MARKET RADAR: Oil to Fluctuate, Gold down and Stocks Up

Tuesday, November 2, 2010

By Bill Sarubbi

The mid-term election cycle is bottoming now. The question is: why should the market rally? I think that the answer is two-fold. First, there is much liquidity. The second reason is the outcome of the US election.

In the Austrian election, the conservative Freedom party increased their number of seats by 50%. All other parties lost seats, with the Greens losing the most. The Republicans are favored. I think that the Tea Party and independents will take votes from the Republicans. There are rumors Thus, moderate Republican gains are indicated. Why is this bullish for the market? Studies have shown that stock market gains are best when:

• Neither party controls the White House and the Senate
• The Senate is out of session.

In other words, they are unable to interfere in the economy as much as they usually do.

The month is likely to start off on the downside. The daily DJIA is up against resistance at the prior April high. Note that the momentum shows a series of lower highs. In addition, the ISEE number (call volume/put volume) is very high, showing a high degree of optimism. The weekly chart shows that the index is overbought. There will likely be a continuation of the short-term pullback that began on the 25th. This will likely terminate by the 12th, and a rally will follow through December.

Since IBM was recommended, the stock has risen despite the mild decline in the market. The stock is expected to continue to rise.


Oil has been trending sideways. I expect a low to be in place around the 3rd. The rally will likely carry into the 17th-26th. The cycle makes a double top in that time period and then falls into February. So, oil is likely to rally from the 3rd into the second half of the month. From that point, the cycles fall into the first quarter of 2011, so expect a downtrend into the New Year.


Gold followed its seasonal cycle, correcting in the second half of October. The last report stated that the period from October 13 to November 1 is one of the seasonally weak of the year. Gold peaked on the 14th and retraced 23.6% of the prior advance, the smallest correction that could be expected. On October 27th, gold rallied strongly. The market activity and the calendar tell us that the correction is over. Gold is only about 10% above its 200-day moving average (the turquoise line on the graph below). It will likely rise much higher than this before a significant high is in place. Important turning points are projected for the 8th, 12th, 18th and 22nd.

Bill Sarubbi, a strategist and portfolio manager currently operates his own business from Europe. He spends most of his time in Vienna, London, Tokyo, and Abu Dhabi.

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