Afraid to buy the Dow? I was – until now!

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Yesterday, I made a 180 degree change of heart on the stock indexes for the VIP Traders Club. My advice was to buy the Dow.  Believe me, that was not an easy decision.  Although I have been largely successful in forecasting the major trends in most of our other markets traded – from currencies to crude oil to soybeans to gold to T-Bonds and so on – the indexes have had me stumped for a year.  Yes, we very profitably rode the huge Corona Crash decline a year ago of 9,000 Dow points, but the rally off this low has been staggeringly strong – and I missed it totally. I have been zigging when I should have been zagging. 

Through most of the post-Corona Crash rally, most of the sentiment indicators I follow have been flashing “top ahead”, but with each ‘top’ has come a new surge to new ATHs.  Just last week, DSI bulls on the S&P have been registering over 90%, which is a level where previous highs have been made. But this indicator is not a short-term timing signal – strong rallies can persist for a long time with a very high percent bulls reading.  I am reminded of the famous dotcom rally in the Nasdaq in the 1990s when Fed Chairman Alan Greenspan uttered the infamous ‘irrational exuberance’ verdict – only to see the bubble expand for another four years before it popped.  Strong trends can often persist for far longer than you can imagine!

Here is the S&P with a possible upper target on my pink tramline

Yesterday, it rallied to the black trendline which should be resistance – a moment of truth.  It has been noted by many that trading volumes in the NYSE have been very thin recently.  Most chartists will say that this drop-off in volumes in a rally is bearish.  But I fail to see the reasoning – low volumes mean fewer buyers and fewer sellers – a wash.  It tells me nothing about the outlook for the trend in prices.  OK, so there is less conviction in the bulls’ camp, and likewise in the bears’. But as Isaac Newton almost observed, markets continue their path unless impacted by a new force – and that new force has yet to arrive.  That’s why the trend is your friend (until it’s not).

I would say that many professionals are not convinced by this rally.  There are all sorts of reasons to be fearful from the tsunami of debt being created in this pandemic to the elevated valuations of the big tech names.  That is some Wall of Worry. Then there is the WallStreetBets crowd and their ilk manipulating some stocks – surely a sign of a bubble about to burst? And with the Archegos affair – what other over-leveraged funds are lurking out there ready to implode?   Yes, there is lots to worry about (there always is).  But even so, stock indexes continue making new ATHs.  That is a fact – all else is conjecture.

The bottom line is this: I am a swing trader and my task is to help my clients avoid major losses and to help them make profits.  Period.  I have little ego in the game and I am not too afraid of changing my mind when necessary.

Of course, I am well aware I may have turned bullish right at a major top – that is a hazard we all must live with as traders. But the key is that I always use my reliable Money Management Rules that all VIP Traders Club members have access to.  That avoids large losses by the use of sensible stop loss strategies. If I have joined the rally at a top, I am confident I can join the downtrend (if it develops) at an early stage that would negate any small losses from my bull trades here.  I would not take that personally, as so many traders would.  If I can avoid a large loss and produce a profit, I will have done my job.

Meanwhile, the Dow is up over 200 pips from where we entered yesterday, so maybe I am finally on the right track!  We shall see.

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A terrific lesson in perseverance

There is not a trader on the globe that enters a trade with 100% accurate timing every time. Of course, as a swing trader, that is what I always aim for.  But in this real world of uncertain trends, I sometimes enter my first attempt, get stopped out for a small loss, and then try again.  This was certainly the case recently in my campaign in the currency cross EUR/GBP.  Sterling was making new highs against the dollar but I believed it was teeing up for a sharp decline based on my EW reading.  That would likely aid long positions in EUR/GBP

I had been tracking it on the downside for some time and made a couple of failed attempts as it bounced off the pink trendline.  But when it poked above  my upper black tramline on 22 March, I expected a pull-back for a possible kiss – and a much better trade entry.  If it did that, I could set a very low risk long entry with a close stop anticipating a Scalded Cat Bounce higher.  The building mom div there was the likely fuel to power it up.

I also noted it has fallen back to the pink trendline – a doubly strong area of support.  We entered our long positions at 85.35 on Tuesday and saw the market rocket up to pass my first target and settle yesterday at 86.80 on the Scalded Cat Bounce I had previously forecast.  So now we are already in decent profit and I can move stops to break even for a no-loss trade, whatever happens now – a trader’s dream!