Yesterday’s volatile stock market action was telling. For the first time in weeks, the Dow suffered a significant fall – but then recovered. The VIX Volatility Index was likewise volatile (sharp up and then sharp down) The news items that emerged were that a former administration official was about to spill the beans on the Russian Connection (down market) and that the tax bill got approval (up market).
To my mind, the exponential rally in recent days, which many backward-looking valuation-obsessed pundits had called insane, was the perfect omen for the eventual tax bill success. The powerful advance was telling all who could see clearly that the 8,000 pip Dow gaining Trump Trade was built on the belief that US corporations would get a reduction in their tax rates. The US headline corporate tax at 35% is one of the highest in the G7. It has made US companies un-competitive in international trade.
The hope is/was that with major tax cuts, US trade will now boom – and post-tax profits E will rise to justify the current extreme P/E levels by lowering them to more ‘normal’ levels.
And VIP Traders Club members took full advantage of that explosive move in the Dow.
With that news out of the way, bullish sentiment has moved even further off the scale – hence the rapid recovery yesterday.
So are stocks headed for more stupendous gains (keep in mind that there may be bumps along the road to lower taxes!) – as most believe?
We know from many years of observation that markets always top out when bullish sentiment is extreme – and that is the condition that is present now.
That means I will be looking for a major top soon. Of course, if the market does sell off next week, it will dumbfound an awful lot of people who believe the news makes the market, especially if more ‘favourable’ news emerges. This is allied to the belief that ‘bullish’ news always causes the markets to surge.
But have these people not heard of the ‘buy the rumour, sell the news’ phenomenon? Time after time, markets fall after bullish news (and vice versa) – but they don’t learn the lesson from that. They make up some excuse such as ‘profit-taking’, or ‘disappointment it wasn’t bigger or better’.
Another interesting development noted by many last week was the so-called rotation out of the FAANG Gang to the stolid Dinosaurs of the Dow. The leader of the pack – Alphabet/Google may have turned at last.
Here is the 2-hr chart
The all-time high (so far) occurred at $1085 last Tuesday and the move down is a clear five waves with a large momentum divergence. This looks pretty textbook to me and next week I expect a rally hopefully in three waves. If we do see that, then a move down off that C wave high should be spectacular.
FTSE and DAX are lagging the Dow
This divergence is also telling. While prospective tax cuts in the US are buoying the Dow, there is no such prospect in Europe (far from it) – and the lagging indexes are surely reflecting that much lower level of bullish sentiment. Here is the FTSE
The latest rally phase carried it to the 7600 level – and matched the June high setting up the Double Top possibility -a classic reversal pattern. But the standout pattern is the rising wedge/ending diagonal with a clear breakdown in August and the subsequent kiss back to the underside of the lower wedge line and then a scalded cat bounce. That is pure textbook (see my text pp 83 – 84, 143).
Note the latest rally topped on a very strong momentum divergence which heralded a sharp decline. I am always on the lookout for these divergences – and with good reason! Now the market is in decline, the next big test is the previous low in the 7200 area.
And here is the German DAX
This chart has an altogether different look with the prominent long-term blue tramlines and a clear Elliott wave pattern with the final wave 5 making its five up high at the 13,530 level on 7 November. I have a three wave pattern down so far and my best guess is that we are on the verge of a large third wave down. Any sharp break of the lower tramline would spell curtains for this market and I would say that this would coincide with the Brexit ‘negotiations’ getting bogged down in the days ahead.
The reality is that German industry has a lot more to lose than the UK in terms of trade disruptions. And the German car makers are already behind the eight ball in developing electric vehicles. And with huge political pressure on their ‘polluting’ diesel engined cars, I can see ripples of fear in German industry spreading – and putting pressure on the EU to do something.
Is Corn ready to pop?
I confess I still have a soft spot for the agricultural markets because my very first futures trade was in corn (it was a loser!). But that trade taught me a lesson – try and trade with the trend and get in as early as possible.
The corn market is a sleeping giant most of the time. Price movements are usually gentle and in recent weeks, trading has been trendless as the market assesses weather prospects for the new crops. But occasionally, weather is a real issue and we can see huge rallies as in 2013 when corn surged to the $8 area. Here is the long term weekly
The standout pattern is the Double Bottom reversal pattern at the $3.12 area. From there, the market has struggled to rally in fits and starts. The other feature of note is the lovely blue downtrend line. If this can be overcome, the buying should become intense and push prices up to test the previous highs in the $4.50 area.
Now let’s zero in on the daily chart for the short-term action
Since August, the market has been building a base and when the market can push above the yellow band of resistance, there will be an awful lot of buy stops placed there by the bearish hedge funds.
I have been accumulating long positions for VIP Traders Club members for some time in anticipation of a sharp advance and my first major target is the underside of the pink trendline in the $3.80 area.
One of the nice features of this market is that it is so large that price movements are rarely very scary (unlike Bitcoin, for example!) – and this is an ideal market for relatively new traders to try out their wings on.
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