Have we reached peak optimism in stocks?

I believe we are very close – finally – to the big swoon in stock indexes most of us have been waiting for (some more patiently than others!)  And I will lay out my updated case here, which I believe is stronger than ever.

Last week was pivotal for commodities.  Grains were clobbered hard (by the Trump/China spat fall-out).  But more crucially, Copper plunged after setting a new high only days ago.  It is nicknamed ‘Dr Copper’ for a good reason as it seems to have a PhD in economics where its price path often acts as an early warning signal for changes in the state of the global economy.

Last week, it surged – and it appeared the bullish sentiment swirling around the markets would continue.  Since China is the world’s leading user of copper with its mammoth building programme, I had my doubts about this.  I figured that the well-flagged tariff ‘wars’ would turn into something much more serious.

And China has its own huge problems with debt levels into the stratosphere and the construction sector in danger of screeching to a rapid halt as company defaults grow.

But I needed the charts to signal the likely end of the road for the metal’s bull run before I had a reliable sell signal.  Here is the long range monthly from 2010

The rally off the 2016 lows has traveled between the lovely tramlines in what appears to be a corrective A-B-C pattern – and right to the Fibonacci 50% resistance.  I can also count wave C complete in five waves which topped on 7 June at the 33 cent area.

And yesterday, it fell out of bed.  Here is the daily

and is now testing the pink trendline.  Breaking below that would set up a test of the major blue tramline.  And breaking below that would set up a major decline phase.  And with the two tops at 33 cents, we have a possible Double Top – and that is a powerful reversal pattern indeed.

The other major commodity that oils the wheels of the global economy is crude.  Here is the long term weekly chart

In May, it hit my long-standing target at the $70 area.  I also had a potential target at the $80 area, but when it fell sharply earlier this month, I put that option very much down the list of probables.

So now, it appears my A-B-C correction is over and the major downtrend can resume.  Here is the daily

The five waves in wave C are very clear and we have a textbook break of lower pink trendline and a bounce up to kiss it before peeling away late yesterday.  This is a bearish setup.

So now, all major commodities are turning down – and not from all-time highs (as are stock indexes) which sets up a major divergence.  One of them will have to give.

Here is the Dow – the most senior and most watched of global stock indexes

I have been looking for the top in wave C of 2 for some time and odds are rapidly expanding that last week’s high at the 25, 405 print represents that tipping point.

I have excellent blue tramlines and with the push up to the Fibonacci 62% resistance at the 25,400 level, it has created an ‘overshoot’ since the market dropped to close beneath the upper line.  An ‘overshoot’ usually signifies a buying climax.

At a buying climax, you can expect bullish sentiment to be at an extreme.  And it certainly is: the Daily Sentiment Index (DSI) reached the 76% level – the highest since the January top.

And another measure of extreme investor optimism is the put/call ratio.  When very bullish, traders buy more call than puts and the ratio declines – and vice versa.

Here is the 10-day average of the ratio (inverted) that shows it is at its lowest level since the January top.

chart courtesy elliottwave.com

Also, investors have been piling with high hopes into the latest batch of  IPOs at a rate of knots, looking for the next Google or Amazon – or Apple. Will any of them make it?

And talking about Apple, here is my reading of the chart

I believe I have found the top of wave 5 of 5.  The purple wave 5 sports a lovely five up along a beautiful tramline pair.  Remember, Apple is a core holding among pros and retail investors alike. Many funds hold it. so when it enters a bear market, more and more of them will be forced to sell and the move will snowball.

With Apple as one of the leading FAANG members appearing vulnerable to a hard fall, will this put the high-flying NASDAQ at similar risk?

The most extreme optimism in shares has been concentrated in the tech and small caps with a new all-time high in Nasdaq last week.  But if my ending diagonal is correct – and the overshoot is confirmed by a close below the blue tramline (next week?), the outlook for that hard down scenario zooms into first place.  If not, there may be just one small down/up sequence next week to cap the rally off.

How I traded the Copper volatility

VIP Traders Club members use my Split Bet Strategy and also my Break Even Rule.  I advised going long on the imminent break of the pink trendline

But slightly before that, I had a minor blue trendline and set buy order on the break above it that was touched.  After a slight pause at the pink trendline, it just took off in what looked like a huge short squeeze and rapidly reached my 33 cent target where I advised members to take at least partial profits for a tasty 2 cent gain.

I had originally expected a slight dip in a fourth wave before rallying in the final fifth wave, but that is not now an option.

But by taking a profit at a major target, I locked in a profit so even if the market dips further next week to our entry where we will be stopped out, we still have a good profit in the bank.

Many long traders would become excited by the sharp rally and hold positions looking for much more upside as their optimism surges.  They would have taken the elevator up and then back down again for a total waste of effort.  This is the fate of most investors/traders.

To VIP Traders Club members, I am not only offering good low-risk trades, but teaching members a simple strategy of how to manage their positions professionally.  The world is full of market analysts – some good but most hopeless – but there are precious few real traders who combine good analysis with solid tactics and strategy to minimise losses and maximise gains.

Anybody can give an opinion on a market (and they do!), but how do you translate that into a viable strategy where losses are contained? They don’t cover that crucial aspect.

My primary task as a trader is first to lose as little as possible on the losing trades and then secondarily to make as much as possible on the winners.  If you can do that, you are well ahead of the game and have a chance to be an excellent trader, racking up consistent profits over the months.