

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Please see Thursday’s Update for our note on the AAII sentiment survey.

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The put-to-call ratio continues to carve out a bullish (up-spike) pattern (chart below).

The chart below shows that the SPX is forming a bull pattern (blue arrows) in the AAII investor survey, and Rydex asset allocation indicators.

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This past week, the SPX was turned back at the 62% Fibonacci retrace line (2743) but found support at the 50% retrace line (2703). On balance, the technical indicators are bullish, which makes it probable that the SPX will move above the 2743 resistance and make an attempt at the upper trend-line in the 2775 area (chart below).

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The long-term technical picture of gold continues to look weak; the RSI has broken below the lower trend-line; the MACD has made a bear cross-over; the ADX bull momentum continues dropping; only the stochastic is approaching over-sold levels, which makes it weakly bullish (chart below).

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Gold has re-established its normal positive correlation with TIP (inflation expectations) and looks set to follow the ETF lower, like it did in the fall of 2016 (chart below).

Gold continues to trade inversely to the USD/JPY FOREX pair, and even though the stochastic of the pair is approaching over-bought, there is still upside technical space to move higher (gold lower). (chart below).

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Despite all the evidence of price pressure on gold presented above, there is one line of evidence that is pointing strongly to a rally in gold. The commitments of futures traders show that the large speculators (money managers) are long only 18K contracts, compared to long 200K contracts just three-months ago. And the swap dealers (the experts in the gold market) are long 22K contracts, compared to short 40K contracts three-months ago. As is obvious on the chart below, gold usually rallies when money managers are minimally long, and swap dealers are maximally long. As such, we have to expect at least a bounce in the price of gold, even if longer-term the gold price continues to be under pressure (chart below).

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ANG Traders makes no guarantees concerning the profitability of our trades. Our trade notification service is not intended as investment advice in any way. It is simply providing information about the trades we ourselves are executing. Always consult a registered advisor for assistance with your investments. ANG Traders assumes no liability for any losses that may arise from replicating our trades.

Forty years of private equity trading, and still learning.