Are you ready for the Trade of the Century?
I will focus more heavily on the US stock indexes from now on because I believe we are getting very close to The Top. It is striking that only some of the major US indexes are making new all-time highs among the global indexes. And none more so than the S&P 500 and Russell 2000 both of which surged last week with the Dow lagging slightly.
This is the Dow chart I showed last week with my best guess for the way ahead
I imagined wave 4 would last a week or so, which it did on the nose, and then embark on an extended wave 5 up. Here is the Dow updated showing the accuracy of my forecast:
In EWT, there are always alternative labels when in real time, and this is no exception (there is usually one option with highest probability). I have a slightly amended structure and also have a new pink trendline drawn off previous highs and this line becomes my next immediate target at around the 22,500 area with the major target the blue tramline around the 23,000 area, as before.
And here is the S&P which has been much stronger
But admire my tramlines! Both blue lines have multiple highly accurate touch points and I regard them as very powerful lines of support/resistance. Now, the market is pushing up very close to the upper blue line, but note the weakening momentum on this rally – a stark warning sign that the market will very likely have enormous difficulty in penetrating this area.
And if the market starts to turn down in the next few days (as is likely), that will put in my wave 3 of 5 in the Dow and lead to a heavy decline in wave 4.
But I do not expect that to be the start of the Big Slide – there should be one more push up into new highs to complete fifth waves of all degrees of trend. That will be the high to end all highs! And my best guess is that it will occur before December 31.
So we have three months max for the waves to trace out this pattern – plenty of time for traders to prepare for the Trade of the Century.
In terms of timing with global events, odds are growing that North Korea will do something rash on the nuclear front (they haven’t gone away), and the bearish mood of secession is growing (the Catalonia ‘referendum’ tomorrow). Also, odds are growing that the UK will walk out of the Brexit talks which will impact many markets. To name a few. And there may well be more out in left field waiting in the wings.
Yes, there are many booby traps for the bulls out there – not to mention the recent surge in bond yields. I mentioned last time that bullish sentiment was riding high. Here is the latest COT on the mini Dow
and with last week’s strong performance, hedge funds are now an incredible 10:1 bullish with the trade heavily hedged against them. I have never seen hedge funds so one-sidedly positioned. Although using COT and sentiment data is not a timing tool, I believe this shows when the markets eventually turn down, it will be in a ferocious move.
Long-term stock investors are well advised to look to start taking profits (if they have them – not all issues are making new highs or are in bull trends!).
Interestingly the FAANG shares, which were the generals leading the charge until recently, made their highs weeks/months ago. Alphabet (Google) made its high four months ago in June!
As for the low cap high risk issues, here is the weekly Russell 2000
The wave labels are pretty clear – and I have nice tramlines with multiple t ouch points, especially this year. I have five very accurate touches on it since January, but last week, the market burst through resistance and closed higher. But on a strong momentum divergence! That growing weakness may well spell the end for purple wave 3 in the days ahead – and set up a possible overshoot if the market retreats sharply down to close under the upper blue tramline. I shall be watching out for that.
But, as with the Dow and S&P, this dip will be a fourth wave and lead to final fifth wave up into new highs.
In the VIP Traders Club, we retain a part long position as we nervously eye the turn.
Gold remains weak
As a measure of the intense risk-off attitude out there, gold staged a small rally off my $1280 target, but as of yesterday, could not extend the advance. This was the chart I posted last week:
I had targets at the $1280 and then the $1260 levels. In fact, the market did decline to the $1280 level and staged a small bounce. But not before following my roadmap above with a nice bounce. Here is the chart updated:
I now have a small wedge/ending diagonal pattern at the highs which started at the $1280 area (yellow bar) – and this level was matched last week, which is a typical retracement level. And now we have a budding A-B-C correction that may have ended. But with hedge fund bullish positions remaining high (bulls are 4:1), I am not sure we have seen the lows just yet. If not, the $1260 area beckons and that would be the end of the C of B wave before a resumption of the bull run can occur. That will happen in conjunction with a decline in shares.
In fact, last week I had the $1260 level; was my preferred target. We shall see.