Who remembers the 1980s British TV series Tales of the Unexpected? They were stories with an unexpected twist at the end – and the stock market story of 2017 could well have been one of them!
This Year of the Unexpected finished with shares coming off new all-time highs at the last moment, having climbed a mammoth Wall of Worry – and what worry! Most sane persons were noting the astonishing degree of investor complacency for months on end with the VIX plumbing new depths as stocks went up the escalator. Such a record-breaking run of super-bullishness is unprecedented – and of course, the natural reaction is that it will all end in tears – it cannot possibly last.
But if you were constantly shorting the indexes in anticipation of a huge correction (at least) to some degree of sanity, you would be nursing major major losses. That’s not my style. As a trader with a trading mentality, my task is to find the Path of Least Resistance – never mind the rights and wrongs of it. The market is the market and it is always right.
Yes, valuations on some shares are ridiculous just as Bitcoin valuation at $100, then $500 and even $1,000 was increasingly insane. But Irrational Exuberance can take markets to unheard-of nosebleed levels as we saw in the Dotcom boom of the 1990s. As a trader, it usually pays to ask no deep questions — and to simply follow the market until it signals a change in direction. The goal of a trader is to make profits, and avoid losses. Period.
The trader is not there to be proved right in their views. Most of us have an emotional need to be proved right – but therein lies dogma and inflexibility. The more convinced someone is, the less likely they are to change their stance when conditions change. That is a fatal flaw in a trader.
You can argue the ins and outs of it down at the pub with your mates if you wish. But if you are holding a winning position, does it really matter if you do not really understand/believe the ‘reason’ for the trend? Some may think you lucky, but as Napoleon said: ‘I would rather have a general who was lucky than one who was good’ And he knew a thing or two about the correct tactics of fighting a war (until he met his Waterloo, that is).
But there is one thing I can say with confidence: when the bubble does burst, the losses will be staggering -and swift. All institutional investors are piled on one side of the boat. Every measure of bullishness I come across is in extreme territory. For instance, NYSE margin debt is at an all-time high. Investors only borrow to buy shares when they are feeling very bullish. With margin, they can buy more shares with their funds. But on the downside, losses magnify and that is what we will see after the turn.
As I write on this last trading day of the year, US stock indexes are selling off hard in the final hours of trading when many have gone home early for the New Year holiday. Recall this chart of the S&P I posted on 16 December
I have a blue trendline off the April wave 1 high and the market was powering above it in what would be an overshoot – provided the market could plunge back down to set a daily close well below it. I have been on the lookout for a reversal and with very late selling last night, that has been accomplished. Here is the 4-hr chart
With a slight new all-time high around noon at 2697, the market began its decline and when it broke below the upper trendline – and then the lower trendline – it was hard down to the close.
That action has put in the overshoot (a reversal pattern that signals a buying climax) and with the huge momentum divergence at the high, odds the top is in place have rapidly increased. We very likely have a new bear trend in force. I have fifth waves of many degrees of trend complete at yesterday’s high. The scene is set for a very interesting start to the New Year!
One other point – years ending in “7” very often witness a plunge in stocks (2007 was a great example). This is the Decennial Pattern. If this is indeed the top, it has only just squeaked in by the skin of its teeth! Since there was no plunge in the year, a delay into 2018 would likely be unusually large.
Now is the time to plan for a much more volatile 2018. I believe stocks will defy the 2017 law that said they always go up.
Gold and silver already in huge bull run
Gold and silver are tracing out the waves I had set as my roadmap months ago. Here it is on the weekly showing the 2011 $1920 top.
The huge slide 2013 – 2016 (as the dollar advanced) I saw as a third wave and near the lows of January 2016, I started to look for a major reversal. This was to be wave 4 up – likely a lengthy corrective wave. My view then, as now, is that once wave 4 top is in place, the market will start a major bear trend to below the wave 3 low at $1050.
This will be in accordance with my long-standing forecast for a global deflationary economic depression. The low for gold could reach the $500 area with the US Dollar reaching all-time highs. But that is for another day. In the meantime, we have a strong rally phase that has not ended.
Long-time readers will know that I rely on sentiment measure in my analysis and especially when bullish or bearish sentiment becomes extreme. That is when I look for a change in trend. The most interesting cohort is the hedge funds who are predominantly trend followers. They employ armies of expensive mathematical talent to divine trends and are some of the biggest herders.
A hedge fund analyst is under enormous pressure to go along with the herd. To go against it is a major risk to career prospects! That is why most hedge funds are completely flat-footed when the trend changes. The enormous pile of wrong-way bets are then at risk and waves of covering ensue. That produces very strong thrusts – and those are the kind of setups I like to trade! We have two such now.
Here is a great example of sentiment in action in silver.
chart courtesy www.elliottwave.com
This chart shows the COT data for hedge fund speculators (managed money) and in recent days, they have been piling up masses of short positions – as prices rise. This is a clear indication they do not believe the rally will persist. They have all bought into the conventional wisdom that with Bitcoin and the other cryptos, people will shift out of PMs and into the cryptos where all the action is. And with shares soaring, who needs gold? This argument will come to haunt them.
Note the occasion when hedge funds held a record net long position back in early 2017 – right at a major high. They were totally on the wrong side of the market holding record long positions then. Their liquidation helped the market drive a bear phase of some size.
But today, with an ongoing vigorous rally, they are storing the fuel to ignite the rally even further. I expect explosive moves in gold and silver in the New Year. But the really big trade will be when wave 4 tops and positioning short for a move down of possibly $1,000 in gold over several months.
Bitcoin is following my roadmap beautifully
In my last post, I wrote that BTC was a short at the Fib retrace since the market had traced out a five down and a three up. Here is the latest
The C wave rally hit the Fib 62% perfectly and then started its decline. I advised VIP Traders Club members to exit all longs and reverse to a short position at the $16k area. Now I have a pretty small scale wedge (blue lines) and today’s gap break now sets my next target at the $11k – $12k zone with much lower potential.
The mania surrounding BTC is part of the same phenomenon that has captured stock markets – an extreme in bullish social mood. If BTC is starting a major bear trend, as I suspect, stocks will accompany it. I am using BTC as one of my social mood thermometers.
On Tuesday, US crude oil hit $60. That capped off a wonderful 2017. Club members started a long campaign two years ago at the $32 area. That was when I estimated crude would reach $60 at the least based on my EW and Fibonacci analysis. Sentiment at the time was highly bearish and if you believed the pundits, you would be expecting oil to drop to under $20. That was what the hedge fund shorts were hoping for. But I took the opposite stance – and Club members are now reaping the rewards of taking that completely contrarian position.
To be a big winner in the markets, you often have to ignore the utterly plausible pundits – and take the opposite trade. That’s what I specialize in and have done so for years. My tramline methods get us into major positions at low risk – and can also pinpoint good exit strategies as a considerable bonus.
Why not start off the New Year with a two-week Free Trial membership of my VIP Traders Club. We trade most of the major markets. 2018 will see huge moves as we did in 2017 and I plan to capture many of them for members.
Wishing you a most Prosperous New Year!