Are we there yet?

Dear Trading Diary: The Nasdaq tech oxygen is getting thin up here! And the Dow is showing signs of exhaustion as it peels away from my line in the sand trendline (see below). Another tech boost came from the prominent AI supplier Broadcom that reported blockbuster demand for its products. But with the more feet-on-the-ground companies in the S&P 500 showing definite signs of ‘range anxiety’, the tech generals are even more out in front of their foot soldiers in what may become the market version of the Charge of the Light Brigade. And here is what is happening under the bonnet:

This is an incredible chart. For the last two weeks as the index was pushing into new ATHs, breadth has been in sharp decline (more daily losers than winners). The rising tide is not lifting all boats! And the tectonic plates are moving along fault lines so that earthquakes cannot be far away. If this continues towards year end, we may see another sharp reversal around 1 January (a date when several historic trend reversals have appeared).

And here is the Dow as it peels away from my make-or-break trendline resistance:

It made its ATH on 4 December and since then has declined steadily by a not inconsiderable 1,000 points. So could this be the start of something big? Remember, the Dow is much less tech-heavy than either the Nasdaq or the S&P and so reflects the ‘real’ economy more closely.

Last week’s action was a little quirky in that the front month future diverged markedly from the cash quote. That rarely happens. At the time I thought this may be a subtle sign the sands were shifting and by the close Friday that feeling was bolstered. Now I scan the above advance/decline chart and I am asking again the question: Are we there yet?

Another subtle sign the euphoria may be cooling is the sharp hike in Treasury yields last week

The move up from the Double Bottom leg in September is my wave 1 ( a clear impulse) and the sip that I forecast is my wave 2 that carried to the normal Fib 50% retrace a week ago. Since then yields have roared northwards in a very clear kick-off to what will turn out to be a powerful third wave up taking it well above the wave 1 high of 4.7%.

To power yields higher is the ballooning Federal deficit (see last week’s blog). But along comes the Lone Ranger in the guise of Elon who promises to round up the DOGE baddies (government waste) and kick them out of town. But first he must contend with the Blob that wants to maintain the status quo. We know Elon has not put a foot wrong with his great successes of Space-X, Tesla and Twitter but will this be his Waterloo?

An awful lot is riding on him (and Trump) to make meaningful changes in January. To me it seems too much us being priced in to markets. Bullish sentiment in the dollar is near ATHs and stocks are near theirs. But are the Bond Vigilantes above giving us advance warning that things may not turn out quite as rosy as most believe.

There is a two week period before year end and in this time, we should get further clues. For VIP Traders Club I took part profit in my long Nasdaq and raised my trailing stop on the remainder. Whatever happens, I will extract a nice profit on that campaign. But I am ready to begin a bear campaign at any time.

With the FOMC next week looming and expectations for a 25 bps cut, volatility is sure to be front and centre and the VIX will respond. I am looking for a new trade there.

Update on my Gold campaign: When gold reached the $2,795 ATH on 30 October, I forecast that the wave 3 top was likely in and the market would then enter a long wave 4 corrective phase lasting weeks/months. That forecast has been smack on the button.

And because fourth waves are notoriously tricky to trade, I became very cautious but still managed to negotiate some of the twists and turn successfully. Here is one possible option for my roadmap

If we call the 13 November low my ‘a’ wave of 4 and the rallies the ‘b’ wave then we are entering a large ‘c’ wave lower to perhaps the $2,300 region lows. One factor that could produce this result is the hedge fund positioning as in the COTC data. Incredibly they are almost seven-to-one long! I do not recall ever seeing a larger bias to the bull side.

With that extreme bias, any dip could result in a snowball selling effect as the froth is blown away. Only a push above my wave ‘c’ of ‘b’ at $2,730 could send me back to the drawing board.

Whichever way the market turns, I will be trading extremely cautiously.

Update on my Heating Oil campaign: A month ago I highlighted the potential for the start of a major bull rally phase. But I was a little premature (a not unusual occurrence for yours truly) and took an early loss. But instead of giving up and moving on, I have been monitoring this market and believe now is the time to get interested again

I pointed out the good mom div at the late September low and the excellent trendline resistance with multiple accurate touch points. Remember, the more of them and the more accurate the touch points hit the line, the more reliable is the line as a divider between support and resistance.

So far it is all resistance but when the market moves above this line, it becomes very reliable support and indicates where to place stops.

With the crude oil charts similarly placed, a push above the trendline next week would be a clear indication the trend has reversed. Bearish sentiment towards oil is intense with forecasts of massive over-production.

How conventional economists are hopeless at speculating: Because they believe that markets obey a cause-and-effect model , they are oblivious to the correct Elliott Wave interpretations where markets are fractal and move according to swings in sentiment. Here is a recent typical extract from Bloomberg:

…this is part of the ongoing ripple effect from the energy shock, but it more or less forces the central banks to diverge. The impact on bonds, however, was counterintuitive. When central banks cut rates to fight incipient deflation, that tends to mean lower bond yields. Instead, bond markets across Europe saw the biggest daily rise in yields for eight months. This is hard to explain.

It is hard to explain for conventional economists! But not for Elliott wave adherents. The above chart has been my T-Bond yield roadmap that I have been posting for my VIP Traders Club for a few weeks.

Note that all of last week, the 6-month T-Bill yield kept falling. Conventional traders would be long T-Bonds in sympathy with the falling 6-month yield – and they would be dead wrong.

In terms of the dollar, taking your cue from the falling 6-month T-Bill yield would put your firmly short the greenback. But last week it did have a slight upward bias but my wave analysis was unclear and I stayed away until the fog could clear.

I had been long sterling but took a small profit on the Thursday dip at my trailing stop. With the UK economy faltering (latest figures call for a ‘Recession Watch’), the BoE will face even greater pressure to keep cutting cut rates. But will surging gilt yields finally sink the ship damaged by the coming tax hikes?

Of course, falling yields and weaker sterling should spur the FTSE to make new highs to break clear of my upper wedge line