Elliott waves in Cable and the Dow – are they reliable?

I believe the Elliott wave theory offers the most comprehensive and logical explanation for the seemingly random moves in the financial markets. I have started a new short video series (uploaded to my website and to YouTube) where I analyse various setups in real time using my Tramline methods in which the Elliott wave theory plays a fundamental basis.

But no matter how reliable you believe your conclusions are, there are times when the theory breaks down and you get a different result. Here is a chart example in the GBP/USD (cable) where I posted my video analysis on Wednesday 19 April:

Because my Elliott wave labels are not written in stone, I have placed question marks in the wave 4? and 5? positions. Out of the competing labels, I judge these to be the most valid – subject to revision as more market moves come in.

My wave A? was put in on a good mom div that was another clue the top was likely in.

One of the wonderful features of the Elliott wave theory is that once you have identified where a major wave has likely terminated, you can then offer projections as to the degree and extent of the likely reversal.

So, with the highly significant trendline break and rally to place a kiss on the underside of the line, the market was likely to be starting a Scalded Cat Bounce (SCB) lower in a small scale wave 3 (as marked).

Note that there are other competing interpretations of course, but all of them involve a push above the trendline kiss, Thus, the trendline is my line in the sand and is thus my guide to where I can set a protective stop if I am wrong.

Thus, the sensible trade on this basis was to short at the current 124.36 and set a stop at say the 125.00 level above the kiss.

So how is this one working out to date? This is the current picture as I write at 11:30 am Friday:

Well, so far, so good. It is moving lower as forecast but has not yet broken below the key minor support at 123.50 at my wave 1 low. If we really do have a SCB working, any rally will not come close to the 125 stop and more likely start a mini-plunge down.

That is what my forecast implies. But if we do not see that event soon, my Elliott wave labels will be in severe doubt and I will need to re-assess. Otherwise, sharp falls now will herald a move sharply lower to the 122 region.

So instead of using guesswork or arcane methods (or even forecasting from economic data), Tramline and Elliott wave analysis offers solid options with definite roadmaps to precise targets.

And this kind of analysis takes up only minutes of your time – a great advantage in today’s data with a news-loaded information overload scenario.

US National Debt – is there no end?

Debt matters, as we individuals and companies all know. But governments operate on a different rationale. Because they can tax at will, they are seen as 100% safe debtors. The vote imperative will always swing to bribing voters with more goodies – and thus taxing and borrowing more.

Few politicians have won influence by promising to cut government spending.

But when inflation rears its ugly head, as it is so doing at present, the issue of investor safety does likewise since bond yields are insufficient to compensate fixed income investors for their loss of the purchasing power of their coupons – and market sentiment can change radically (after a lag).

I discovered an interesting factoid this week. The US National Debt is 230 million times the median US mortgage. With a current population of about 330 million, the National Debt per resident is 2/3 the size of the median mortgage. And we know that home owners have taken out massive mortgages in order to purchase houses whose prices have shot into the stratosphere (just as they have here in the UK).

Are you as amazed as is your truly to discover that the average house mortgage is now $440,000? So the National Debt per person is $300k! The median income is $70k and thus all US workers carry a National Debt of over four times their annual income. Ouch!

And very soon, Congress will decide whether to raise the debt ceiling even higher (as is its perennial custom) to avoid an awkward situation when they try to issue new Treasury bonds and bills to avoid default.

Of course, this could impact the current secondary market heavily (which we trade). Many of us have long wondered what it would take for fixed income investors to go on strike and refuse to finance the ballooning US debt. I have a feeling we may soon find out when the debt ceiling issue comes to a head.

Of course, any disruption to the Treasury market will carry huge implications for the dollar – and stocks. As will a further increase in bond yields that will prompt another increase in debt to cover the increased interest payments on the new debt.

But what about the corporate bond sector? Corporations cannot raise taxes but they can raise prices but at the likely cost of losing customers (that is something the Feds are shielded from!). Already we are seeing signs of great stress in some sectors such as commercial real estate and small business. This from Bloomberg:

Small businesses say it hasn’t been this difficult to borrow in a decade; the amount of corporate debt trading at distressed levels has surged about 300% over the past year, effectively locking a growing swath of businesses out of financial markets; bond and loan defaults have ticked up; and the Federal Reserve says banks have tightened lending standards. Corporate bankruptcies are on the rise, too, particularly in the construction and retail industries. –Bloomberg

With inflation still high, this is not likely to change any time soon. The Russell 2000 index is the most exposed to the SMS sector and that is languishing compared with the Big Tech names.

Is this the straw that will break the camel’s back?

So are share indexes now poised to move lower (again)

Last week I posted my blog with the heading ‘Am I nuts, or is it the stock market?‘ On the basis that we both are nuts, there are many clues that sentiment has turned less bearish (a temporary positive for shares). Economic data is now somewhat less bearish and VIX the Fear Index has made new lows.

And these are ideal conditions for the bear to re-assert himself (see above).

A year ago last January I managed to identify the ATHs in the US stock indexes and navigated their very tricky progress south to the October lows. As you remember, the path was not smooth! In fact, the bear trend was punctuated by severe counter-trend rallies.

A trader taking a ‘sell and hold’ approach – which we did not – would have been mangled by these huge rallies. But I knew the only way to profit was to take profits near the lows and reinstate shorts near the highs.

Naturally, this took considerable skill and luck to judge the turning points but we managed to do it most of the time and we ended at the October wave 1 low in profit.

And since then, shares first screamed higher that I confess was far stronger than I imagined to the December Fib 76% wave 2 high, and then entered a phase most analysts (including myself) have been finding very difficult to analyse – and to forecast

I have two very significant down-sloping trendlines on this weekly Dow chart. The lower one various bear market rally highs off the ATH – and importantly, the waves 2 and 4 highs.

So why importantly? Simply because Ralph Nelson Elliott, way back when he discovered the Elliott wave guidelines, considered the trendline joining the wave 2 and 4 highs/lows define the correct trading channel and thus defined the parallel tramline that can be relied on – if you can find it. Here is the weekly chart showing this feature

My lower parallel tramline starts off with a PPP (see my text) – always a good starting point – and has several pretty accurate touch points along the way – including the major wave 1 October low! I find that touch on wave 1 low very impressive – and a validation of this particular Elliott guideline.

In addition, when the market broke up out of the channel in November, it pulled back to kiss the upside of the upper tramline, was repelled and then bounced higher. It has done that twice and that validated that line as a significant line of support from November (and resistance up to that date).

On the face of it, the Dow appears now to be in a bull market – and it is when measured from the second kiss low on 17 March. But it is trading at the same level as it did exactly two years ago. It has gone precisely nowhere in two years (the Nasdaq has performed better, of course).

So is the rally running out of steam here? Here is the 45-min chart

I have a decent tramline pair working and the market is now testing the lower one. Note the large mom div at the Tuesday 34,150 high. I have Elliott wave labels that suggest the wave 5 of ‘C’ rally may be complete. I have a feeling we shall soon find out.

VIX the Fear Index is plumbing new lows that shows almost total complacency that a savage bear trend is approaching.

Remember, portfolio managers should buy VIX insurance when it is cheap, not when they really need it as stocks sink, when it becomes dear.

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I was wrong – Soybeans are still in bear trend

We have been trading the ags recently and my work suggested a renewed bull market. But recent action tells me I was wrong.

Here is the Soybean chart with my tramlines and Elliott wave labels

They have been in stuttering rally mode off last summer’s major low with my best guess pattern being an a-b-c counter-trend rally to the 1550 February high.

I am able to draw two up-sloping trendlines off minor lows that define two wedge patterns – note the kisses on the lower wedge lines – the wave 4 high on Wedge 2 lower line. That validates the construction.

But the move off the .C’ wave high is a three down so far and so an alternate option is that the market will stabilise around here and move higher to new highs.

But my preferred option is that indicated on the chart – a move to new lows in wave 5 and a test of the lower trendline around the 1360 region.