Dow and S&P go over the top!
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The Dow and S&P made new all-time highs yesterday and that has finally resolved the dilemma I have been labouring under for some weeks. They have now ‘gone over the top’ and are now subject to intense fire from the bears who have been biding their time ready to pounce on the complacent bulls.
Recall, I had two main options for the rally off the low of last August. It was either a b wave leading to a strong c wave down when it turned, or it was a five up. I can state now that it is the latter – a large five up that is leading to a major high.
Here is the Dow daily that shows it clearly:
Red wave 4 is a textbook A-B-C and the waves up off that low are best counted as a five with yesterday’s move into new high ground the confirming factor. Now, I can count purple wave 3 as a five up – and on a strong mom div!
Also, with the complex purple wave 4, it is satisfying Elliott’s Guideline of Alternation where wave 2 and 4 are of opposing characters. Wave 2 is a simple A-B-C while wave 4 is much more complex.
As I mentioned to VIP Traders Club members last week, the purple wave 4 low on Tuesday was a clear signal that the trend was still up. On that day, we had a ‘mini-crash’ of about 100 pips and it appeared that should have been the start of a move down of several hundred points. But strong buying emerged to push the market back up and the market continued in that vein for the rest of the week.
Note my pink tramlines. They have multiple touch points and I consider them reliable lines of support/resistance. Significantly, the market closed above the upper line yesterday. Because I believe the fifth waves could turn at any time now, a move to close below that line would set up an overshoot – a typical indicator for a trend change. That is one thing I am looking out for.
Of course, if the market does turn down soon, there will be a massive momentum divergence – and yet another indication to look out for a massive move down of many hundreds of points.
But the one crucial sign of a turn would be a small-scale five down off the high – and that will also be something I will await.
The waves in the S&P are somewhat different but tell a similar story
The move yesterday into new high ground confirms that the market is is the final purple wave 5 of red wave 5 of blue wave 3. That means we are perilously close to a major turn inot major wave 4. Note also the momentum divergence building.
I have a powerful pink trendline that is acting as major resistance. It is possible the market could stretch up to that line in the 2470 – 2480 area, but I am not sure of the potential. It appears we are in wave 3 of purple wave 5, so I expect one more down/up sequence to complete the entire pattern.
In terms of COT sentiment, it is interesting that in the mini-Dow, hedge funds are ten-to-one bullish, while the commercials are four-to-one bearish. That is pretty lop-sided and another reason to expect a top fairly soon – maybe next week?
The DAX traces out clear Elliott waves
The fog is clearing in many stock indexes – and the German DAX is no exception – here is the daily
We are in blue wave 5 of purple wave 3 of red wave 3.That means I expect a new high to complete the third waves and then a large purple wave 4 down, That is my best guess, but I am willing to envision an imminent wave 4 down. As ever, I will be closely watching market action in the coming days to make real time judgments.
Incidentally, isn’t it curious that the DAX remains in a strong rally while the euro follows suit. Conventional analysis states that when the euro is strong, it provides a headwind to export-focused German stocks that rely heavily on a favourable exchange rate. So much for conventional analysis!
As with the S&P, I have a solid pink line of resistance which should put a cap on the rally which lies in the 13,500 – 14,000 area.
The Aussie flies north
One of my favourite trades at present is long the Aussie – and yesterday it closed above major resistance for the first time in many months – the critical level was the 78 level. For perspective, here is the weekly
Note the huge wedge forming over many months with yesterday;s close well above the upper wedge line. The entire move down off the 212 highs around the 110 area is a nice five down. If correct, I expect the relief rally to be an A-B-C or variant and we are currently in the throes of wave A which is not yet complete.
Also, a typical relief rally carries to the Fibonacci 62% correction, which conveniently is also the wave 4 high, so this becomes my outrageous target – in the 95 area. If this is achieved, the potential gain is a stunning 17 big cents.