Are long-term investors catching a falling knife?
That was a terrific week for us. Last Friday October 12, I forecast that the current vigorous stock rally would top out at mid-week on Wednesday. And right on cue, the Dow made its high at 25,850 at 0 am UK time. Most of us were awake to capture that in a short sale! And on Thursday it plunged to the 25,230 low for a move of a cool 620 points.
Now how was I able to make such an accurate – and hugely profitable – forecast days ahead? Was it pure luck? Do I have a crustal ball? Am I using a secret formula? Did I put a magic Chinese hatspell on the market? Do I have powerful friends in the hedge fund industry? Was it gleaned from reading the MSM? Do I have a hotline to the Chairman of the Federal Reserve? (You get the point).
Strangely, many pundits and investors/traders believe in one or many of the above as factors in the ways of the markets.
In fact, all I used was my trusty Tramline Trading system and the many years of experience I have racked up analysing waves and trends on charts.. How many other commentators made this prediction? My guess is either precious few or zero. But it is a high that will stand for a very long time.
Today, I will move away from the usual US indexes and focus on the DAX, which I know many VIP Traders Club members love to trade (and with good reason as the moves can be spectacular).
The DAX topped its magnificent bull run at 13,580 on 23 January – the very period when the Dow and S&P made major highs. Today it trades at 11,550 – a loss of 14%.
As ever, I like to start with the very long term picture
Since the Credit Crunch 2009 low, the market has been in its final wave 5, and since then has traced out its own five wave impulsive pattern.
I have two tramline pairs with the pink pair tracing out the final wave 5 of 5 (which itself sports its own five waves!). For an Elliottician, this picture represents an absolute textbook example of wave patterns where a solid prediction for major market turns can be made. We know that when fifth waves terminate, the market turns and reverses and the correct trading strategy reverses from buy to sell.
Of course, those unfamiliar with EWT will keep trading the old trend, oblivious to the new one. Th is is a disastrous policy and will bring down a heap of hedge funds who are mainly trend followers.
The other blue tramline pair is the longer term pair starting in 2008. The upper one connects the two wave 3 highs and its extension is the limit of rallies. And in January, the market pushed up to touch that resistance. That was when I started looking for the turn.
At the January high, I was waiting for signs of the new trend starting and here is the daily chart at that time
That is where the two tramlines meet in what I call a ‘Chinese Hat’ which I cover in my text pp 59 – 60, 135. When two upper tramlines cross over, that is the point of maximum resistance – and the most likely turning point where profits on longs can be extracted and new short positions taken. This is my point of reversal.
As the market bounced off the lower tramlne in April, I expected a hefty bounce of at least a Fib 62% of the decline in a second wave. In fact, it stretched to the Fib 76% retrace on the button. Many believed the bull market was back on during the rally. I did not. My best guess was that the rally was a wave 2 and would lead to a savage third wave down.
And in fact, this is the most likely picture as the market has broken hard below the lower pink tramline. All through the various twists and turns, I have managed to advise members the most favourable times to enter short trades at low risk. The latter requirement is essential since I do not want to sit on a losing position after entry for long.
That means my timing has to be almost perfect – a most difficult task as I am sure you will agree.
Going back to the weekly chart, you will see my main target is the lower blue tramline in the 9,500 area.
With the DAX in full retreat, what does this imply for the Germ,an economy? We have all been told for years that Germany produces world-beating machinery, cars, machine tools, and so on. Its focus on exports has produced a high standard of living for its citizens. But have we reached ‘peak Germany’?
And with Brexit looming (in whatever form it eventually takes), is this marking the end of the road for the over-arching influence Germany has had in EU affairs?
One key element here is the value of the euro. Its relative weakness has of course been of great benefit to German exporters, but will it stay weak for much longer? If not, that will be another nail in the German economy coffin. So let;s take a look. Here is the long term weekly
I have a magnificent wedge with the upper line containing four highly accurate touch points, making it a highly reliable line of resistance. Breaking above that would be highly significant. And within the wedge, the waves are highly overlapping but with some highly major tradeable moves. This strongly suggests the next major trend will be up.
The lower wedge line also contains accurate touch points and also a lovely Prior Pivot Point PPP (see text pp 52 – 53).
At the 2015 low I have a major momentum divergence and the rally off it is impulsive and I have labeled it wave 1 with the decline to the current market wave 2. Here is a close up on the daily
And my wave 1 is a necessary five up to the upper wedge line where it turned down in wave 2 which sports another momentum divergence at the spike low on a slight extension from the Fibonacci 50%.
My reading is that the market is poised to rally to test the pink resistance at 1.18 and of successful, will go on the test the upper wedge line again at the 1.22 area.
Of course, this is a completely contrary opinion with bullish dollar sentiment (on rising interest rates) rampant. In fact last week, COT data shows the ‘smart money’ commercials increased their long positions in what could be a tip-off to higher prices.
And if it can break clear of that wedge line, watch out below for the DAX. Gott in Himmel!
Is silver finally taking off?
We have been patiently waiting for the silver rally but now the chart is shaping up for just that
The low was put in last month after descending a lovely pink tramline pair. The rally to the 15 cent area is my wave 1 and the subsequent dip wave 2.which planted a kiss on my lower blue tramline. That sets the lower tramline and a parallel line above has two lovely PPPs and conveniently passes through the wave 1 high! That’s magic!
Extending that line produces my first major target at the 15.20 area which should be the purple wave 3 high.
For this scenario to be valid, I need to see a strong push up next week. But imagine the picture if my euro analysis above is correct. Then, a mammoth short squeeze will be on because hedge funds are at a record net short. In this case, they will be hit by a double whammy – strong euro and silver, where they are net short. Hmm.