Huge third waves lower have started in stocks
What a fascinating (and landmark) week- especially for fans of conventional market analysis. Both the dollar and the T-Bonds made extremes (that may or may not last). but the major event was in US/UK stock indexes that swooned sharply on Thursday (Dow was off 900 pts) and again on Friday (Dow off an additional 1,000 pts) – with no apparent major new news to trigger such an event. As I wrote to VIP Traders Club members Thursday morning, this is baffling conventional analysts who cling to the mistaken belief that it is the news that drives markets.
If that is the case, they must explain Thursday and Friday’s sharp decline when there was apparently no new news of note. All they can do is drag up the usual ‘bearish’ factors that have been in the market for days. If the market had risen strongly instead, they would post facto have invoked the usual ‘bullish’ factors to ‘explain’ it.
All of these factors are well known (except for those that have not been uncovered yet!).
But this conventional approach is intellectually dishonest. Basically, they have no methodology for reliably predicting what effect a particular news item will have. Most of their analysis is after-the-event and of little use to us. Many times, a ‘bullish’ report will have a negative market effect in what appears to be a perverse reaction.
But such common events still does not make them question their beliefs!
Remember, at all times there are so-called ‘bullish’ and ‘bearish’ factors always at work in all markets. Which ones do you select? Most of us will go with our internal biases. In fact, that is what makes the market. It is a place where buyers and sellers come together and agree a price. They have opposing views on the market.
I would say that very few sellers believe the market will advance. If they do, why do they not wait for a higher (better) price?
Both cohorts contain traders who are either buying or selling assets they own or want. And they contain traders who have no assets but want to short the market as they believe it is too high.
One of the reasons why we may be at a major turning point in the T-Bonds is the five up/three down pattern as shown on the short term chart
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For this scenario to be valid, the pink support line should hold. But with the dollar advancing and the ‘hawkish’ Fed about to raise rates to ‘combat’ inflation (that may be topping anyway), confidence in the Bond Bears is sky-high. This is the ideal scenario for a ‘sudden’ disappointment.
But the big event late in the week was the sudden turn-around in stock indexes.
Stocks are heading much, much lower
Last week was a textbook case of why I follow the Elliott Wave Theory and do not trade on the news (for much of the time!). In no uncertain terms, the Dow traced out a beautiful five wave up pattern that terminated with a sharp reversal on Thursday at 2 pm. This is pure EWT at work.
Here is why. On Monday, the Dow kicked off the final small scale fifth wave of the counter-trend rally that had started on March 8 at the major Wave ‘b’ of 2 32,400 low.
On Monday, the pattern did not appear complete and needed one more push up in a final fifth wave to a new high above the wave 3 high. This contradicted much learned opinion. And over the next few days, the market did move up on cue and on Thursday at 2 pm it made a new high at 35,500 – and that was enough to satisfy the five up pattern I had as my roadmap.
But with that completion, the market could then decide whether to turn lower (or move even higher in an extended fifth wave). It chose the former option – in spades – losing 1800 pts to yesterday’s very weak close on the low of the day (unusual).
This action has all of the hallmarks of a major third wave kicking off. Remember, third waves are long and strong. This one is certainly strong. And it should be very long. All of the 30 Dow components closed down yesterday and the selling pressure everywhere was relentless all day.
Of course, the MSM pundits had to find a ‘reason’ for this ‘sudden’ weakness (that EW followers could reasonably have predicted). As far as I can see as they flounder around, all they can come up with is that the Fed ‘may’ raise rates, not by 50bps, but by a much more radical 75 bps (0.75%) off the zero bound. This has not been done since the 1980s on this scale. This my friends is pure desperation. And still they cling to the ‘news makes the market’ view.
Of course this is makes perfect sense from a career perspective. The vast majority of their readers believe in the ‘news makes the market’ theory and would recoil in horror if they were told they were wrong! If your salary depends on believing the untenable, what would you do?
So, in less than two days the Dow is off by 1800 pts (5%) and deeply short term oversold. Can the perma-bulls stage a rebound next week?
One more point about last week’s action. The Dow rally from Monday to Thursday’s high was a decent 1,200 pts and was accompanied by record fund outflows from US shares along with a record high in the AAII bearish sentiment survey. Remember, the AAII is populated by America’s’ Mom and Pop’ retail investors. So, the public were extremely bearish and were selling on a huge scale (and buying put options by the ton) – yet the market rallied hard Mon-Thurs. How do the fundamentalists explain that? EW practitioners can. It needed a fifth wave up -and got it.
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Has the commodity bull run its course?
In the time-honoured tradition of large organisations and especially governments (see last week’s blog) of starting a fight of the last war, I see the head of the UN has publicly predicted the global ‘food crisis’ will last for a long time and prices will escalate by 40% year-on-year. That’s a pretty gutsy out-there prediction.
incidentally, I never came across such a strong prediction last year when prices were much lower when it would have been much more useful.
I would guess that this person is not a student of global agriculture (or of Elliott Wave patterns) but is reflecting a common view that because Wheat, Corn and Soybeans prices have rocketed in recent months, they will continue doing so for ever. This is the ‘shooting for the moon’ school of thought.
Anyone who casts a glance at a market price chart will observe that no market has ever hit the moon but they top out, decline and then bottom out in a series of clear up and down waves with clear tops and bottoms. This occurs on all time scales.
And these tops and bottoms often occur just when a prominent statement is issued that confidently predicts the continuation of the existing trend. Generally, the bolder the prediction, the sharper the reversal away from it.
That may be occurring now in much of the commodity sector. Corn is a major global foodstuff (and animal feed) and a source of an eco-fuel. The price has rocketed from the April 2020 low of $3.05/bu to the recent $8.15/bu high – a gain of 300% in two years.
VIP Traders Club members have been trading this market for over a year and my strategy for the Club was to take profits on the way up and reinstate positions on dips. That has worked very well for us.
But the market has run into major long-term resistance and shows signs the rally may be rolling over
If my wave labels are correct, the greatest threat to the rally is the very large mom div into the high.
With generally bullish expectations still sky-high, I would not be surprised if a start is made to a major decline back to the $5 area. Watch this space.
And the Crude oil rally is in a precarious position. It has come off the March $128 high with a thump to sub-$100 and is now trading around that level
Here is a valid EW picture that could mean we are in a strong third of a third wave lower to break below my solid line of support (matching my Dow forecast). Bullish sentiment remains very high as many pundits expect tight supply markets for some time.
But supply may be on the increase. Recently, the UK government has at least paused its War on Fossil by urging oil companies to drill, baby, drill. And fracking on the mainland is getting a warmer response. Even the arch eco warrior Biden has been begging US oil companies to increase production as Russian supplies are being phased down in the sanctions.
But what if the sharp decline in the Dow last week (and all other indexes) are heralding a severe drop in global GDP growth – and a possible US/UK/EZ recession/depression just down the road?
Even only a Fed 50 bps rate increase in May would play havoc with heavily-indebted company P/L statements which would be a double whammy if GDP growth slows as well. And the Fed has promised more rate increases later in the year.
If so, you can be sure demand for oil will drop – and $100 oil may be seen to be very expensive a few months hence.
Thus, there is solid case to be made for a drop-off in inflation rates now that oil has hit the major $128 high and other commodities appear to be in or on the brink of severe corrections. Watch this space!
