Has the AI bubble burst?

Has the AI bubble burst?

Dear Trading Diary: A blockbuster week for all of my accounts! My £5,000 Phoenix account has sailed past the milestone £20k mark on the back of my long Dow and long Gold trades (both taken out on trailing stops). And now with signs the AI bubble has finally been pricked, I am on high alert to kick off my long-awaited bear campaign. The bear is waking up!

And has the pin been found with the Friday widespread internet crash signalling the extreme electronic vulnerability modern economies are in?

The tops have arrived right on cue with the long Trump/short Biden spread widening into an unbridgeable chasm (B may be gone soon, but which dummy will replace him?).

The Thursday Republican Convention crowned Trump as Emperor and he is deadly serious with his MAGA agenda of torching the Net Zero fantasy/delirium and going all-out to drill, baby, drill. If successful in lowering energy prices substantially (the Crude market was hit hard on Friday as a clue), that would set off a huge deflationary phase with a rapid un-inverting of the yield curve and a stock market crash even greater than the 1920s Wall Street Crash. My long-awaited deflationary crash is now looking to be getting closer.

Oh, and will he really drain the Washington swamp (and set up his own swamp denizens)? Already, the ‘progressive’ Net Zero move is on the ropes (weak EV sales) and the DEI dream (Diversity, Equity and Inclusion) has become a nightmare for many companies including Microsoft who are ditching it as not only unaffordable buy actually hits profits (who would have thunk it?).

The outlook for all assets including stocks, commodities (ex-Gold), bonds, real estate, classic cars, NFTs and so on is not bullish. We have reached the peaks.

This has been a long time in coming. I first saw the possibility of a major crash over ten years ago but as usual I was too early! One reason the balls were kept in the air so long was the actions of the Fed and other central banks in printing shed-loads of funny money (dollars and pounds and euros, etc) in QE operations that pumped up price inflation – and asset values.

But now the chickens are coming home to roost and the piper must be paid. The Fed balance sheet is now falling and is down over 20% from its recent high and that always signifies a tightening of economic conditions ahead. The Great Bear is upon us.

Already, the leaders on the way up – Big Tech – are faltering. They will be the leaders on the way down and next week we see Q2 results from three major Magnificent Seven issues, including Microsoft (not having a good day as I write with global internet having crashed). These results should be pivotal. And if supportive, an ideal opportunity to position short for what I am sure will be one heck of a ride.

Update on my Dow trade: Despite being a long term bear, I can still trade on the long side when I spot a short term high prob/low risk swing trade setup. And that is exactly what I did a few days ago when I saw the final fifth wave up looming that was to be the likely final melt-up buying climax. (Or it could be the wave 3 top of wave 5 I have been tracking for members). And because I had been moving my trailing stop up tight underneath the rising market, I was happily stopped out at 41,100 for a super 1,000+ plus win in just a few days. Nice. It closed the week well down at 40,300.

Last week’s high was wave 3 of 5. Or was it? The severity of the decline Thursday and Friday puts that option in a little doubt. I had been expecting a ‘normal’ wave 4 of 5 dip but this one looks abnormally large. With momentum hitting a huge air pocket, odds are for a bounce next week. But if not, then the bear will surely get its claws into the bulls and perhaps create a panic if the Q2 results next week are not in the expected blockbuster norm.

With my profit in the bank, I am happy to await developments. One thing I am certain – stock markets will become more two-way and a lot more exciting – and tough to time.

Big Tech falls off its perch: Here is a stunning chart of the Nvidia rocket (I almost ran out of graph paper doing this!)

chart courtesy www.elliottwave.com

As noted at top of chart, a company insider recently said: “This is just the beginning“. Really? Nvidia shares have been in a classic bullish mania for some time with investors falling over themselves to buy, baby, buy. But other company insiders have been cashing out furiously all year! Do they believe this is just the beginning? The public certainly do – or at least it did until last week’s 22% mini-crash. I am more convinced it is the beginning – of a huge bear phase.

But I am left wondering if the company insider quoted was just using the age-old technique of keeping the public buying while he and his chums are happily selling out to them as they become billionaires (at least in dollar terms).

One thought – what news ’caused’ the mini-crash? That is a question asked by conventional pundits who cling to the erroneous belief that it is the news that makes the market. So far as I can tell, there was no news specific to Nvidia at the reversal. How odd! How to explain that? They can’t but they still cling to their belief. In reality, it is the news that follows the market. When the share declines further, you can be sure a major news event will emerge to ‘justify’ the decline.

But of course, that may be a good place to buy and not sell!

As one of my sentiment litmus tests, Nvidia is now entering a more two-way market with wild swings ahead. Trading it will be fraught with timing problems. But I am confident I will be able to use my Tramline approach to identify likely high prob/low risk entries.

I had been trading Alphabet as my AI exposure for Pro Shares and just as I did with my Dow, Gold and Crude campaigns, I was stopped out on my tight trailing stop for another great gain.

OK, so odds are high the Nasdaq has peaked but the blue chip Dow may have one more new high. And that is why I have refrained from shorting it and favouring the EU Stocks 50 to short. Here, I have a potential H&S reversal with good trendline breaks. This is a textbook setup:

I had been misled earlier by the multiple kisses on the underside of the wave 2-4 trendline but now the direction of travel down looks a lot more secure. Only a push above my RS high would amend my stance

In the background, a Trump win would put great pressure on EU markets as the US would start to dis-engage with Europe. Already, political tensions are running high and they could get even hotter this summer in the heat (a traditional time for riots). The upcoming Paris Olympics would be a natural place for major disturbances/riots/demonstrations.

Has the Oil market reversed? Oil has been in a major rally off the June low which I had been riding. But Friday saw a hefty reversal as it has been bouncing down off the major trendline for about three weeks (with several failed attempts at penetration):

Earlier, I had been long and rode the market up to the trendline that I felt sure would be major resistance. I was taking no chances and raised my trailing stop to sit tight just under the market. And on the first dip I was taken out for a huge gain off my $73 entry and out at $82 for a solid $9 win.

And with Trump’s convention pro-fossil speech on Thursday, the market took note and fell hard. My most bearish option now places the current wave at the start of wave 3 or ‘C’ down. But with the dip to the Fib 50% retrace, I will be looking for possible long entries looking for a tradable bounce back up. But with a great profit in the bank, I am in no hurry to trade – the cross-currents are too strong here and I expect wide swings (as I do in most other markets).

Update on my Gold campaign: Again, I have been raising my trailing stops on my long positions. And again, that policy paid off handsomely when I was stopped at $2,450 for a huge $68 gain. That was also great timing since the market was hit hard on Friday and closed at $2,400.

The rally to the $2490 ATH on Wednesday is my wave 3 top and the two-day plunge is wave 4 of 5. It has plunged by a huge $90 in just two days. That was not a surprise to me since hedge funds are 7/1 bulls/bears – a relative extreme. In these conditions, contra-trend reversals can be (and often are) large. this one was large.

This wave pattern is identical to the wave pattern in the Dow (above). If the Fib 50% level can hold next week I expect the rally phase to resume – and of course, that applies to the Dow as well.

I tried the long side in Silver last week but that failed. I took the loss to my PS which was a lot smaller than my Gold wins. I may take another look next week.

A hymn of Praise to the Trailing Stop: If I were a tad more artistic, I could pen such an ode and perhaps name it The Song of the Trailing Stop (copyright reserved). I could even write an opera on it.

I have often said that in trading/speculating, researching and getting into a trade is the easy part. Once in, the even bigger challenge is managing it so as to extract the optimum profit/minimum loss so as to gradually build up your equity over time (as I am doing especially for my Phoenix account). This requires regular daily monitoring of positions.

In fast one way markets such as we have seen – until Wednesday, that is – the trailing stop is the most efficient method of capturing big profits that I know. It is entirely doable for part-time traders who cannot sit at their screens all day. My recent winning trades were a result of my moving trailing stops just once in the morning. That was all.

The one great benefit is that in a vertical market (such as Nvidia above), it takes the guesswork out of where to take profits. Many use the ‘gut feel’ approach. I say that is more akin to gambling. It often results in taking profits too early before the big move. Chins become heavily bruised in many cases.

Another benefit is that once in place, you are almost guaranteed a profit and can rest easily with a clear mind to research the next setup. Having a mind free of anxiety is almost necessary for sensible trading.

Has the VIX finally found bottom? I have been disappointed by my recent forays into trading the Fear Index but I see the picture is changing from total complacency:

…towards extreme fear. Very bad things are about to happen. The large up gap on the 11th was the omen for the Trump assassination attempt on the 13th and with stocks down last week, it has continued moving up away from the gap. It has rallied by a huge 30% off the low two weeks ago.

I am working on a major campaign and with hedge funds massively short, a major short squeeze is extremely likely. And higher volatility will keep the VIX active. When the surge gets going, it will resemble the Nvidia chart (as it sinks). How fortunes change!

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