In a previous post The Oil Price is Suddenly Hot News – Has it Topped?, I pointed to the manic extreme bullish posture of hedge funds in the crude oil bubble which was waiting for the pin to arrive. It duly arrived on Friday.
It matters not what the pundits chose to identify as the ’cause’ of the 5% crash. The MSM is always full of plausible-sounding reasons for the sell-off and it makes for dramatic copy.
The fact is that any piece of news – either ‘bullish’ and ‘bearish’ – can influence traders in a variety of ways. I’m sure you have many times have seen an outwardly bullish news item herald a sell-off (and vice versa). This is not an infrequent occurrence.
In the light of this, I still marvel at the tenacity of traders to cling to the dis-proven theory that the news makes the market. But of course I am glad they do so – otherwise I could not use my Tramline Trading methods so successfully! If everyone thought like me, I would have no market to trade.
As I pointed out last time, with hedge funds (trend-followers) at a staggering 10:1 long:short ratio, the crude rally was an accident waiting to happen. Here are the charts
and this is the update
Here is the long term chart shown two weeks ago:
Wave c of B appears to have topped and we are now in big wave C down. A confirmation would come if/when the $60 area is breached. This C wave is headed to below the A wave low at $28.
If this super-bearish picture is correct, it will coincide with a stock market crash and the onset of a recession/depression. But of course, very few will recognise it for that since social mood is still extremely positive.
The Trump/NK bout remains in an on/off sparring phase. Here is a fascinating chart showing temporary outbreaks of peace have occurred near market peaks since the 1990s at least
chart courtesy www.elliottwave.com
So we have been here before – many times, in fact! So do not be surprised if this time it ends in stalemate – and at a major market high.
Treasuries reverse sharply – also from extreme sentiment
In my post a week ago, I highlighted the potential for a severe reversal in US Treasuries. Hedge funds (who are a perennial of profitable information) held a record net short position and the Elliott wave picture was compelling.
We had been short for a long time but I became nervous with this position in light of all the friends that had joined me. I hate crowds! Which is a very useful trait to posses in trading. When hedge funds suddenly wake up to believe your story – look for the exits.
This was the chart I showed
I penciled in the low of wave 5 of 5 and suggested if this was the low, the reversal would be huge and the hedgies would be forced to cover their shorts in a mammoth short squeeze. And this is this scenario playing out in spades
Indeed, some short squeeze! But at the 144 level (a gain of 4 big points in only 7 trading days), it has hit major resistance and I expect a pull-back here.
But medium-term, the trend is up and more pain will be inflicted on those hedge funds who cannot read a COT diagram. I love it!
This is another market where hedge funds have been short for a long time. Global wheat stocks have been at a record high and there was little incentive to take a bullish view. Unless you were reading the charts, that is.
Last year, I identified a Wheat Wedge and suggested that if the market could push up past the upper wedge line (from bad weather news for example?), we would be in a third wave that could stretch quite a distance.
This is the picture today
We had that break a while ago and the market has been testing the resistance there but last week, has powered well clear of it. This action suggests we are in a third of a third up – and that means the trend is strong and my major target at the $6 area is well in sight.
And bad weather news is starting to emerge!
VIP Traders Club members have been long for some time.