Are shares about to rally in final wave 5?

Are shares about to rally in final wave 5?

On Tuesday the Dow lost over 200 pips as I noted in my previous post and since then, the market has been edging up (and then down/up yesterday), moved by the usual suspects – the Dip Buyers who have been trained like a seal to buy all the dips.  But will it continue to work like a charm?

As you know, I have been waiting for a wave 4 down to emerge when my wave 3 finally topped.  So far, the March 1 high in the Dow at 21,170 remains my top pick for wave 3 high and since then, I have been working on the basis we are now in wave 4 down.  Market action has confirmed my view.

I also maintained that this wave 4 would encompass several hundreds of Dow points before ending.  To yesterday’s low at 20,530, the decline has eaten up 640 pips – and is in my original ballpark range. So, shall I start looking for a turn back up in wave 5 soon?

Of course, the media were hell bent on attaching a story to last week’s action to ‘explain’ it – and they were presented with a slam dunk in President Trump’s will it or won’t it health care bill that went down to the wire on yesterday’s close.

But the market was already falling off the 1 March high before any mention of this was made. No, the media must have a story – and the more dramatic the better.  When the Dow fell by over 200 pips on Tuesday, there was no obvious ‘catalyst’, as I mentioned in my last post.

In the pre-PC age, financial commentators used to have two office drawers full of index cards marked “Bullish stories” and Bearish stories” and depending on whether the markets went up or down that day, a card would be selected at random from the appropriate section and that story would be used in their copy.  Money for old rope.

But of course, 99.99% of readers would buy it because they adhere to the incorrect principle that it is the news/data/fundamentals that drive financial markets. Yes, the law of supply and demand apply more or less to economic markets, such as the bread or cabbage markets.

When cabbages are in short supply, the price rises pretty quickly.  But there is no such similar concept of ‘supply’ or ‘demand’ in the share market.  A share price is determined by the actions (or non-actions) of those that own the shares and those that wish to do so.  The supply is the entire equity issued which is fixed. Yes, if a fund suddenly decides to sell a huge block of shares in one trade (a very rare event), the bids of the buyers would be lowered and so would the price.

But in reality, funds get together to match block trades at agreed prices, or if they wish to offer them on the open market, they will scale in their offers to as not to depress price too much.

But would this lower price attract an army of buyers and drive the price back up, or will it attract more sellers driving the price down?  That is determined by how powerful the buyers’ buying (and sellers’selling) interest is – and that reflects their relative state of bullishness, or sentiment.  And that is how sentiment drives speculative markets.

There is no such concept of ‘fair value’, either.  The commonly used P/E ratio as a measure of a share’s value has swung from the low single digits to well over 20 since the 1970s.  And for many high-flying tech shares such as SNAP, the P/E value is meaningless because the company has no earnings! So what is the ‘correct’ fair value?

It is what a buyer and a seller agree to in any instant of time.  It is just that.  And prices fluctuate in accordance with the Elliott wave pattern which maps changes of sentiment.

Many commentators are screaming that shares are over-valued by most measures.  But for a trader or investor, that opinion is of little value – except to highlight the degree of skepticism in some ranks of the financial industry.  Of course, if this sentiment grows, it would create a headwind for the bull market.

Here is the Dow showing the lovely tramlines containing the latest rally phase

Note the overshoot on the upper tramline as wave 3 was formed on a final thrust on buying exhaustion.  Coming at the end of a long and strong bull run, I noted previously that this overshoot is significant because it heralded a reversal of some magnitude – which is precisely what is occurring.

Also note that yesterday’s low made a close hit of the lower tramline, and one possibility is that wave 4 has ended and wave 5 up can start soon.  That is also at the Fibonacci 38% support level.

Here is a closeup of wave 4

The textbook form of fourth waves is an A-B-C three-wave pattern (or some combination) – and this one fits like a glove.  Not only that, but in the same textbook, B waves are also A-B-Cs and the C wave is usually a five.  the B wave is clearly a three, so let’s see what the C wave looks like in closeup

Indeed, we have a five down with red wave 2 and red wave 4 both in the required threes. Red wave 3 is long and strong and yesterday’s wave 5 low appeared on a gigantic momentum divergence.  There is nothing in these waves that is not straight out of the textbook!

Putting all of this together, I have to say that yesterday’s low is the best candidate for the final wave 4 low unless we see one more sharp dip early next week.

Another possibility is that red wave 5 has not completed, but action early next week should tell the story.

In terms of timing of highs/lows, since President Trump lost the health care issue (so far), my view is that the next item on the agenda – tax reform – will bring him success (in common with all Western nations, taxes in the US are widely seen to be too high especially for low earners, too complicated and an impediment to growth and there is wide support for reform).  After all, he had made huge losses before (his Atlantic City casino being one of his clunkers), but has always bounced back from setbacks before.  He has history of coming back from the dead.

Also, Mr Trump’s supporters must be getting a little itchy now; they see no respite from Obamacare and see no benefit yet from voting for Mr Trump.  The government must throw them some lifelines – and soon – to keep them sweet.

My best guess is that as the upcoming tax reform bill gathers momentum, it will be met by a more positive mood in Congress and send stock markets higher in the final wave 5 to new all-time highs. And as wave 5 turns over, the US  budget deficit talks will bog down and the government will shut down (again) this summer.

And then the Big Bear will be in charge and will present traders/investors with the greatest shorting opportunity in all of our lifetimes.


A lesson in patience – Pearson plc

For my VIP Pro Shares service, I have been following this UK share for some time.  I noted the huge decline on 18 January in a major profit warning and expected a relief rally of some weeks, a period I judged because the decline had been so brutal (a one-day drop of about one third).  I figured it would take a long time to go some way to repairing the damage as bargain hunters would dribble in to take the shares off the hands of the stale longs.  This is called redistribution.

If it was to be a relief rally, I expected an A-B-C form where I decided to wait for the C wave high in order to short.  I noted the upper blue line of support/resistance and extended it downwards and where it intersected the Fibonacci 50% level (yellow bar), that would be a good candidate for my C wave high.

Each day in February I checked on progress and when the first up/down appeared, I felt more confident a final C wave would emerge – and was not disappointed because in early March, the shares hit the 700 level – smack on my target area.

That was when I sent out a Trade Alert to members to short this share.  Now with the market moving down, it has broken below my minor uptrend line and appears ready to move even lower.

Patience is sometimes a virtue!

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