Is this plunge worth buying?
Now that the Dow has plunged by 2,000 pips in a matter of eight trading days and has met a major trendline (as has the Nasdaq), it has entered a very tricky phase (for short term traders, that is). There is little doubt that the army of Dip Buyers has not changed their spots and will be out there doggedly blindly buying the dips. In fact, they must be overjoyed to see such a huge chasm as they have been starved of them since the last big one in February!
In general, I have advocated using my split bet strategy in such conditions whereby part profits are taken at lows and reinstated near the highs of bounces. Of course,that is easier said than done, especially if you have a life outside of the markets and not able to put on trades at appropriate times.
Although I am very confident the main trend has finally changed to down, we have had a few false dawns since the February lows and prudence says we must allow for the possibility the market could recover a large part of those 2,00 pips. So taking profits on lows is the better part of valour. After all, what is our aim in trading? Is it to make money efficiently and relatively safely, or to be proved right in our clever forecasts so as to boost our egos?
Every trader must be very clear on this point. I have found that the most secure trading careers are established using this approach.
Be grateful for the opportunity to grab a profit at an extreme and stay humble and open to possibilities that run counter to your view. Stay flexible and let the market dictate your thinking, not the other way around.
Of course, you may miss a possible further move lower, but you still have part of your original position remaining.
So what did ’cause’ the sudden plunge last week?
As is their custom, the MSM (and 99.99999% of the experts) are falling over themselves to come up with the reasons for the plunge (after the event, of course). They cite the trade/tariff wars, the rising bond yields, the huge levels of debt, and so on.
BUT THESE HAVE BEEN WELL-KNOWN FACTORS FOR MANY MONTHS!
Yet the stock markets continued rising in the face of these negatives.
If this explanation has any intellectual validity, they must explain this contrary behaviour and also why the Dow topped on Wednesday 3 October and started the carnage. Of course, this is impossible under the ‘news makes the market’ theology.
Several have observed ‘nothing has changed’ in their rationale for investors to hold their nerves. But they are wrong. What has changed is sentiment, but that is something they pay no heed to, except near the end of a collapse (by then, it is time to reverse and go long!)
Of course what fools most people is the fact that markets turn when times appear great. Supposedly, we have a booming US economy with low unemployment so let’s buy the dip! The Fed won’t kill the bull, will it? But I have news – the Fed never has and never will control the markets. It is a follower of market changes in interest rates, not leader as I have shown many times before.
By observing the Elliott wave counts and the growing divergences between important internal measures of momentum such as the new highs/new lows ratio, I was able to pinpoint the trend reversal pretty near the top and position VIP Traders Club members short in full anticipation.
I have been following the VIX Fear Index and this chart shows in stark detail that hedge funds remain fully committed to their inflexible view that volatility will remain low (and stocks high) and that this plunge is a dip to buy
chart courtesy www.elliottwave.com
But note the sudden surge last week in the VIX to above the 20 level to the area of the previous spikes. The potential for more huge gains in VIX is considerable as hedge funds will be forced to cover shorts as the S&P declines.
Is the dollar correction over?
We have been riding the dollar lower with our long euro/sterling positions off the wave 1 high but yesterday, I advised members to take profits and go long the dollar again – and this is why
If my EW labels are correct, we are starting wave 3 of 3 up. My fail-safe is the small wave 2 low.
UK Financials lead the FTSE charge lower
As you know, I have been bearish UK banks and other financials for many months and believed they would lead the way lower in the FTSE as they did in 2007/2008. This is coming to pass.
Here is a UK-based bank that has large operations in the Far East – HSBC
The rally off the 2016 low has been stunning as investors believed the bullish Asia story, which was considered the engine of global growth, lead by China.
But of course, every story ends – even good ones – and the market reached its high at the £8 level in January. And that was the month of major highs in the Dow, S&P and Nasdaq. Note the large momentum divergence at the high – a hint that the next major move was to be down.
After a hefty plunge to the £6.50 area, it staged a rally where I advised Pro Shares members to short as I suspected a Head and Shoulders reversal pattern was forming. Of course, I couldn’t be confident of this interpretation until the well-defined neckline could be broken. That was accomplished last week.
So now my downtrend is established, I can set a downside target using the well-known measured target rule – and that surrounds the Fibonacci 76% support at around the £5 area.
And it;s a similar story in US financials. Here is the Great Vampire Squid (aka Goldman Sachs)
It looks like a H&S pattern although not a textbook shape. And last week, it broke below my neckline to confirm the downtrend.
Members of my Pro Shares service are already short.
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