If you are going to panic, then panic early!
Dear Trading Diary: That is a well-known aphorism with experienced traders/investors. And that is what our friend Mr Warren Buffett almost did when he sold a vast chunk of Berkshire’s Apple holdings recently near the top. He has now raised a growing pile of cash that can be invested in ‘safe’ 4% Treasuries. It seems he is in no hurry to buy more equities. Does he know something most MSM pundits don’t (they advise buying the dip)? He is not often wrong so I decided to join him and thereby took an excellent profit in the Dow.
To put it mildly, that was an even more tumultuous week (VIX and yen exploding) and I am pleased I managed to navigate it by not making too many stupid mistakes and making a few good decisions (shorting the Dow and covering).
In trading/investing, it is prudent to stay away from volatile markets until you receive a really good technical signal – and that is what I was presented with in Crude Oil on Wednesday (along with Gold). And that requires patience (not something I am naturally abundantly blessed with).
And that high prob/low risk signal in Crude resulted in an immediate gain of about $2 and crucially allowed me to raise my stop to Break Even. I now have a zero loss trade with the potential for a good gain. That, my friends, is the ultimate goal in my book. If you can enter all your trades/investments on that basis with almost zero risk of loss, your account equity will never dip and will just keep growing.
Of course, that is the ideal but in real life we do take losses where precise timing is wrong and you were not able to move your PS to BE in time.
But if you only select those trades that offer high potential rewards with low risk, your winning trades will far outstrip your losers especially when using the trailing stop technique . And keeping stupid mistakes to a minimum (we all continue to make them). Simples! In essence, it becomes a numbers game over the years.
One of the most fast-moving markets was the dollar/yen
From the astronomic 162 ATH in mid-July, the market started a crash (in a monumental yen short squeeze) that took it to my major target at the lower tramline around 150 and that is where I took my final profit for a big gain. But the selling was so intense that it broke below the tramline support and collapsed to the 142 low. Drat – I missed that. Now, it is edging back up towards planting a kiss and then a Scalded Cat Bounce (remember we noted such a pattern in the S&P recently to great effect).
With the pundits all in a tizz wondering whether the carry trade is now dead or just pausing and what the BOJ will do and if they really mean what they say (that is a full time job in itself keeping up), I just skim the commentary and focus on the chart patterns and in the case of dollar/yen they are sending me a pretty clear message.
OK, went the week well? Yes it did with my Dow trades where I took a major profit in one and broke even in the other. After the plunge on Black Monday, stocks bounced and on Tuesday I suggested we would see a two-day correction in a three up in wave 2. That is the normal pattern in a genuine major third wave down. And right on cue on Wednesday, stocks fell hard after the two day bounce.
MSM pundits were universally complacent about Black Monday claiming it was a summer rush of blood to be normalised later in the week. It was just a ‘head fake’. With the market leader Nvidia down 35% – that is some head fake. More a whole body spasm!
Now. that complacent consensus is what I like to see because it inspires greater confidence that the next shoe will drop soon and follow the story given by my French Fry IndicatorTM in recent posts.
The S&P has completed a textbook Kiss and Scalded Cat Bounce (see textbook pp 83-84, 143) with the kiss the wave 2 high. Since then, the market embarked on what will be a major wave 3 down that has not yet completed, Last week the market has rallied in a classic three up a-b-c to the Fib 50% retrace of wave 2. It can either reverse here or perhaps move up further to the Fib 62% and then do so. I am on high alert for such an outcome.
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I cannot fail to comment on the UK riots this week. The underlying picture is very messy (as is common with riots) but only to say that the ’cause’ was said to be the public anger about the unrestrained immigration we have endured for years and the ‘left-behind’ lower income families. But my question is simply: why now? Why not last month or last year? After all, publicity about the massive influx of immigrants has been in the headlines for months. It has been no secret.
I have a simple answer – it kicked off last week just as social mood turned down sharply, as evidenced by huge stock market declines especially in Japan and the US.
Until that tragic event, social mood was still positive and the FTSE remained in a bull trend. But at exactly the time the riots kicked off, UK stocks began a sharp correction for a 6.6% decline in two trading days. Were the two connected? I believe so. Riots in the UK are pretty rare and when they occur at scale as they have, then we need to take note.
And we just learned that the UK authorities are coming down very hard and swiftly on the now-jailed rioters but ominously also on just onlookers some of whom have been arrested just for being at the scene. Together with rumours that social media platforms will be forced to remove ‘mis-information’ posts, it is a clear signal that free speech is under greater attack – and a clear sign social mood is darkening very fast (as evidenced by the stock markets’ declines).
Authoritarianism is on the rise and shades of the 1930s spring to mind.
Remember, in bear markets bad things happen.
Update on my Gold campaign: The market has been in consolidation mode following strong advances off the major low of last October (up from $1,812 wave 2 low to a recent high of $2,484 – a gain of 37%).
The weekly chart above shows the market is in the grip of a virulent wave 3 of 3 of 3 advance. This is being confirmed by the exponential surge off the latest wave 2 October 2023 low. And because third waves are usually far stronger and longer that you can imagine, odds are extremely high the exponential phase will get even more so in the coming weeks.
I have long maintained that the surging gold price is warning us about something important in coming financial conditions – and it is not good. I remain bullish.
Treasury yields have just normalised: Short term Treasury yields have been higher than long term yields for two years – an extraordinarily long period. Why is that important? Simply because previous recessions have always been flagged by the re-inversion as is happening now. It has a 100% track record as a recession predictor.
But because bullish mania remains strong, some pundits are saying this time is different and is a false signal and give all sorts of elaborate reasons why. But would you go against a signal that has a 100% track record going back many recessions? No. neither would I. Especially given the perilous over-indebted situation public and governments are in.
Now with long term yields exceeding short rates, demand for short term loans is weakening as the economy weakens. And in September, the Fed will be forced to cut perhaps even harder than many believe. But with consumer inflation still high and likely going higher (Cadbury has just doubled the price of chocolate bars), the Fed is on a tightrope.
So will a rate cut boost shares? Quite probably not since the major trend is now down as social mood darkens and investors will likely see a major Fed cut as an ‘official’ admission the economy is weak and take fright from stocks – and pile into Gold.
Update on my Crude Oil campaign: I have been trading this market in typical swing trading fashion by buying at lows and taking profits near highs. Why am I doing this and not just sitting on long-term positions? That is simple.
Last October, crude made a high at $95 as stocks made a major low. I recognised then that the market would likely enter a more two-way phase with no clear major trend for some time.
And in fact my outlook has been vindicated with huge swings up and down to the current $77 (which is about half-way between the Octo 23 high and the Dec 2023 low).
For a spread better/CFD trader, holding a long term position in this period would be unthinkable as the first move against you would attract the attention of your margin clerk. Ouch!
No, the only practical way to play it is by swing trading – and my results have vindicated this approach. I remain long from $73 but a little nervous since the market is being pulled hard one way by rising demand/falling supplies near term and then the other way by the weakening US economy. And that is why I will remain a swing trader in this market.
MEMO; I have just re-stared posting on Twitter. Follow me on @JohnBurford19
