Can stocks keep on defying gravity?

Can stocks keep on defying gravity?


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Last time, I wrote about the Wall of Worry that stocks are climbing.  Mainstream sentiment of the global economy has been bearish for some time and I have referenced several prominent MSM articles that basically say “the economy lags yet stocks (especially tech) are strong”  In the exasperated words of Victor Meldrew, they are saying “I don’t believe it!”

And  this negative MSM sentiment is helping propel stock higher, of course.

Many pundits have commented on the fact that much of the central bank largesse with QE/ZIRP/NIRP has been funneled into Wall Street (and real estate), certainly not into Main Street.  And that is behind the rise of The Donald in the USA (and perhaps Mr Corbyn here in the UK).

Therefore, so long as central banks persist in their disastrous policies (which they will – at least for now), I see no end to this asset-pumping process.  Institutions have no other choice.

But of course, markets do not move in major trends without some counter-trend moves.  And I believe we are poised for one of these.

In the background of course is the date-certain event of the US elections on November 8 (only seven weeks away) and now, Trump (anti-establishment) seems to be gaining on Clinton (establishment).

I believe that the outcome (and the ever-changing expectations of it) will have much more influence on the markets than anything the Fed says, does or doesn’t say or do.

Imagine if two weeks before the presidential election Trump is in the lead in the polls!  Where do you think stocks will be?  Hmm.

So let me examine the potential for such a massive sell-off going into November.

I will analyse the Nasdaq (Tech 100) because this index has been the centre of speculative fervour – and contains many of the darlings of today’s market, including Apple, Amazon, Alphabet. Amgen (and that is just the ‘A’s).  This index has been leading the Dow and S&P up (some would say dragging them up as P/E on S&P now at an elevated 25X!).

When we get the next sell-off, the Nasdaq will also lead the way down as risk-on will quickly morph into risk-off.

One of the most speculative sectors is the Social Media sector containing the likes of Twitter, Facebook, and so on. Here is the weekly chart of SOCL (Global Social Media Index ETF)

A pretty bullish chart, right?  But on Friday, struggling Twitter is rumoured to be in the sights of a few media companies for a takeover.  Could this be a top signal?

Back to the Nasdaq – here is the very long-term monthly chart for perspective:

Remember the dotcom bubble?  There it is on the left in all its glory.  And the collapse off the top is in a clear five impulsive waves complete with a huge momentum divergence at the 2003 low.  That set the ground for a massive counter-trend rally in an A-B-C.  That much was foreseeable even back in 2003/2004.

And the rally since then fits this three up scenario extremely well.  Wave B in the 2008/2009 Credit Crunch collapse has a clear three down form and wave C is a textbook five up within my lovely tramlines.

Note the upper blue tramline has an excellent PPP and touches the multiple highs of 2015.  The equally impressive lower tramline has three highly accurate touch points (the minimum required for reliability) marked with red arrows.

The remarkable fact is that the entire post-Credit Crunch rally has been totally contained within the trading channel as described by my parallel tramlines.  That has lasted 7 – 8 years.

What a superb demonstration of the power of tramlines!  But tramline do not last forever.

But there is more – the C wave has a very clear five up form with a characteristic ‘long and strong’ wave 3 and a complex wave 4 (whose low accurately touches the lower tramline).  And the recent move into new all-time highs has set the final purple wave 5 in place.  The only question now is where and when will this wave complete?

Here is a close up of this final purple wave 5

Fifth waves most often possess a five up pattern within and here I have labelled purple waves 1 and 2 (which is in a clear textbook A-B-C pattern).  And from the purple wave 2 low in July, the market embarked on a third wave with very strong momentum readings (a typical sign at the start of a third wave).

I have my first five up (small red numerals) with wave 3 ‘long and strong’ and wave 4 low on 12 September.  From that low, I have a strong wave 5 to new highs (although with weaker momentum than in wave 3).

So, according to this scenario, we are at or very near to a major top.

For more clues, here is a close up of this fifth wave on the 4-hour chart

and this wave is a beaut!  I have a textbook tramline pair with very accurate touch points and I also have a potentially complete five up!  This is manna from heaven for tramline traders, especially given the momentum divergence.

So we have reached a point where a break of the lower tramline would signal a reversal, according to my Tramline Rule.

And if that does occur, we will have in place the green wave 1 high (second Nasdaq chart).  The question then becomes: How low will green wave 2 fall?


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