Markets weather the mini storm
I see that Branson and Bezos are about to go into semi-space with Branson first. Is this the ultimate ego trip? Can it tell us anything about the general state of supreme confidence in the future of markets? Hmm.
Last week saw a sharp pull-back in stock indexes – and then rallied hard into yesterday’s close. At the same time, Treasury yields topped and closed sharply higher and commodities rebounded off their correction lows with crude oil and Natural Gas sharply higher. On Wednesday, the Fed mentioned the T-word (taper) and produced a minor flurry of panic that quickly subsided.
But the fine details of those moves gave major clues in how to trade them. Let’s take the Dow first.
From the May 10 ATH (still standing), the market declined in a clear a-b-c pattern. That was Clue No 1 – as three waves are always counter-trend to the one larger trend (up). Of course, it only becomes apparent over time that the pattern is actually a genuine three – assumptions have to be made while in the heat of trading. And that is where risk enters! But the strength of the rally off the wave ‘c’ low is a clue the uptrend was intact after the 21 June low.
But last Monday, the market started a decline and we shorted in anticipation of a large sell-off. That was excellent timing as the market did descend – but by Thursday it became apparent the pattern down was also likely a three. That meant I had to accept the likelihood the decline has run its course and the uptrend could resume soon. And that view was confirmed by Friday as the market rallied strongly and took out of our short positions at break-even. Remember, our stop-loss policy includes a very valuable tactic of moving protective stops to break even under these conditions so that the worst result of that trade was zero loss. Nimble traders were taking profits on the ‘c’ wave break made a profit.
Long time readers will note that I have made a considerable habit of identifying a high, shorting it and seeing the market decline. By tracking the form of the sell-off I could ascertain whether it was likely to be a temporary dip (with a three down), or the start of a major five-wave impulsive pattern pointing to a much larger correction to come. Obviously, my efforts have been in vain as market have kept roaring back. But instead of taking huge accumulated losses, my Break-Even Rule has come to the rescue more than once to prevent that.
In other words, I have been wrong on direction several times, but have not suffered major losses as a result. Each time though, there was the set-up for a more protracted decline (we have caught a few of these) and one day, we will catch the Big One with a position very close to the top. Waiting for a clearer signal the trend has changed -as so many do – introduces a lot more risk as we would be scrambling to get on board probably ahead of a major bounce and that would give us a starting running loss to our account.
In that event, you may be tempted to carry the trade without a stop. Bad decision! That loss could turn out to be an account killer if you guessed wrongly on the trend. Do not do it! You must be there to fight another day and only take minor losses.
But now, my outlook is for further gains and a break of the May 10 Dow ATH appears imminent. In that, the Dow would match that of the S&P and Nasdaq which are into new ATHs.
Interestingly, Junk Bonds. which trade more like high risk equities are booming with yields way down. So compare this actions with my projection for T-Bonds. The latter are 30-year maturities with the market taking inflation expectations into account – and these are currently high (see below).
Second, here is the T-Bond chart
The Fed has been keeping its finger firmly down on the Buy button on Treasuries of all maturities of late. And demand from investors and institutions has been solid. Combined, that has resulted in a solid rally phase to Thursday’s high. I believe that rally is a fourth wave of the larger pattern and Thursday’s 265 high was the wave 4 top. The internal pattern in my wave 4 ticks all the boxes especially the three-wave a-b-c pattern.
And what a perfect time for the top to be made – latest DSI reading shows bulls at an extreme 90%. Even the MSM are on board the bull side – one recent article states that US CTAs (financial advisors) are lining up billions for their clients to purchase Treasuries. That is total commitment to the bull case – and a clear contrary indicator.
Once the fifth wave gets under way, I expect prices to decline over many weeks and exceed the wave 3 low at 153. There is lots to shoot for in this most crucial market. I believe most will be amazed at how high bond yields will reach – and many will ascribe this to booming commodities which have taken a break recently.
Many cling to the principle that if stocks go up, bonds will go down. And the historical record often confirms that – but only during certain periods, Other times, they trend together. Why is this – surely we learn that stocks and bonds compete for trading capital and if bonds appear more attractive than stocks, investors will dump stocks and buy bonds. Bonds up, stocks down. Makes sense, right?
But another argument is this: If bonds appear ‘cheap’ the yields are low. This means economic activity is in decline as demand for loans drops. If so, this indicates a weaker economy and stocks should decline as the prospect for company earnings weakens. So, bonds down, stocks down.
As with all arguments based on economic factors, you can argue both sides with validity. Which side would you choose today? Stocks are up and bonds are up since at least March. Obviously, there is another factor in the picture – and it is of course the view on what the Fed is saying or hinting. That factor seems to be in control at present.
Personally, although I note the various arguments I am guided in my analysis by the chart EW picture and the state of sentiment. When bullish sentiment gets too extreme, I am looking for a trend change.
And my third example is crude oil which has just completed a minor correction
Last week’s sharp $6 correction is hardly visible on this scale and was totally predictable as the market had reached the resistance level at the 2018 high at the $75 mark. Note the a-b-c three down culminating in the 2020 Corona Crash to the $10 area. And what a buying opportunity that was! But of course, many were caught up in the panic of the selling at the time as visions of economic destruction were rife.
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. If you like trading Gold and Silver (and also stock indexes and many other markets), why not join us by taking a two-week Free Trial to my VIP Traders Club here.
If you trade individual UK and US shares, we are trading them in my Pro Shares service. Take a generous three-week Free Trial to my Pro Shares service here.
We have been long Apple shares since last year for Pro Shares and I featured it in my latest Chart of the Week for Interactive Investor. This is the updated weekly chart
My wave 3 high last August was made on a large momentum reading but note the pattern of this indicator since then, the new ATH in January was made on lower momentum to indicate a divergence that pointed to at least a decent correction (which occurred). Then, with the renewed advance, the momentum is now testing the trendline and a break above will point to a sustained rally near term. Even oscillators carve out three-wave Elliott wave patterns sometimes!
And note the lower trendline on the price chart. Since July last year, it has contained all of the declines to date making is a very solid line of support. And the sharp rally off my wave 4 low is testament to the power of that line of support. It is when you notice these subtle points contained in the charts then you can have a lot more confidence in your analysis. Remember, no forecast is 100% assured, but I feel many investors/traders believe otherwise.
If I am correct and Apple (and its fellow leader Microsoft) continue in their upward surge, all stock indexes are set to shoot higher near term. But this should be the final stage of the entire equity bull market since at least 1930. I am still expecting a flame-out very likely later this year. Watch this space!