Dow makes a new ATH – but not with conviction

Glory be!  The Dow managed to eke out a slight new ATH yesterday at the 35,100 mark. But it was not on convincing strength – the advance/decline ratios were tepid at best. And get this – in the red hot Nasdaq 100 index, only 2% of its components made a new 52-week high.  The other 98% did not. The social media giants (Facebook, Twitter, Snap, Google) all surged on latest results.  These are part of the 2%. So if we discount them, the market’s rally remains iffy.

Not only that, but there is a building Dow Theory non-confirmation.  For younger readers, this is one of the oldest technical indicators (and so is dismissed by most in favour of the latest coolest signals – and that makes it highly valid IMHO).  If the DJIA diverges from the DJ Transportation Average (DJTA), there is a non-confirmation that usually signals a possible trend change round the corner.  And the DJTA made its high on May 10 along with the Dow’s ATH.  Since then, it has declined by 10% while the Dow has rallied and now trades at its 10 May level. That is some divergence – and a warning sign the expected trend change may well be imminent.   It certainly is worth monitoring (which I will do).

Last week I posted a Facebook analysis which called for at least a correction off the $358 ATH, but I was premature as it surged to $375 yesterday. This is one of the narrowing band of large cap shares making new highs (see above). It is also one of the FAANG Gang and that index is at a very interesting juncture:

Remember, these mega-cap tech shares have been the stand-out leaders of the US market for a very long time, leaving many in its wake.  And remember, one day they will become the leaders on the way down when the general market turns as it will. It made its 7400 ATH back in February, dipped in what looks like a small five down then rallied back to the 7400 high to form a potential Double Top – provided it cannot keep surging up from around here.

Also, I have a small scale five up to the 14 July high with a classic Elliott trendline that connects waves 2 and 4.  Note that line was broken on Monday then pushed up to plant a kiss and is now in a potential Scalded Cat Bounce lower – provided it cannot push much above the trendline.  Action next week should be highly indicative.

But at the very least, I have a low risk trading setup with potentially very high reward.  So what could stop these juggernauts from a fundamental perspective?  It seems impossible, right? Everything is in their favour from the stay-at-home pandemic regime to the effectiveness of the advertising on their platforms. In the background, central banks seem intent on keeping up their money printing schemes with money supply still surging.  And interest rates seem to pinned to the floor for ever.  Surely, you must be mad to bet against the FAANGS!

But there is a very tall Wall of Worry facing them – and that is regulatory impositions that have been bubbling under the surface.  I mentioned Biden’s statement last week that Facebook was “killing people with the vaccine disinformation on its site”.  Whether this indicates an effective reining-in of social media to come, time will tell.  Also, they have gotten away with claiming they are just a platform for people’s posts and not a publisher which would place them under much stricter regulations (as newspapers are).  How much longer can this last?

Yes, there is much to worry about in the social media world for investors and one day, they will be talking about these instead of the latest earnings results when sentiment changes, as it will.

Of course, most traders know the Fed will begin ‘tapering’ at some stage.  What many have not factored in is the scenario of rapidly rising bond prices as investors start to price in a larger inflation factor.  Food prices are surely on the rise as adverse weather patterns around the globe are hitting yields.

Ag prices are surging – and inflation is back

One of the markets we are trading for VIP Traders Club is Coffee.  Last week the market exploded upwards by 30% on the back of record freezing temperatures in the coffee growing areas of Brazil, the largest global producer accounting for around 40% of world supplies.

We actually started trading Coffee about a year ago at around the $1 per lb level when prices were making historic lows (overproduction).  Based just on the possibility that prices would go no lower since world consumption was still rising (Asia) and a weather glitch could prompt a rally phase, I judged the reward/risk ratio was highly favourable.  Of course, I had not idea the current weather glitch would have such an impact.  But being at the right place at the right time is often a formula for success (without any special knowledge of the coffee growing business). 

And that brings up an interesting point for trades/investors. Sometimes, having too much detailed knowledge of a company or a commodity can blind you to failing to take decisive action in the right direction.  Personally, I have tried to keep my own knowledge of a market to a few basic concepts since having an overall view of a few important factors is my style of analysis.  I do not want to be bogged down by too much detail which confuses.  Some call this ‘analysis paralysis’.  That is when you find both bullish and bearish details and thus cannot make up your mind which to follow so you do nothing – and likely miss a great opportunity.

Back to Coffee – here is the impressive rally on the monthly chart

I have a hugely impressive 10-yr trendline with highly accurate touch-points with the break and kiss in May/June last year and now we are in a Scalded Cat Bounce (see my text pp 83 – 84, 143).  But even with the doubling of prices in a year, we are not near my main targets.  I believe there is a lot more to go for.

Coffee is one of my three ‘Beverage Commodities’.  Here is Orange Juice – a very small futures market, but packed with as much potential as Coffee.  Why?  Because the largest producer is no longer Florida (the lovely orange groves there have long been grubbed up to build houses) but – Brazil.  Yes, freezing Brazil!

And just as in the wonderfully funny movie Trading Places, frosts have damaged the orange crop and prices are shooting up.  On the monthly chart, prices have only managed a 40% increase off the 2020 lows – coincidentally at $1/lb which was the Coffee low!.  I believe there is much to go for here as well.

The other Beverage Commodity is Cocoa, which has been lagging, and we have started a campaign last week in this market for VIP Traders Club.

In the major ag markets – the US grains of Wheat, Corn and Soybeans – prices have been strengthening sharply and currently in a corrective phase.

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Trading the financial markets is not just getting the trend right (difficult enough), but in entering your trades at the right time just as the train is leaving the station.  Entering at a disadvantageous time often results in an immediate loss to your stop even though you have guessed the direction correctly. And trading without a stop is financial suicide.

I was lucky enough to catch the start of the commodity boom last year – and I believe they are now poised to resume their advance after this corrective period. And I am planning a campaign in stock indexes for members. And if you like trading Gold and Silver, why not join us by taking a two-week Free Trial to my VIP Traders Club here.

If you trade individual UK and US shares, we are trading them in my Pro Shares service.  Take a generous three-week Free Trial to my Pro Shares service here.

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But the main driver of consumer and producer inflation remains the oil market -and it is in a strong bull trend.  All the major corrections are in threes which signifies the bull trend

Currently, it is testing the important October 2018 top at $75. It may spend a little more time consolidating but I believe the uptrend will continue.