My ducks are lining up

My ducks are lining up

What a terrific ride we are enjoying on the Trump Dollar Express and in related markets, but is it time to start thinking about taking a well-earned rest-stop – as well as major profits?  And what a ride it has been!  Since the ‘surprise’ US election results were dawning last Wednesday, our markets simply zoomed off into the stratosphere with the dollar and US stocks leading the way.

Most novice traders get more excited when their lovely market positions rack up gains day after day.  Of course, they congratulate themselves for their foresight in seeing it coming – the gains are their just reward for taking the risk.  And that is good and true.

But in real life – and especially in relatively un-manipulated ‘freely traded’ public markets such as those we trade – there is an invisible hand at work hovering over proceedings.  Just as almost everyone is convinced  the market can only go one way, the big hand forms a big clunking fist and smashes down on the massive herd and scatters them in all directions – and hands them a valuable lesson in market dynamics.

Experienced traders know this is a fact of life – and can easily be understood from a behavioral perspective. When a bullish herd swells to a gigantic relative size, there are few uncommitted traders left to sustain the up-move, and just a small contingent of profit-takers can easily force the market down off its peak.  And this move can easily gather steam as other bulls see their paper profits evaporate – and start selling to capture what is left.

In general, the larger the bullish camp compared with the bearish camp, the sharper the price falls off the peak.  In these conditions, huge moves can occur in a matter of minutes.  I have found that using the Fibonacci levels to be very useful in pinpointing likely price extremes (aka turning points), and I use Fibs as one of the three pillars of my Tramline Trading method.

So how do we prepare for a price reversal from a huge thrust, such as we have seen last week?

Let me take the EUR/USD market as a terrific example.  Here is the weekly chart

The plunge down to the March 2015 low is a very large A wave of what will be a huge A-B-C.  The red B wave has taken over 18 months to form and is in the shape of a typical wedge with five major waves as labeled.

The purple E final wave was made as the Trump news came through and since then, market has moved down by over 7 full cents – all this in a matter of seven days!  As I noted to VIP Traders Club members yesterday, market has closed down in eleven of the past eleven days!  I believe this is unprecedented as a string of consecutive losing days.

And now, market has dropped right onto the line joining the previous major lows and that is an area of major support.  Remember, markets have long memories – and with the hugely near-term oversold condition combined with latest DSI bullish readings under the 10% level, I expect a sharp relief rally at some point soon.

Note that I will not call the bottom – yet.  Extreme sentiment readings can persist for some time and it is dangerous to trade against a major trend when in full flight.  I would rather stay with the trend and look for signs the market wants to turn.

In that regard, what does yesterday’s COT data tell me? Here is the data as of last Tuesday when market was trading a cent or so above Friday’s close:

With the market is a sharp downtrend, hedgies slightly covered some shorts while the commercials swung somewhat to the bearish side. But still, hedgies remain 2:1 short and commercials 2:1 long.  While this is not extreme, it allows for a hedgie short squeeze that should carry the relief rally up by a few cents.

And on the above chart I show my Best Guess where the turn will appear next week (ideally) and produce a rally to kiss the blue line around the 1.09 area (or higher).  The rally, once started, should last a few weeks – and that would place it nicely into the time scale of the next Fed meeting on December 14, where I expect Janet to announce a Fed Funds rate hike.  Why am I so confident?  Here is LIBOR wkly


This is the rate banks use for inter-bank loans.  Note it started rising hard back in December as Yellen forecast the Fed would increase rates four times this year (what ever happened to that?  You just can’t trust these guys, can you?).  The latest spurt post-Trump takes the rate to over 0.5%, which is where most believe the Fed will take Fed Funds to.

As I never tire of saying the Fed follows the market, not vice versa.

And look where the rate was back in 2014 – around 0.16% and now at 0.56%, a rise of 350%.  One day, the stock market will take notice of that trend.


Crude oil is poised to resume rally

Many months ago as market was putting in the $30 lows back in January and staging a recovery – much to the surprise of most pundits (who were calling for $20, or even $15 oil), I noted the lovely wave pattern that conformed to Elliott principles as a complete five down with a huge momentum divergence at the wave 5 low:

That was when I suggested the recovery would rally to the $60 zone (at least).  I based that on the fact that counter-trend moves often stop at the wave 4 extreme of the previous wave down and this is also the Fibonacci 38% resistance level.  The combination represents solid resistance.

Since that low, market has formed a wedge over several months in what is an A-B-C form.  Also, the reversal has the form of a Head & Shoulders with the pink neckline marked.  This lies at the $52 area.  If the market can push up to that area, odds are good that it will break through and we shall see a rapid move up to test the $60 area.

I have positioned VIP Traders Club members long in anticipation.


What other ducks are lining up?

Last week, I made a case for gold to make a turn very soon and we are very close to that event.  Here is yesterday’s COT

Ahah! Hedgies were loaded up on longs last week and had to abandon ship by a huge 20%, and the small trader rode the wave down by adding to shorts.  But what stands out are the commercials (smart money) who swung massively to the long side.  This is potentially very bullish data.

And according to reports, a record amount was withdrawn from gold ETFs last week by retail investors throwing in the towel.  Also, several high-profile investors announced they had sold huge gold holdings.

The bottom line: the turn is very close – and when it starts, I believe we could see gold exceed its old high of $1375 in due course.  DSI bulls are a lowly sub-10% – at area where major upturns have been started previously  Look out above!

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