Patience is a virtue

I confess, trading has been pretty tough of late. 

And that is typical following a record-breaking stock market crash as the forces of the perennial Dip Buyers and the Let’s Get Out sellers combine in a classic stand-off with wide swings that are providing whipsaws galore.  And whipsaws are the arch enemy of traders everywhere. 

But I see the fog clearing very soon and stocks will start a devastating third wave down.  Lots of patience is required in this period – a trait that is quite rare among some traders!

Also we are in a second wave rally in a new bear market – and second waves are never the simplest waves to trade.  But at least, I believe we are firmly in a second wave and not a new bull phase.  That is being confirmed partly by weak NYSE trading volumes on up days and the chart patterns.

And after four weeks of enforced house arrest, the natives are getting understandably restless and the pressure is mounting for a relaxation of the lockdown rules.  That has gone hand in hand with an improvement of overall sentiment as more of us are looking forward to what we will be doing after lockdown is relaxed.

And investors, who are picking up on this sentiment boost, are pushing shares higher as they believe things will be getting back to the wild ways of the last ten years when US companies were buying back their own shares with abandon.

And of course, the late-comers to the bear cause are being squeezed to provide more fuel for the rally.  All of these forces are normal following a plunge.

And this sentiment boost is exactly what happens in bear market second waves.  They tend to reproduce the old feelings of supreme confidence that lead up the the highs back in February.  But second waves never exceed the old highs in price.  They can come pretty close though.  But as I write, the Dow is trading 6,000 pts below the ATH and at the Fibonacci 50% retrace and so is a very long way to testing the ATH. 

Odds that the old highs can be tested are low in my opinion.  I fully expect wave 2 to end soon – probably when the US gets a glimpse of life post-lockdown.  It is certain Trump is desperate for the lockdowns to end as soon as possible and just one tweet from him could send stocks spiking up – and then back down.

Meanwhile, the economic data are coming in showing record drops in most measures in March.  And April will not look any better.  But that is likely already in the market.  Only a real shocker would be a negative surprise.

And many are expecting a second wave of virus infections to come when lockdowns are relaxed and people get sloppy about hygiene. That is likely in the market as well.  But is the market prepared  for a very strong second (and third) wave?

The US and UK governments were quick to introduce a support plan for businesses and individuals and so many of the programmes were not thought through very well.  Many are providing perverse incentives for employees to prefer to be on benefits rather than be furloughed and receive their normal salary – or at least 80% of it.

Here is a great example in the US here.  The employer took a grant from the US government to keep her employees on the payroll at full pay – and they almost staged a riot as they were earning more on the dole!  What a tragic state of affairs where not working pays more than working. Only governments can come up with this Alice in Wonderland world (as they did with negative interest rates).

But it simply perpetuates the trend of an ever-expanding benefits system in both countries. And what politician today would stand a chance of being elected if he/she argued for a cut-back in benefits?  The majority of households in both nations are dependent on benefits of some sort. How tragic – where has self-reliance gone?   

So the system keeps growing like Topsy.  Until it collapses under its own weight (to come).

But with the reduced economic activity this year – and likely next and the expected drop in the tax take – can the economy support the benefits monster? Will investors want to keep buying the tsunami of new sovereign debt at the current low yields, or will they demand higher rates?

Odds favour a rapid rise in yields.  I expect T-Bond yields to move sharply higher this year.  I am getting ready to start a campaign for the VIP Traders Club.

I am using wider stops now

Because whipsaws are lurking everywhere in this second wave in stock indexes, I have decided to trade small with wider than usual stops.  In ‘normal’ times, I can usually find good low risk entries using a 60 – 80 pip Protective Stop, but now I have to widen them to 150 – 200 pips.

Of course, that 200 pip risk is a mere blip on even a 2-hour chart! It has been moving my this scale in minutes.  Here is the problem exposed on the 2-hr Dow

Since the 2 April low, we have three main waves (yellow bars).  The long one is 4,000 pts high and the  shortest is 1,000 pts.  So using only a 200 pip stop forces me to precisely time my entries more than usual.  Only a small slip will result in a loss.  A pretty tall order, is it not?

With those constraints, trading short into breaks is almost a guaranteed losing tactic (the whipsaw effect).  So that leaves trading short into rallies/bounces (or trading long into dips/pull-backs).  That strategy is the only one that stands a chance in these conditions.

So that means the Fibonacci levels are critical for good timing.  I always place the Fibs against the most recent wave, such as  this one

The rally into the tramline kiss on Thursday afternoon also conveniently took it to a Fib 50% retrace. So that is where doubly strong resistance lay – and a great place to enter shorts with the 150 – 200 pip stop.  Of all the points on the upper chart since 2 April, that was the most secure short entry.

But you had to be there at 3 om Thursday to take advantage (or have the foresight to set a resting limit order).  The market didn’t hang around long at that level and promptly entered a Scalded Cat Bounce, making the kiss genuine as super-strong resistance.

If you missed that entry, there is another opportunity, although not quite as well defined.  The surge yesterday retraced a Fib 62% of the previous Scalded Cat Bounce decline – and was another Fib-based opportunity.  The Fib 62% retraces are usually the  lower risk opportunities.

Some traders may be tempted to trade long in this period.  That is fine for day trading, but since the main trend is now down, most of the profits will be made on the short side.  For most traders, trading with the main trend usually the way to go.

So what is my outlook now for the Dow?

I like to go back to the long term charts at times like these and here is the weekly showing the February ATH at 29,440 as the final wave 5 in a long series of fives.  That is where we took short trades

The Corona Crash sent it down by over 11,000 pts (a Fibonacci 38%, please note) on March 23 where to took profits.  That was a very successful operation.

In the four weeks since then, the market has staged a sharp rebound in wave 2 to around the Fib 50% retrace around the 24,000 area.  And that is one of the candidates for the extent of wave 2 before the big wave 3 down starts – but not the only one.

Here is a close-up of recent action showing my two main options

Either we have wave 2 high in place or it could push up to the Fib 62% around 25,100 area first. I have used the Fib levels extensively in this campaign and I believe they will remain a very useful tool in the way ahead.  Either way, I remain of the opinion that wave 3 down will get started soon.  And when it does, it will devastate the Buy the Dippers.  It will be worth waiting for!

Note the relief wave 2 rally off the March low has been a lot weaker than the Corona Crash with its upward slope shallower than in the Crash.  Also, daily trading volumes on the NYSE likewise have been trending far lower – a sure sign of a weakening trend that will end soon.

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Is Gold shooting for $2,000?

I see many pundits are so bullish a $2,000 target is a virtual gimme.  In fact, I have seen even higher moonshots.  But I believe they are mistaken and we are very close to a major turn lower  Here is the latest action

The wave pattern is complex and open to various interpretations, but I believe we are in a large B wave that is about to top out into a devastating C wave.  Last week’s surge has taken it to meet my major blue trendline around the Fib 76% of the decline off the 2011 high at $1920.  The end is nigh.

And how about the positioning of the hedge funds here?  This is the latest COT

The hedgies are now almost 10/1 long!  That is about as bullish a ratio as I have ever seen. Not to be out-done, the small specs are 2/1 long.  But note the commercials – they are hedging massively into the rally at a 2/1 ratio.

Remember, hedge funds are trend followers and always are at their maximum long positions at major turns.

The decline will be swift and I am lining up VIP Traders Club members in preparation for a potentially very profitable crash.