Make no mistake, this has been a very important week technically speaking. More and more signs are aligning with my view that we are at or very close to major stops in several (unrelated) markets – including stock indexes. I will try to list some of them:
Messi – regarded as the world’s greatest footballer – has just accepted a 50% pay cut from his club. Like it or not, football has become a quasi-religion with the recent Word Cup tournament highlighting its importance in social life. The outpouring of violent sentiment by English ‘fans’ as they lost in the Final was a testament to the extreme feelings the so-called ‘beautiful game’ engenders. Many regard racial abuse as the most heinous of crimes today – and they were on full display on social media, according to reports. Back to Messi – I am not feeling too sorry for him: he will still take away $80 million a year whether he plays or not. But will this summer mark the top of the football salary bubble with Messi leading the way down?
If football is a bull market sport, action around next year’s World Cup tournament in Qatar will be revealing.
We know from history that major stock market tops occur when confidence in the future is extremely high. Intellectually, this makes sense. With everyone in the boat rowing as hard as they can, nothing can make them go faster – they have reached their limit. So where shall I start listing examples? As usual, I start with my old reliables – especially the DSI (Daily Sentiment Index). I can also add the record low funds in money market accounts (everyone is totally invested), and the degree of confidence in professional US financial advisors – here is an interesting chart:
chart courtesy www.elliottwave.com
The degree of unanimity for ever-higher prices among the pros is at a record extreme. There are more that 4 bulls for every bear. Naturally, many advisors are cautious creatures as they wish to protect their relationship with clients and many will not go out on a limb chasing the latest ‘meme’ stock – they stay with old school dividend payers. These are the kind of advisor that recognises the market is in a Fed-induced bubble and when the stimulus must inevitably be wound down at some point, stocks will have a major prop kicked away. These appear as the bears in the survey.
Similarly, the DSI indicator is well above the 80% mark where major highs have been made previously. It is telling a similar story – confidence/complacency about the future for shares is at or near ATHs. This is dangerous territory for long-term bulls. Even for short-term bulls!
3. One of my leading markets for bullish all-out wild west speculation has been Bitcoin
It is off by over 50% from its April $65k high and is testing the solid shelf of support. A hard break here would send it off to complete a five wave impulse down and spell the end of cryptos. I am seeing more bearish articles on cryptos in the media with prominent gurus stating their case. At the April highs, there were a lot more bullish articles with many predictions for $100k and above. That mirrors today’s picture in stocks – very few outright bearish views are being published compared with those of the trend-following persuasion.
4. Stock indexes made buying climaxes last week with weekly key reversals. A weekly key reversal often appears at major trend changes (these are new highs for the week but the close is lower than that of the previous week – it shows up as a red bar on my weekly candlestick charts). Here is the Dow weekly from the Corona Crash
The rally is in five clear waves that likely ended last week. But the entire 16-month rally has been a succession of new highs but on gradually lower momentum indicating an underlying weakness. The Dow has been lead by fewer stocks such as Apple making new ATHs. And that has been the case with the other majors, the S&P and even the tech-heavy Nasdaq.
I have a solid trendline which was broken in mid-June, rallied to plant a kiss on it and is currently backing off it. If it is a true kiss I expect a Scalded Cat Bounce down to much lower levels. Next week’s action should hold the key.
One other point – the Dow made its ATH on 10 May at 35,100 and that level was more or less matched at 2 pm UK time yesterday. The market then fell heavily losing 450 pts by the close. If it cannot recover, we will have a Double Top pattern with tops separated by 9 weeks which is enough to qualify as a genuine DT.
Trading the financial markets is not just getting the trend right (difficult enough), but in entering your trades at the right time just as the train is leaving the station. Entering at a disadvantageous time often results in an immediate loss to your stop even though you have guessed the direction correctly. And trading without a stop is financial suicide.
I was lucky enough to catch the start of the commodity boom last year – and I believe they are now poised to resume their advance after this corrective period. And I am planning a campaign in stock indexes for members. And if you like trading Gold and Silver, why not join us by taking a two-week Free Trial to my VIP Traders Club here.
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The pandemic rolls on
One final thought – there is considerable chaos surrounding getting a summer holiday into Europe and especially into France. Travel company shares took a knock last week as the expected surge in bookings has tailed off. Virus cases are rising rapidly but the authorities seem confident the NHS can handle this. Hmm.
Not only that worry, but the recent extreme heat and drought in the USA and Canada and now the floods in Germany, Belgium and Netherlands (also in Switzerland) are boosting the agenda of the climate change crisis advocates. It is interesting that Saint Greta appears to be silent so far. Hmm.
Many are clamouring for a speed-up in measures to ‘de-carbonise’ with a heavy emphasis on a rapid conversion from gas boilers in our homes to heat pumps. That is estimated to cost £20 Billion or 10% of GDP at least. Not only do they not work in many of our old homes but when they do, the electricity cost will be massive to run the pumps.
This is rapidly falling into line with my thesis that the Western economies will collapse on the altar of the climate change agenda. First, shares will fall and then the economy will follow in the usual pattern. China wins again!