May-hem in Westminster!

I am no great devotee of the political scene, except for light relief from trading, but the campaign waged by the ruling party in Thursday’s elections must rank as one of the most incompetent ever. Not only that but Labour, who could -and did – promise the earth in giveaways (aka bribes) believing they had little chance of actually being forced to carry them out, ran a blinder.

If I was a student and running up debts like there was no tomorrow (with few proper job prospects) and was offered the prospect of having those debts wiped off the slate by a Labour government, I might actually be tempted to vote for them. Of course, no government in power could possibly implement all these goodies and get away with it. Labour can thank their lucky stars they didn’t secure a majority, otherwise they would have to disappoint an awful lot of their followers – and bring the Great Crash that’s coming that much sooner (see FAANG collapse below).

And what an almighty boo-boo as the Tories proposed a ‘dementia tax’ half way through the campaign. The first rule of politics is to lure naive voters with fabulous give-aways, get into power and then worry about the policies later. And when they fail, the other party repeats the process and they get into power in turn. It’s called the two-party system (aka revolving door).

I noted that the Tories could hardly believe the results as they came in. But they missed a trick – they could have blamed the Russians for hacking of emails and websites, as Mr Trump’s enemies are fond of doing at every opportunity. Yes, all politicians need an enemy to ‘fight’ even if they have to make one up.

Of course, sterling fell heavily on the news. I covered my GBP/USD trades and analysis a little while ago and noted that the rally to my target at 1.30 had been achieved and the next big move was going to be down in wave 5. With that bold statement, did I have prior knowledge of the election results? How come I could go against consensus that was calling for more sterling appreciation? Was it a wild guess that turned out right by chance?

This was the chart I showed a fortnight ago

The market had hit the meeting of my upper blue tramline with the Fibonacci 23% resistance level which was the top of the C wave of the A-B-C of wave 4 up. Note that wave 4 took about as long to run as wave 2 and this is a symmetry I like to see. It gives me more confidence in my EW label positions.

Here is the updated chart in close up

I have a very nice tramline trio working and my first major target is the T3 support tramline in the 1.26 area. At this early stage in wave 5, we should be in Elliott wave 3 down after completing waves 1 and 2. Note the very large momentum divergence at the 1.30 high, which did portend a very large move down.

When the first five down completes, that should be my large wave 1 leading to a bounce in large wave 2. But the form of this pattern is yet to be decided. However, the ride in cable will be very exciting for weeks and months to come. It is one of my top markets I trade for VIP Traders Club members.

Do higher interest rates result in appreciating currencies?

Many people – including MSM financial journalists especially – believe this is an obvious rule of demonstrable truth. How many times have we read that the Fed is about to increase the Fed Funds rate and “this will boost the dollar” (or vice versa).

Here is an interesting chart that totally disproves that notion

chart courtesy www.elliottwave.com

The blue line is the EUR/USD exchange rate and the black line is the difference between euro and dollar 3-mo rates. If the above ‘received wisdom’ were true, the two lines would track each other very closely with the correlation index hugging the +1.00 ceiling for ever.

But that is not what we find. Just look at the wide swings in the correlation index between total correlation (+1.00) and total un-correlation (-1.00). Isn’t that interesting? And the most recent period is one where they are diverging sharply (-1.00). Hmm. And if they get back into alignment again (likely), they will likewise be diverging (-1.00). We are in a curious period.

Actually, the world of finance is littered with similar myths that remain the stock-in-trade for experts and gurus in the media. Such as the myth that gold and silver follow currencies up and down together. There are times when they do and times when they do not.

It may be news to some but the economy and the markets that drive them are hugely complex organisms. The field of economics assumes the economy is like a giant mechanism – pull one lever and you always get the same result every time the other end. Of course, this just cannot be true in an economy that has such a complex web of relationships.

We are dealing with humans – and we are just not that predictable. One day I may want to blow £20k on a new car, thus boosting GDP. Or I might want to save it and buy a £20k corporate bond which has no effect on GDP if I buy it from another investor. When times are good and social mood is bullish, I may lean towards trading in my car for that fancy one.

But when I am feeling less expansive, I will want to conserve my capital and buy that bond instead and make do with my old car. And those feelings (sentiment) spread over the whole population is what drives the economy and the markets.

Has the FAANG Gang bitten off more than it can chew?

The shares of Amazon, Facebook, Apple, Netflix and Alphabet (Google) have been rocketing almost vertically for some time, but late yesterday they all fell hard in unison with declines of up to 8%. Across the board selling was fierce – but I anticipated it for my VIP Pro Shares service just days prior!

I had been following the leader of the pack – Apple – for some time and reckoned the 15 May high at $157 was the top of a very large wave 3. That was the place to take profits as I expected the next wave – wave 4 – would be anything but plain sailing as wave 3 was.

This is what I sent Pro Shares subscribers on Tuesday June 6 in my Trade Alert:

I have been keeping a beady eye on Apple and with the current new product launches, what a timely way to judge if they will spur the shares on to new heights, as the iPhones did in the past. The charts are telling me something else

I reckon the 157 high on 15 May was the wave 3 high and we are starting a wave 4 correction where the first A-B-C up has completed. Note the C wave reached the precise Fib 78% resistance and then turned. I would receive much more confirmation if market would close well below the upper blue tramline at the 154 level.

I will await this signal and advise you to short the shares then with Warning level at 157

And yesterday, the shares certainly did close well below my trigger at 154.

The key to my understanding of this market was recognition of the wave 3 top which lead to a small five down which signaled the start of a new downtrend. This is basic Elliott wave theory. Also, the recovery off the 18 May low was hesitant and weak/ That was a clue to expect a move down which was likely to be sharp.

Why did I anticipate heavy selling on the first down move? Simply because Apple has been the apple-of-the-eye for the vast majority of investors. Everybody has recommended it as a core holding (sorry!). Bullish sentiment has been off the scale for years. It could do no wrong as product after product received wide acclaim in the press and with the public. Devotion to Apple products verges on the religious. Also, it has cash holdings larger than most nations’ GDPs for goodness sake.

So when heavy selling hits the market, you can expect very large declines (the market has run out of buyers) – to the astonishment of long-only investors. “Why is it doing this to me? The fundamentals are the same – nothing has changed, surely? It’ll be OK – it’s just normal ‘profit-taking’ and they will come back. I’ll hold.”

That is the lament of most investors – and in strong bull markets, it pays off. But when the trend changes, this attitude means the investor rides the shares all the way down and if the decline is large enough, they throw in the towel near the low just before it trends back up.

We who understand how markets really work know something has definitely changed – sentiment.

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