Most investors/traders subscribe to the view that markets follow the news and data releases. The problem with this view is that very often, what most consider ‘bullish’ data is sometimes met with selling (and vice versa). But sometimes, ‘bullish’ data/news is met with an advance.
In the first case, they say the market is in a ‘buy the rumour, sell the news’ event or has suffered from the dreaded ‘profit-taking’. In the second, they say the data was so good, it caught the shorts scrambling for cover and the market of course rose.
So which is it? Before the event, can anyone say with any confidence which outcome will eventually prevail? Of course not. All of the above are rationalisations for market action after the event. But given this naked dilemma, they still cling to their false beliefs and ignoring the inconsistencies. Isn’t human nature wonderful?.
What we need is a method of forecasting likely action before it occurs, of course.
Last week, I outlined such a likely course of action in GBP/USD – and that was completely contrary to the consensus, which was highly bullish. The COT data was showing a seven-year extreme in bearish dollar positions by hedge funds. Remember, these guys are largely trend followers and are almost always heaped up to the max in wrong-way bets at major turns – and this was just such a place.
Yesterday, the latest GBP data showed GDP came in significantly lower in the recent quarter. And so sterling was marked down a ton.
The point is, with sterling already starting a new downtrend, the data is now following the trend and is confirming the way markets really work. And that is: Bull markets top out only on great news when speculators are max long (commercials max short) and when they start a new downtrend, the news turns increasingly ‘bad’ until the bearish consensus reaches a climax – and then the market starts to turn up again in a ‘surprise’ rally to induce short covering.
Basic human nature has ensured it has always been that way – and has lead to the maxim that markets exist to punish the majority. That is because most traders/investors react to their basic emotions (see last post) and are always zigging when they should be zagging.
This is how the market reacted to the poor GDP news
Of course, all sorts of excuses were trotted out to ‘explain’ the poor showing including the Beast from the East cold snap that curtailed construction activity last month. But more pertinently, UK car production has been in a steep decline for months – and this is a litmus test for economic sentiment, as is the on-going decline in consumer confidence.
In a bullish economy, consumers normally want the latest models, but less so when the economy is turning. I read that the Millennials – who are the largest and most influential consumer group now – are shunning consumerism in a volte face to the habits of the previous generations. It’s the sharing economy now – and buying a car isn’t part of that. They can’t even save enough to buy a house – and that comes before a nifty car.
It’s the same in the USA – car sales and production are collapsing. Now Ford has announced it is getting out of the business of car production (except for the Mustang) and focus-ing (sorry!) on light trucks. This is a big deal (that has not yet received much attention)
This trend has massive implications for the economy – and jobs. Look for big lay-offs soon and GDP data to continue heading south.
Back to the chart – I had identified the 17 April high at 1.4375 as the likely Elliott wave 5 of 5 of C high and positioned short in anticipation of a rapid decline and was duly rewarded with a seven-day plunge of six cents. Nice.
We should be on our way to break below the Brexit low of 1.18 in due course in wave 5.
We woke up and smelled the coffee
This is a notoriously treacherous market to trade Many say it is about the most manipulated on the board, but I am no conspiracy theorist. But it often displays some remarkable chart patterns – and that is what I am after in a market.
I had been tracking it downwards for some months and very patiently waiting for a bottom to form. This was a most frustrating quest – no sooner had I believed I had found the bottom, the market fell back to new lows again. Luckily, I decided to avoid trading it until I had something that gelled.
And on April 19, this was the eye-opening vision that appeared on my screen;
The market had fallen into major multi-year support in the 115 zone – and on a decent momentum divergence. I reckoned the odds were good I had found the end of the bear trend. Time to start looking for a major turn. Here is the daily that gave me much greater confidence my patience could well pay off – and soon:
From the start of the year, the market has traced out a series of highly overlapping waves, but all well contained within a down-sloping wedge pattern. Overlapping waves that follow a definite trend such as these is usually a sign of correction, or a build-up to a reversal.
Note that all of the touch-points fell very accurately on both lines. That is stunning – and the pattern is a wedge/ending diagonal. It is called an ending diagonal because it occurs most often at the end of a long trend. When it does, it signals a very likely explosive reversal up.
Not only that, but the COT data showed hedge funds were massively short this market – and that was no surprise coming as it did after a very powerful and lengthy bear trend that had been in place for a year and a half. That was plenty of time for the traders at hedge fund desks to believe the downtrend would continue for ever!
That sounds crazy I know, but that is precisely what hedge fund traders believe. Otherwise, they would not be so short at lows, would they? They are about the most ardent herders in the business. That is why they are worth keeping a close eye on.
With this low risk/high prob opportunity, I advised VIP Traders Club members to go long and was able to suggest a very close stop (that is very rare in this market). Here is the chart as of yesterday’s close
And right on cue, the market is roaring northwards after our entry and convincingly broke above the upper wedge line with yesterday’s close well above it.
And as I had suspected, as of last Tuesday, the latest COT data showed the hedgies had indeed started covering their shorts. I expect that to continue and drive prices higher.
The point is this: By using my very simple Tramline Trading methods, any trader can identify these high prob/low risk setups and reap enormous rewards.
Now we have an excellent trade working, it needs to be managed! And in a way, this is a more difficult task that finding the original trade. My work has just begun.
Has Amazon stopped flowing uphill?
On Thursday night after the NYSE market close, Amazon released its mammoth results – and they were universally acknowledged to be a blow-out. Naturally, the knee-jerk market reaction was to boost the share price by a ton.
I have learned from experience that in such a volatile situation, it is usually best to let the dust settle for a day or so before making any forecasting judgments. Many times, after the initial burst of emotion, cooler heads prevail and it is these that I need to observe.
And what a terrific example of this in action yesterday. After the surge to a new high Friday morning, the cooler heads decided that it was time to head for the exit
I have drawn in two blue trendlines (they are technically not tramlines because they only have two touch points each). The post-results surge took the market to a precise spike hit on the upper line in confirmation this is a line of solid resistance. Note that I drew these lines well before the results since I had the two lower touch points already and the upper line is just a parallel line drawn across the 13 March high.
Naturally, there should be more to-ing and fro-ing over the next few days at least. But unless the upper line can be breached pretty soon, I expect the lower line to be tested in due course.