As just one more example of how a reading of twists in market sentiment can help provide traders with superbly-timed trades, here is a real time one.
The Dow made its all-time high on 1 March at the 21,170 level and since then has undergone a correction stretching to 760 points to the low on 27 March – a period of almost four weeks.
I have noted that many commentators have welcomed this pull-back as being a ‘healthy’ development (which it certainly is). It came after a manic period when the Dow closed its main NYSE session on the upside on twelve consecutive days in late February! That was a record and told me the end of the rally was nigh.
After making its 1 March top, the market then proceeded to close down for eight consecutive days! As I pointed out at the time, that left an ‘island reversal’ on the charts – and signaled a more extended correction lay ahead.
With this information, I could then say the market was in a major fourth wave down after making the wave 3 high at the 1 March top.
Prior to the 1 March high, the sentiment of the pundits was generally positive and they trotted out plenty of reasons for maintaining the view that rally would continue as the Trump tax and spend plans were not even in place – and were coming down the pike with a major boost to earnings.
But after the low was put in on 27 March, I noted the tone had become mush more ambivalent – and some even were striking a bearish tone, especially on seekingalpha. This is entirely consistent in a correction. Some will start to doubt the ability of the market to rally again the longer the decline proceeds.
In terms of my Elliott wave analysis, I believe that this wave 4 down has some way to run – both up and down.
This is what I sent to VIP Traders Club members on Monday 3 April:
I am re-assessing the upside potential in the near term. Odds are now swinging a little more to a more extended wave 4 than I had believed when it made the low on 27 March. It may well turn out to be in a larger A-B-C that lasts until next month.
One idea I have is this – wave 2 (an A-B-C) lasted nine weeks and for a first approximation, let’s say wave 4 lasts about as long. That would set the wave 4 low around May 8.
The yellow Fib 62% resistance remains formidable. The odds still favour an extended wave 4 to take up most of this month so the pattern from here should get more complex.
The first day or so of this week should tip its hand – whether it wants to continue the rally to test the 20,800 level before turning, or to head straight down from here.
So with a forecast that the wave 4 could last for all of April, I expect quite a few ups and downs. I had two alternate scenario as of early Monday morning, so let’s see how things looked early this morning when the Dow was trading at the 20,680 area – this was the chart I sent in this morning’e Trade Alert:
The market had rallied Tuesday afternoon and had met the pink support/resistance line. I believed that a break up through it would herald a major thrust in the C wave as depicted.
That is what I advised members this morning for a very low risk trade risking only 30 pips:
ACTION I advise going long here (currently 20,680) with PS at 20,650
And this is the 2-hr chart taken seconds ago:
In the space of a few hours, the market has zoomed up by around 200 pips – and a short term profit could be taken as the Fibonacci 78% has been hit on the nose. Nice.
Of course, I am looking for a b wave high and this could be it, but I need a little more evidence first. But at least members have a tidy 200 pip profit if they wish to take it.
But this trade came from my reading of a more bearish stance out there in the media. From total complacency up to 1 March, more doubt is creeping in. And today’s very bullish action (the Dow is up 180 pips on the day so far) is telling me that the swings this month will be quite violent and traders will need to be very nimble to take advantage. But the profits are there for those that are.
Incidentally, I also advised members to go long the Russell 2000 which is likewise in rally mode. For details on how you can join the VIP Traders Club,
click here.
