Shares are on a cliff edge
Exciting, isn’t it? Blink and you miss a 200-pip swing in the Dow! Yesterday’s action was particularly vigorous following Thursday’s strong relief rally with heavy and persistent selling. The whipsaws are huge – and the potential for being on the wrong side of them is likewise very very high. More capital is lost in conditions such as these.
But in spite of this frenzy, we have been timing our trades for VIP Traders Club members with great precision – thanks mainly to Mr Fibonacci. Can any other trade service claim that?
One of the several stock indexes we trade is the pivotal China A50 which comprises the 50 largest cap domestic Chinese companies. Naturally, with the newly current Tariff Wars between the USA and China, this index is being heavily impacted by these developments (among many others).
Some sober commentators call the China economy as the Red Ponzi, since it is built on mountains of debt. In particular, whole cities have been built where nobody lives. They even built a replica of Manhattan Island that stands empty. All built on debt – with no income to service it! I call that an egregious mis-allocation of capital, and will be the downfall of this top-down demand economy.
In the next global downturn (which is almost certainly upon us), I expect China to be the worst hit. The downside potential for Chinese stocks is immense.
Today, I see AEP in the Telegraph paints a doom-laden picture of what could happen if China ups the ante against Trump’s Tariff Tantrums. Their ‘nuclear option’ would include dumping their vast stack of Treasuries, although if that occurred, the US Treasury would likely step in to mop them up in a damage limitation exercise.
One of the results would be a global stock rout – with China leading the way with their hugely leveraged economy (their debt to GDP ratio has ballooned to 270%, the highest in the world).
As the world’s second largest economy, traders could do worse than trade this market. In fact, I spotted a wonderful opportunity to position short a few weeks ago.
And my reading of the chart shows the great danger Chinese shares are presently in. Here is the weekly
showing the magnificent Double Top reversal feature. Genuine DTs are pretty rare, but this one is a textbook beaut. Not only that, but the recovery off the dip after the first top is a clear A-B-C which signals a correction to the main trend, which is down. And the C wave has a glorious five up pattern.
The first decline off the 25 January high is a spike to the Fibonacci 38% support, which is my wave 1. Then a rally to an accurate hit on the Fibonacci 62% retrace. That was when I pounced! It was a perfect setup for a low risk trade as I judged that to be wave 2.
And then the market started a wave 3 decline that is currently testing the same Fibonacci 38% support. Here is the closeup
Not only did the market hit the Fibonacci 62% in purple wave 2, but it kissed the underside of the central tramline – and when it did that on 26 February, it started to peel away in the expected scalded cat bounce down (see my text pp 83 – 84, 143).
One of the wonderful aspects of using my ‘kiss and scalded cat bounce’ theory in real time is that as the market is about to plantits its kiss, you can pre-set your order with a tight stop to give you a high probability/low risk trade. And those are the kind we all want!
The other welcome feature is that when your order is filled, you expect to see a rapid move down right away. Your trade should never be in loss for long. Seeing that develop gives you confidence in your analysis. But if the market sticks around the kiss area for long, you can suspect something is awry.
So now, the market is sitting on the Fibonacci 38% support again (top chart) and if/when it gives way, the power of the third wave will ensure a rapid descent – and my main target for wave 3 is the Fibonacci 62% at 11,000 area (currently 12,400).
To note is last week’s yuan sell-off against the dollar (I track USD/CNH) – and that suggests capital flight out of China is picking up. If that accelerates – as is likely – Chinese (and all others) stocks are in for a very rocky ride down Prechter’s Slope of Hope (which the EWT helps plot in advance).
Incidentally, Robert Prechter has coined the above phrase to describe a bear market as the hope engendered by the previous bull market – climbing the more famous Wall of Worry – is dissipated as values work lower. In a bear trend, rallies are provided by the Buy the Dippers (and short covering on profit covering by the early shorts).
When these fizzle out, stale longs take the opportunity to get out at better prices and combined with fresh short selling, force the market lower. This was the dynamic at work last week in global stock markets. Of course, if you recognise the new trend as bearish, you will take rallies as opportunities to add to shorts – hopefully at low risk.
Tesla bounces – but will it fall back now?
Last week, I noted how Tesla shares had collapsed from its $390 high to around $260 – a loss of $130 (33%). I also noted that the shares were deeply oversold at that level and I expected a bounce last week. This is what I wrote last week;
But now the wave pattern is not totally clear – we could be in a three down or a five. And with the market very oversold, a bounce can be expected near term and I shall be taking some profit off the table. But my near target is the blue tramline in the $220 area.
Right on cue, they indeed started a recovery after I had taken profits near the low and this is the current setup
Starting Monday, the market surged higher and yesterday reached the Fibonacci 50% retrace, which is also massive chart resistance which should prove formidable. My max upside is the Fibonacci 62% at around $320, but that should be it.
Now, my wave 4 should take some time to develop so I shall be in no great hurry to put on major trades just yet. But I am happy to have a major profit in the bank to await my next move. Trading is fun, isn’t it? Especially when you are making profits.
If you want to have fun trading – and make profits at the same time – take a two-week Free Trial to my VIP TRADERS CLUB – details here