Having taken a two-week break to sunnier climes, I am back at my desk wondering if anything happened while I was away. Apparently, not much – except stock markets topped of course. But being on holiday did not mean I missed the turn! Oh, no. From the beach, I managed to send my VIP Traders Club members an Alert on Monday calling the top was in and to start shorting the indexes as the Dow was trading at the 26,000 level and the S&P at 2805.
As I write, the Dow is down 750 pips already and the S&P is off 80 points. So is this the start of the big wave 3 down I have been expecting? Not necessarily – and here’s why.
Last week the ECB announced more massive ‘accommodation’ for the eurozone. But markets tanked on the news in an evident show of good news being bad. More on this later.
So this is how I managed to nail the Jan-Mar rally high on Monday from reading the charts (and noting sentiment indicators).
The Dow ATH was made on 3 October at 26.960 and the market then declined to the Christmas low at 21,450 for a very decent move of 5,500 pts where I advised members to take at least some profits on shorts off the table. At that stage, all I could see was a three down to that low. There was no convincing case I could make for a five.
Remember, one of the clearest signs of a trend change is to observe a clear five impulsive waves in the opposite direction, but none was visible even with a squint. That put any thoughts of a massive immediate decline in doubt in early January,
If the pattern off the ATH was indeed a three, that implied when over, the market would rally hard to new ATHs. Obviously with such a stark dilemma, the decision to await further clues was prudent. And as the market continued its rally phase last week, odds were switching to the bullish scenario.
But all sentiment measures were against that. DSI bulls had reached the 88% level where previous tops had been made. Also, momentum data suggested the rally was rapidly running out of steam. Not only had the put/call ratio started rising from an unusually very negative reading (indicating more bullish calls were being bought than bearish puts), but trading volumes on the NYSE were falling off a cliff. Fewer traders/investors were buying into this rally. Not a bullish sign.
Another clear topping signal was flashing when the S&P failed to match the Dow into new high ground. The S&P made its high on Monday March 4 while the Dow made its high on 25 February. That massive divergence was a critical input to my decision to start shorting these markets last week.
And on that Monday 4 March as the S&P was making its rally high, I got my signal – and it came in the form of a kiss (see my text, pp 83 – 84, 143). This is the actual chart I sent to members on Monday
The blue lines outline the wedge I had previously identified and a few hours after the market had kissed the lower line following the break, it was starting to peel away from its new high. Note the momentum divergence into the kiss. That is when I pounced as I saw a Scalded Cat Bounce coming fast down the pike.
Note that at the same time, the Dow had already broken below its wedge and was trending lower. I believe I had a strong bearish case.
And here is the S&P now as I write
It certainly looks like a Scalded Cat Bounce down! Here is the Dow with its wedge – note the major difference is that on Monday when the S&P was making its high, the Dow was not – a clear divergence:
With the earlier high, the Dow is leading the charge lower, which is unusual since within the 30 stocks in the Dow, there are many ‘defensive’ issues, while the S&P 500 contains many big tech names that I believe will lead the bear much lower. Hmm.
It is subtle divergences between the two senior indexes like this that can provide the alert trader into the correct trade position – with exquisite timing and at low risk.
But will it be plain sailing to the downside from here? Whoa! Hold you horses. Remember I pointed out the three down off the ATH last October to the Christmas lows? We could still have these wave labels as a legitimate option:
Either way, I expect a substantial decline near term. And another signal that is flashing is the VIX ‘Fear Index’
Now surging off the base 14 – 16 zone a rally here would imply much lower stocks given the huge momentum divergence at last week’s low.
So that’s the technical analysis – what about the data? On Wednesday, the ECB announced a massive additional stimulus boost to the eurozone economy as they see weakness. They would keep interest rates as negative as possible for as long as possible and offer low cost loans to banks. I wish someone would offer me a negative interest loan as they would pay me to take it up. I would pay it off at the end of the term and pocket the difference.
So European shares shot straight up, as they had following previous ECB good news announcements – right? Wrong. They actually shot straight down. What??? I hear the ‘data makes the markets’ crowd scream. That wasn’t supposed to happen. They had been buying the market all along as it was clear to them that central banks were leaning towards ‘accommodation’ in the face of a weakening global economy since the start of the year.
But just as we can all have too much of a good thing, so can markets. So was this good news bad? The more cynical of us have always believed that if/when central banks embarked on more alphabet soup of QE/NIRP/ZIRP nonsense, the markets would take that as a measure of sheer desperation as they know they are all out of ammo to fight any downturns. Rates cannot go much lower without destroying the currency (as the ECB found out this week as the euro tanked on the news).
Global debt levels are far too high to withstand any more ‘accommodation’ as a massive deflationary wave would be unleashed and the central bank game would be up.
No, sentiment is slowly turning to caution and conservation and shares will reflect this. Offer a fully-loaded drinker another vodka and tonic and he is likely to either throw up or refuse. You can offer loans to companies that see no useful use for the money all you want (slowing sales forecasts?), but will there be takers (except for the most desperate)?
Already, loans outstanding to non-financial corporates are falling. And as shares start their decline, share buy-backs – the major force behind recent rallies – will become less intense, thereby adding to the downward pressure.
And in another bearish development, the latest in the ongoing saga of meetings between North Korea and the US Presidents ended in a failure to reach agreement on nuclear weapons. This charade has been going on since the end of WW2 and always ended in failure.
chart courtesy www.elliottwave.com
But the striking thing is that each time since 1945, these failures marked major stock market tops. I believe this latest one will, too.
And yesterday, as all eyes were on the non-farms payroll numbers (a monthly ritual for the pros), it was reported that the data was a big ‘miss’. That surprise ‘bearish’ development ended the streak of losing Dow days as the news duly followed the market lower. Next week should be a likely period for further low risk trades.
A perfect storm approaches.
Gold dips to my target at $1280
As you know, I have been long gold for some weeks as it traced out a nice 3 of 5 wave pattern to the recent $1346 high of 20 February. That marked a major high which lead to a sharp decline to my $1280 target low last week. Bullish DSI readings were pushing into extreme territory at the high and a decline was inevitable.
So how come I forecast the dip to $1280 with high accuracy days ahead? Here’s the clue
I had a lovely wave count on the rally to the red wave 3 high at $1346 with great tramlines. The purple five up is the third wave of the one larger pattern. Because declines off a wave 3 high often terminate at the wave 4 low of one lesser scale (in this case, the purple wave 4 low at $1280), I was able to suggest this as a target days before the event.
Also, I have drawn in T3 – the equidistant tramline – which is also likely support.
The Elliott Wave Theory – and my Tramline techniques – has overwhelming advantages over every other method of analysis.
With yesterday’s sharp bounce, is the rally back on? Why not take a Free Trial to my VIP TRADERS CLUB to find out?
The dollar rallies – but the end is nigh
High on my list of potential major turns is the dollar. The moves have been complex of late and I confess to being somewhat perplexed with the minor wave labels. Basically, they are a mess. And our recent short dollar trade was stopped out at break even for zero loss, so no damage there.
As a member of my VIP Traders Club, you have access to my unique money management rules that aim to manage your market risk sensibly while allowing full rein to the large gains on offer. So not only do I have an excellent time-tested method of analysis, but also a terrific set of risk management rules. Even traders with small accounts can benefit.
As an aside, I reckon that if you have your firm money management rules in place – and follow them with total discipline – your method of forecasting becomes almost secondary! Show me a trader using great risk management and I will show you a successful trader.
So with last week’s dollar rally (and euro decline), are we at the start of a major upward thrust or is it about to turn down?
This is my best fit for the wave labels and the year-long rally off the 88 low is a bear market rally in an a-b-c which is about to terminate around the Fibonacci 62% level. Note the huge momentum divergence building – a sure sign a turn is at hand.
Also, sentiment supports my view. Last week, DSI on the euro reached an extreme 10% bulls – a level where previous lows were made.
A hard break of the blue trendline would confirm this forecast.
Remember, a collapsing dollar will be extremely deflationary – and bearish for assets globally.