Is the Tesla correction now over?

Dear Trading Diary: Kicking off the New Year, US stocks are coming off highs as I expected. Last time I showed a convincing five down/three up off the Nasdaq ATH on 16 December that pointed the odds to a major trend change to down. Of course if correct, the path will not be smooth – rest assured. For one thing, the strength of the bull market in the tech-dominated indexes last year was partly predicated on lower interest rates this year with the Fed assumed to be cutting again at their next FOMC on 29 January.

But a funny things has been happening on the road to lower Treasury rates set by the market. They are in fact rising especially at the long end (I have been tracking this ‘unexpected’ event for VIP Traders Club members), That is a real spanner in the works for another banner year for shares in 2025. The culprit? Inflation is proving very sticky (see later).

And with rates elevated, credit card default rates have rocketed right into the Christmas period when the plastic usually gets a hammering. Odds are high the next US retail sales figures will disappoint – and that will weigh heavily on bullish expectations no doubt. January looks like a very tough month for many shares.

So just like in the UK, US consumer sentiment is coming off the Trump extremes last month. But will Trump ride to the rescue when he takes office on the 20th? Many are betting on it with lower taxes ‘promised’ and a cull of surplus government workers to lower the national debt (some hopes!).

Adding this up and I see a hugely confusing outlook for the economy – and for markets. That is why I resisted the urge to write down any forecasts for the year. I do not know why anyone would want to do that especially for this year. There are so many banana skins on the road ahead that keeping a very open mind for we traders/investors is even more advisable today.

Low inflation ahead? Look at the oil market for clues. Hedge funds have been bearish oil for some time. The argument is simple and very convincing (otherwise it would not be widely believed). Global oil consumption is in a decline with China leading the way with its weaker economic growth and widespread adoption of EVs. US production is breaking records and weighing on prices. OPEC seems a spent force that would normally stop the recent price declines. Historically they have had the power to mandate production cuts within its members but not any more it seems. The wild card is Russia (as always).

But when everyone strongly believes in something (falling oil prices), something else tends to happen. That is the time-honoured Joe Granville Rule. And if it applies today, can we expect the reverse outcome and see a resumption of the bull market this year?

Last year the market went nowhere from a low of $68 to a high of $88 and back down again. Despite that, as a swing trader I managed to catch several decent swings. Here is the current position on the daily:

Note the very solid long term support (pink) at around $66 – $68. I consider that the ‘floor’. And in recent days the market is shooting up and has just made a new ten-week high at $74. Hmm.

My wave 1 – 3 trendline lies just ahead so the thought arises is this: If the market can break up past that level, will there be masses of buy stops to be triggered that have been set there by the hedge fund bears?

The US oil market is of the West Texas Intermediate (WTI) type and stocks for delivery on the futures contracts are held at Cushing Oklahoma (the “Pipeline Crossroads of the World”) and when stocks are low, short squeezes can manifest in price spikes in the futures exchanges. That seems to be the position today.

In addition, the Strategic Stockpile has been run down to very low levels last year as Biden has been draining the tanks there in order to keep consumer (voter) gas prices low (and boost his election chances!). That clearly didn’t work. But the tanks are now empty and require re-filling.

But with the Drill, Baby, Drill president about to take office, he will have to replenish the empty reserves and that will support prices this year. And the current US cold snap is boosting demand for heating oil and hence crude. I am long Heating Oil for VIP Traders Club.

So shorts are starting to cover and that could turn into a tsunami with new buying. I remain bullish this market – a contrary stance.

Has the dollar reversed right on cue? I have been tracking the dollar in my blogs for some time as it kept surging into new highs on waves of bullish Trumpian market enthusiasm. And I have been waiting for signs of a significant turn-around. Why? Because I expect the coming bear market (bull euro market) to be a very lengthy and highly profitable campaign this year. And it will be totally against market expectations.

In previous blogs I have pointed out that the dollar made a significant turn (higher) one year ago at year-end. It is a curious fact that currencies often make these major reversals around year-end (but not every year). With my analysis of the charts I believe odds are high we will see another one near current levels.

Bullish dollar sentiment remains near extremes and Trumpian expectations to make the dollar great(er) again has boosted it to new highs on Friday. And what a poetic time to reverse! With many US data points this month providing catalysts galore (especially GDP and Retail Sales), the banana skins are strewn across the dollar’s road.

So are we there yet? I believe yesterday was a pivotal day when the euro spiked down to touch inside my 1.02 – 1.03 target zone

There is a wide consensus that the euro will hit parity – and there are masses of traders with short positions just waiting for that level to take profits. I am not one of them. In fact, with the end of wave 5 of ‘b’ at or near completion, odds are very high the reversal is upon us and parity will be missed.

If the market can sustain a rally phase next week, that will kick off the start of a major short squeeze. I have started my campaign. Of course, if it can unexpectedly reach parity then I will be looking to enter at a lower level. Next week’s action could prove crucial to missing the parity target.

History is replete with examples of widely-held targets being approached but not quite making them and a mad scramble to unwind positions ensues. Will we see that in the dollar now?

Is Gold still in a bull market? Last year was a banner year for the PMs and especially Gold. It rose from the $2,000 level in January to the November 1 ATH around $2,800 – a 40% advance. I was lucky enough to catch several of the major upswings before taking final profit just under the ATH. But since then, the market has been in a major correction that may not be done.

This is the latest chart showing the bullish option

In its favour is the very strong uptrend line off the August low that was tested as recently as last week. It survived that test but will it do so on the next test – if there is another one to come soon?

But against that bullish scenario is the very large hedge fund bull positioning (hedge funds are still 6.5 long/1 short). I am today modestly positive and if the dollar does sharply reverse lower that may aid my case. In other words, I am most definitely slightly on the fence!

Of course, if the dollar is reversing Silver will be a major beneficiary more than Gold.

Tesla – will it benefit even more from the Trump association? The tearaway shares have been on a roll with the shares making a new ATH on 8 December (near the Nasdaq ATH) at $488. From an April low of $150. With reports of disappointing car shipments, the shares have been falling back reaching a low at $372 yesterday. That is a loss of $116 – a very substantial 23%. Remember, a correction of 20% is considered by many to be a bear market. Hmm.

But the correction has taken the shape of a clear three down a-b-c which tells me that the correction is a wave 4. Wave 3 up has a clear five up look. And note that wave 4 has about the same size and duration as wave 2 off the wave 1 high. And momentum has dropped to the basement and is way oversold.

Purely in technical terms, yesterday was a clear low risk Buy in a trending bull market. If you knew nothing about Musk or Trump or the details of the company’s business and had just arrived from Mars, then you would most definitely keep your finger on the Buy button.

Sometimes, ignorance really is bliss and it’s folly to be wise. Here, being wise means you are following every twist and turn the Musk/Trump saga and peruse every company report line by line. For me, this muddies my waters so much that I cannot see the wood for the trees (very mixed metaphors!). I prefer to keep things as simple as possible.

Even if a bull trade yesterday fails to work out, yesterday presented a clear low risk trade with a likely target above the wave 3 high at $488 in the final wave 5. Talk about a massive reward/risk ratio opportunity!

My forecast for the coming week: Lower Treasury yields/lower dollar/stronger euro.