Did you expect the unexpected?
There is one Golden Rule in trading I observe and that is: Always Expect the Unexpected.
Although I have been bearish stocks since the January high, last week’s events gave me pause for the immediate downturn. Not only did North Korea appear to cosy up to Trump, but yesterday’s strong jobs data inspired a push to new highs for the move. Both to me were unexpected.
Of course everyone is asking what Kim Jong Un’s game is. There are all sorts of questions, but for me, the important point is that tensions have eased (for now) – and that is not the mark of a bear trend.
I had penciled in a c wave high around the 25,000 area but the market moved strongly above that level yesterday. That means I must amend my Elliott wave count to the above as my best guess.
In fact, this setup works better for a high-odds turn down from current levels at 25,300. I have a wedge pattern with red wave 2? sporting a clear ‘overshoot’ that resulted in a scalded cat bounce down to purple wave 1. So far, so textbook for a third wave down.
But the market had other ideas as it rallied out of the dip on Wednesday. That move went against my immediate bearish expectations. And that is when I took another look and found this highly significant trendline:
I am calling it my ‘rogue’ trendline – and on the Wednesday break, it heralded the surge Thursday-Friday with the 400 point push yesterday. Note Friday’s close has taken it to a very important point. Not only is the 25,300 level right on the Fibonacci 62% retrace of the entire move off the January high (top chart), but it also meets the underside of the wedge pattern where there resides strong resistance.
The whole pattern appears conducive to a turn down here. I have a classic A-B-C relief rally off the purple wave 1 low and a momentum divergence to boot. If the market turns down here, the decline will be ferocious. Of course, the pother option is for the market to surge past that resistance to higher Fib levels.
As I have noted, everyone is urging Buy the Dip! And I am sure many were just doing that in yesterday’s surge that must have taken out many shorts in the process.
Also, latest COT data show hedge funds substantially reduced their short positions in the week to Tuesday when the market was about to surge upwards into Friday;s close. And if they continued that process later in the week as appears likely, their short covering helped the market recover.
So where are we now? Will the Dow power on upwards as if nothing happened in February with that 13% mini-crash with Trump and Un suddenly kissing and making up? Or will the Trump-Un summit collapse to deflate bullish hopes? I feel a lot is riding on this. Remember, many a slip lies between cup and lip.
Of course, there remains the tariff war that may escalate further. Already, Trump has imposed them on some nations but not others. It is a real can of worms. The UK wishes to be exempt, but that would open up more divisions within the EU as UK must toe the EU line as a member. As if the EU doesn’t have any other headaches with the recent Italian election putting anti-EU politicians in power. More nails in the EU coffin.
I foresee fireworks in the days ahead.
You must trade currencies independently
Although when the dollar is in a bull phase, do not expect every cross currency to weaken against it! That golden rule is in full flight with the Yen and Aussie currently moving in opposite directions.
Here is the long term weekly pattern in the USD/JPY
We have made a low at the 106 area after a lengthy bear run off the 118 area last year. It found support at the Fibonacci 62% support (entirely as per textbook). And last week, it pushed up past a major trendline – here is the daily
I have a complete five d own on a massive momentum divergence which should herald a major rally phase ahead. My outlook is for eh yen to weaken considerably against the dollar. The upward break of the tramline is another clue to expect just that.
Another clue is that hedge funds are still almost 3:1 bullish the yen according to latest COT data. There is plenty of fuel for a short squeeze!
And here is the AUS/USD on the daily
The relief retrace off the very strong rally phase earlier this year (where to took major profits) is a nice A-B-C also with a very strong momentum divergence to the same Fibonacci 62% (as in the yen).
And yesterday, we have an upward break of the major downtrend line to match that in the USD/JPY chart! My outlook is for further Aussie strength. The COT data is neutral.
My conclusion: Aussie strengthens while the yen weakens. A possible trade would be long AUS/short JPY if you can do it.
The magic of Fibonacci
Have you noticed that in every chart here, the Fibonacci 62% retrace level has featured prominently? I have found this level is the most common extent of wave retracements.
If you are interested in Mr Fibonacci’s fascinating story, there is a wonderful little book I can highly recommend: Leonard of Pisa and the New Mathematics of the Middle Ages, by Joseph and Frances Gies