Final score: David 1 – Goliath 9
It is a cliche that football is a game of two halves – and so was the GameStop affair! No sooner were the WallStreetBets gang licking their lips over the major upset at half time, Goliath came storming out and routed the opposition in the second half.
From the $480 high on Thursday, it has collapsed to $50 as I write. Any budding rally will surely be stomped on by the host of punters who still believe the bull story and will be bailing out. Actually, there isn’t a story in any fundamental sense – this was a pure short squeeze slap on the hedgies’ wrists. Of course, there were some funds that saw what was happening and profited handsomely from the huge moves.
I read that one ‘trader’ lost $2 Million in a matter of a few hours (another made $1 Million). A classic case of an amateur loser getting more bullish as the price rose to giddy heights. The correct stance was to get more bearish as price rises – and that is how many of the pros play it. In such circumstances, many pros would be selling into the rally on a scale up basis. They are likely starting to cover shorts around here.
A similar story in silver, where a bogus rumour spread that there was a shortage of the physical metal. In fact, it was a great opportunity for hedge funds – very much long going into the run-up – to take profits.
It reminded me of the famous Hunt Brothers affair in 1980 who tried to corner the silver market. They succeeded in running the price up to an astounding $49, but when it became known that there was plenty of silver around, the market collapsed. Such is the universal pattern of short squeezes and ‘corners’.
For we serious traders, it is a dangerous game to play – unless possibly day trading – and I have stayed away from GameStop and concentrated on more reliable set-ups. Such as the moves in the dollar.
Dollar advances strongly – and follows my roadmap
In recent weeks, I have been banging the drum ad nauseam that the US dollar was about to reverse spectacularly. This was very much a contrarian outlook as last year, the dollar was in a solid downtrend. And who wants to fight a downtrend? Money was being made shorting it – and buying almost any currency against it.
The bear story was compelling. The Fed announced it would be ramping up its QE and other operations into the foreseeable future to stimulate the US pandemic-stricken economy and flood the world with dollars. The data looked bad. Pundit after pundit were falling over themselves at year-end to urge traders/investors to prepare for a dollar collapse. It was obvious, wasn’t it?
But remember, when everyone believes something is obvious, it is obviously wrong, The question is in the timing. I set about attempting to pinpoint a reversal at the New Year. That was when bullish sentiment was flat on the floor. COT data confirmed it with specs heavily short the dollar and long the euro in particular.
But a funny thing happened on the way to a dollar crash. On 6 January, I noted the huge momentum divergence and the likely completion of a full five down off the March highs. And there was a magnificent down-sloping wedge pattern forming. Also, the market had fallen to the ten-year tramline support – and the lower wedge line (in green).
I figured if the support could hold there, a massive short squeeze of the specs would erupt and sure enough, a few days later and the market punched through the upper wedge line as observant chart readers surely realised the obvious crash was not to be so obvious.
So my Dollar Campaign for VP Traders Club members is up and running. I expect to see more bullish (or less bearish) dollar news to emerge as the market advances. Could this news come from the other side – the European Union, home of the infamous euro? Will we see reports of more sluggish EU economic growth, more ECB funny money printing, or both?
Is it possible the Fed will be forced to tighten this year in the face of looming US inflation? Oil prices are rising strongly – far higher than most anticipated when the price went negative last March. There is still a bias towards expectations of ‘weak’ oil as the world turns to renewables and EVs.
What if US Crude hits $60, or even higher? That would surely throw a spanner in the works of the dollar bears – and even stock market bulls as bond yields surge (“unexpectedly”) as inflation looms.
I expect my Dollar Campaign to be one of our biggest winners this year. I believe it will develop over many months. As it rises, more and more bears will be converted and the news will be super-bullish at the top. That is where I shall be taking profits. Of course, the path will likely be rocky and many bulls will be shaken out of positions just before rallying again. Don’t let this happen to you.
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Another Fibonacci trading lesson
Last time I showed how I identified several excellent trade entries in Wheat based on Fibonacci levels. When short-term trading, I always apply these levels to my chart using the most recent significant high and low of the previous wave.
Silver has received much attention recently as last weekend the press was full of (bogus) stories of a severe shortage of the metal and that the WallStreetBets crowd was trying to short squeeze the hedge funds as they did to GameStop. As I pointed out to my clients, this was likely to end very badly as hedge funds were not short at all but heavily long as a glance at COT data would show! Oops.
Sure enough, silver topped out on Monday following the initial buying surge above $30. But by late Thursday it had collapsed to $26 – a severe kicking to the gullible ‘short squeezers’ as the expected hedge fund selling emerged. With two lessons in how not to trade against the hedge funds, I am wondering if they have anything left of their Uncle Sam furlough cheques. Never mind, Biden is about to load them up again with top-ups and that should ensure we will see more madness in the markets.
Here is the daily silver chart with my best guess wave labels
The initial break of the upper tramline was the signal the uptrend was intact and the correct stance is to trade from the long side. The market dipped to attempt a typical kiss (at the Fib 62% support) on that upper line and then it roared upwards in a Scaled Cat Bounce to Monday morning’s high above $30. That was when DSI bulls reached an extreme 90% reading. So it was set to reverse strongly, and so it did.
And last week’s dip bounced off that Fib 62% and close higher on Friday. Those hits on the two Fib levels were excellent long entries at low risk (using a close stop). Longer-term, the current rally should run out of steam (at a Fib retrace?).
Here is the short term chart with my wave labels
The move off Monday’s high is a clear five down to the Fib 62% retrace of the previous wave. I have applied the Fib levels from the Monday high to the Thursday low (wave 5). Note the huge mom div there which should herald a sharp rebound that started Friday. That is the usual expectation from such a set-up.
If this rally follows the same pattern as the others, it should rise to the Fib 62% at around $28.50 in a three up. We shall see.