How I avoid a loss on a trade

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As you know, I am a great fan of MSM headlines and regularly quote the wrong-way forecasts many have provided over the years – often with exquisite timing.  Others before me have noted a similar phenomenon in the Magazine Cover (MC) effect – and I have recently come across this doozy.

This MC effect often shows up in mainstream mags, such as Time in the US and even in financial mags such as  Business Week, Forbes, Barron’s and Fortune in the US and Investors Chronicle and FT here in the UK.

But this is a particularly good example in Alibaba shares and found in Barron’s and described here.  Back in September last year this was the front cover:

The important point is that by the time the mag was published, the shares had already lost over 40% in less than a year off the hyped-up IPO price.

So after the trend had been safely in place for many months, the mag felt it was safe to project a continuing bear trend by this forecast for another 50% decline.  There is nothing more comforting to conventional analysts than to draw a straight line on an existing trend.

But did this forecast pan out?  Of course not.  In fact, that warning was very close to the bottom and the shares have improved by almost 100% since:

This is one of the best examples of how using the contrarian MC and Headline Indicator can sharpen up your performance.  Isn’t that pretty?

Another pretty feature of the Alibaba chart is the five waves down pattern with an extended fifth wave containing its own five down.  I would guess there was a large momentum divergence at the low.

EUR/USD follows my roadmap – sort of

This is one of the most reliable charts that display mostly clear EW patterns and Fibonacci retracements – as well as excellent tramlines.  This makes it one of my favourite markets to trade.

But in recent months, there has been no sustained trend and many traders have been whipsawed to death.  It has been a graveyard for trend followers.  Luckily, I have pinpointed several major turns and have extracted a few profits here and there, but it has been hard work.  I much prefer trading third waves, not this zig-zag stuff!

Today, I want to show how I stay out of trouble even if I have the near-term direction wrong.  My secret?  I use my Break Even Rule.

Here is the daily chart showing my excellent tramlines and the recent kiss on the lower tramline:

Just admire the many swings and what a challenge to trade!  But I am confident of my tramlines as both have multiple accurate touch points and a nice PPP on the upper one.

Then last month the market rallied to place a textbook kiss on the lower tramline and then started a normal scalded cat bounce down of over 200 pips to the lows of 31 August at 1.1130.  But because that level is the Fibonacci 50% retrace of the entire wave up off the June low at 1.0910, I was aware that this support area could be strong enough to turn the market back up.

So last Friday I advised VIP Traders Club members to short it at 1.1250 using a tight stop – and that price was touched the same day when the high was only two pips higher at 1.1252.  That was about as accurate a hit as you can expect.

Then on Monday, the market dipped to 1.1140 and I advised members to move their Protective Stop to Break Even to protect their position.  this is standard practice when the market has moved in my favour.

Surely, on Tuesday, the market refused to decline any further, rallied and took us out on our stop at break even for zero loss.  Sometimes, a zero loss feels like a win!

Here is a close-up of the action

and today, the market has rallied further, thereby confirming the wisdom of using my Break Even Rule to avoid a loss.

So with this detour around my roadmap, it opens up the possibility for the market to rally further to the meeting of the Fib 78% and my lower tramline in a second kiss.  But if anything, it has confirmed this market is a very slippery customer!

So that possible second kiss at the 1.1450 area is the maximum upside I will allow for my big picture to remain valid – and that is, when this rally phase is over, we will see a sharp decline towards parity, making this market well worth stalking.