I will ask again: Are we there yet?

I am always on the lookout for omens in the MSM especially that seem to foretell a major turn in a key market.  A prominent article about what investors are doing and thinking can be relied on to signal an imminent turn, especially when the trend has been well established, as in the share markets.

And lo and behold, I spotted this headline article in the WSJ yesterday.

Basically, it relates how long-time bears are now throwing in the towel and severely reducing their short bets.  It also relates how one ex-hedge fund manager, who was bearish for a very long time, gave up and closed his fund and is now a chicken farmer!  I like that.  It’s always darkest before the dawn – and many are just not able to last until the sun rises.

So has this front page article rung the bell at a major top?

For evidence, I turn to the S&P chart

My wave labels are pretty clear – we are in the final wave 5 of 5 (remember, fifth waves are always ending waves).  I have an excellent tramline pair with a pigtail (which I cover in my text, Tramline Trading).  With this setup, I can say that the high will lie up to the upper tramline and after that, a sharp move down.  But can I  pinpoint this high more closely?

Naturally, I turn to the short term chart to give me clues.  Here is the 2-hr showing the structure of purple wave 5

In fact, this wave contains a textbook wave pattern (in red) with a long and strong wave 3 (which also contains its own textbook five wave pattern in green).   The market currently is tracing out wave 4 down and because wave 2 is a simple A-B-C, I expect wave 4 to be a more complex wave (wedge/triangle?) if the Guideline of Alternation applies here.

But when wave 4 completes, this picture implies one more push to new highs in wave 5 of 5 of 5. And it may reach up to the upper tramline in the 2490 area.  And it may not – and fall short.

And that is where keeping a close eye of progress over the next few days will be critical to pinpoint the top.  That is precisely what I will be doing.

But the top will be a large wave 3 and lead to a large wave 4 down of many tens of points that will last for weeks. When that wave ends, a new rally phase will ensue and lead to new all-time highs.  That is the scenario I will be following – and trading for the VIP Traders Club.

Gold is following my script beautifully

On 7 July, as I watched gold sink even further to the $1200 area, I noted that bullish sentiment had dropped to a near-record low.  In fact, the DSI reading on gold was a mere 10% bulls and the reading on silver reached single figures.  Money was pouring out of gold ETFs and into SPY funds.

I also noted the COT data showed hedge funds were massively increasing their short bets into the $1200 area. Because this was a setup ripe for a mammoth short squeeze, I advised VIP Traders Club members to go long both metals.

And this has been the result:

The wave pattern is quite complex, but I believe the $1200 low is a wave B low and we are now in a five-wave wave C up that will take the market above the A wave high at $1300.

The point is this: the market was getting teed up for a possible short squeeze on the strength of the sentiment and COT data.  It is almost like shooting fish in a barrel – you (almost) can’t miss if you get your timing right.  That is because the hedge funds are reliable trend-followers, which means they get over-loaded with wrong bets right at market turns.  When the turn arrives, they usually scramble to cover their shorts – and propel the market even higher.

With the market in a near-vertical rise of $50 off the lows in only three weeks, the hedgies should be running for cover in a squeeze play – but amazingly have not actually capitulated yet!  The latest COT shows they actually increased their short bets in the latest week to 18 July! They also slightly increased their longs bets, which is what I would expect anyway.

So they are nowhere near throwing in the towel and are still convinced the market will turn down again soon.  That tells me the market has more room to move up – and I have a target shown on the chart at the meeting of the blue trendline and the Fibonacci 62% level at around the $1260 area.

The bottom line is the short squeeze I predicted has not yet occurred – and the market is up $50 already.  Does this mean that the market will need to move substantially higher to induce the hedgies to cover their shorts?  I certainly hope so!  We are long gold and silver.

The dollar will spike up very soon 

It is a well-worn adage that currency trends can remain in place far longer than you can believe.  And that applies in spades here.  In previous posts I had expected the dollar to turn but last week saw more carnage with the euro zooming higher.  Those hedge funds sure can throw their weight around, even in currencies.

But I believe we are now very close to the major turn I have been expecting – here is the updated daily chart

Wave 5 of 3 has hit my adjusted lower tramline on a small momentum divergence and this sets up a scenario of a sharp spike – a rapid down/up sequence that has the  potential of a move up of at least 2 -3 cents off the low in one day.  Note that red wave 5 also contains a pretty five wave pattern.  I can count this entire pattern as complete with the slight possibility that we could see one more dip early next week.

The purple wave 4 up should hit my target at the 97.50 area within a few weeks, which is the fourth wave of the previous move down.  But first target is the 96 area.

Bullish euro sentiment is still off the scale and latest COT data shows hedge funds still adding to their long bets and now are about two-to-one bullish.

Next week promises to be extremely interesting. Hold onto your hats!