Sometimes, just a single data point jumps up and sticks out like a sore thumb to point the way for markets. Could this week’s news that the world’s largest ever IPO – the Chinese fintech startup Ant – be just such a bell that rings at the top?
The revelation that Chinese banks are falling over themselves by offering loans to punters to buy the shares at a margin of 33/1. You put up one yuan and the bank loans you 33 for a stunning leverage of 33/1. No wonder the get-rich-quick Chinese ‘investors’ are jumping at the chance to get in on Jack Ma’s latest creation. They are over 300 times over-subscribed. How could they possibly lose with this proven winner?
Well, for one ting they will certainly lose if the shares drop by only 3% in what will surely be a very volatile market as the early birds will want to cash out. And they will owe the bank big time if shares drop further. This has to be one liquidity-driven speculation too far, surely.
What an ideal setup for the start of a crash. Which will add even more pressure to already weaker markets.
The Nasdaq made its 12,500 high on 2 September, dipped in wave 1 and rallied in wave 2 to 12,250 on 3 October and since then has moved sharply lower and is currently at the 11,250 area for a loss of 1250 pts (10%) so far. Note the position of my major blue trendline which is a crucial line of support around the 11,000 region. That is my line in the sand for any bullish case. And only a push above the ATH would send me back to the drawing board on my bear case.
But hold your horses! Yes, we have seen a rapid descent off the September high and last week’s low should be part or all of the first wave down of what is very likely to be a large five. If I am correct, the next immediate wave will be a correction back up – but from where?
So what could prompt the market to try to recoup losses? For one thing, I am sure the Fed and Congress are alarmed by last week’s Dow plunge that was the largest weekly loss since the March Corona Crash. The latter are at stalemate over additional rescue packages, but next week after the election? With many businesses facing ruin with further inaction, I see fast moves on getting a new stimulus programme through both houses, particularly if Biden ‘wins’ and more Democrats win seats.
But no matter who wins the Presidency and who controls Congress, more stimulus looks highly likely to happen soon. But if a disappointment, then watch out below! That is when we we really see how powerful third waves can be!
So how to play it? You will need to be a member of my VIP Traders Club to get my take on the twists and turns of the stock – and many other – markets. We are already seeing very profitable moves for members.
And members please note that we are currently short the T-Bonds as yields are rising. I have been flagging this up for some time. Any mammoth new stimulus programme is very likely to aid our bearish cause. So by being both short stock indexes and the T-Bonds means we are somewhat hedged against any possible sharp recovery in shares (that may happen overnight) – be warned!.
That has been my strategy all along since we know that the indexes can and do move by vast leaps both up and down often overnight. And with the Fed’s scheduled monthly meeting next Thursday right after the election where they may well say something market-moving, volatility should remain very high.
This market is no place for amateurs and dabblers – or especially the Robinhood waifs with a credit card that are losing their shorts on Tesla call options.
And I note that large specs have been adding to their long positions during the decline and now hold the largest net long position since the February high – a potentially very bearish sign for the medium to long term. That is because hedge funds are trend followers and are found to have consistently maximum long positions right at or near market tops.
But since the long term is made up of a succession of short terms, we must focus on the latter to position ourselves with low risk entries for the former.
And here is my poster boy for the manic speculation of ‘investors’ in stocks – Tesla
Because of the huge participation in this share – it regularly leads the ‘most active’ list on trading platforms – the Elliott waves, Fibs and tramlines/trendlines are particularly ‘clean’.
Counter rally purple wave 2 high was set on 2 September and the red wave 1 decline is a lovely five down that sealed the trend as being down. The subsequent rally is a clear three up (with super sub-waves). And when my blue trendline was broken on 23 October – a week ago – that was my signal that third waves were kicking off. Remember, third waves are usually the longest and strongest on the board.
With yesterday’s plunge, I can confirm my third wave down hypothesis and odds are excellent for an eventual test of the wave 1 low at the $300 region with much lower potential. We are short for my Pro Shares service from $440 (currently $390)