Stocks staged a tremendous snap-back rally in the last few hours of trading yesterday – a feat I have observed many times in similar circumstances as many traders take off early for the weekend. This traps many on the wrong side (and then worry how markets will open after the weekend) since there has been a rush to short the markets in recent days, although as of Tuesday, hedge funds (non-commercials) were still piling into the long side as the market was plunging
which firmly demonstrates hedge funds were still clinging to their ‘buy the dip’ strategies as they added 16% to their long holdings that week. The more short-term oriented small trader went the other way as they attempted to take advantage of the huge lurches down. And the commercials (smart money) put in hedging insurance against further losses by selling contracts.
So was this sudden snap-back totally unexpected? Not by my lights! Here is the daily Dow
The blue trendline is a solid line of resistance/support that started life in December 2015. It is a highly significant line.
For over two years, this line has held all attempts at pushing above it – it has multiple accurate touch points (you can see two examples in August and September as the highs just bounced down off it).
I consider it a highly reliable line of resistance/support. So when did it change from a two-year line of resistance into a line of support that would halt future declines? In October last year, the Dow surged higher in the final burst of speculative mania that reached its zenith at the high of 26,705 on 29 January (less than three weeks ago, remember). That created a likely ‘overshoot’ of the line which was exceptionally large.
To me, it was clear that when the market did finally top out, the plunge back to the line would be very sudden. This occurred in spades. The fall I am calling the North Face of the Eiger – and it appears on almost all major stock indexes I cover.
But note how the plunge was contained by the support of the line as it fell dramatically on Tuesday. There was a slight run on of the exact target, which is expected in a panicked market, And the decline yesterday was one further test of the support (with a much more accurate hit) – and it held.
Incidentally, when a market makes a huge move either up or down, the actual high/low is usually tested a second time that gives traders on the right side to take some profits off the table.
So now, with the line of support holding (for now), we only have a likely overshoot because I need to see a deep penetration of the line to confirm. But odds are certainly stacking up we have seen The Top and a break will occur.
Let’s just stop and consider what happened last week. I had drawn the straight line in weeks ago and projected it forwards as a line I believed would likely hold all attempts at penetration (at least on the first attempts). Because markets have memories – sometimes, very long ones – I could make that confident forecast.
VIP Traders Club members are holding great short trades from much higher up and in yesterday morning’s Trade Alert, this is what I wrote: Markets are deeply oversold and I expect pull-backs starting today. You may wish to take action.
Members took action near yesterday’s low for a terrific profit. You have to stay ahead of the headlines to win at trading!
And here is the Nasdaq, the index that has attracted the most fervent speculative juices:
The upper blue line is the equivalent major line of resistance/support and early yesterday, selling was so intense it spiked below it by some distance. But then the support function kicked in and the market closed substantially higher on the day.
So the question I am sure you are asking is this: where to now – the 64 million dollar question! To help answer, a little knowledge of Elliott wave theory in invaluable which is one of the three pillars of my Tramline Trading method.
One of the most reliable signs a major trend has changed is to note a clear five wave impulse pattern down off the high – and here it is on the Nasdaq
and this one is a beaut. Pure textbook, in fact. I have a long and strong wave 3 (with its own five down within), a wave 4 rally in three with a momentum divergence to the Fib 62% retrace. Then a move lower in wave 5 (with its own pretty five down) where there is a massive momentum divergence – and that heralds a strong counter-trend rally into next week. That is the most likely course.
And that rally should take the form of an A-B-C (shown as a schematic and not necessarily to scale) that should last a few weeks.
So basically, I expect the rally to follow on early next week to perhaps the 6500 area, then a three down in wave B and then a C wave rally (in five). I am unable to estimate where the C wave would end (for shorting indications) – it will depend on the strength and form of the A wave.
But we know that an important Fibonacci relationship will be involved that is related to a previous wave. But which one – there are several to chose from?
And this is where the art and experience of a trader pays dividends. A normal 50% retrace of the entire move down sets the 6600 area as a possible, while a 62% retrace brings up the 6700 area (with equivalent targets for the Dow and S&P). The 6700 level is the area of the wave 4 high – and is a typical target for retracements. That will be my favoured target unless proven otherwise.
Of course, all of the above could be negated by a renewed decline to new lows, but I see that at lower odds. But if it does occur, it will be curtains for the bull and a massive wipe-out would ensue.
Crude plunges, as forecast
This is one of my favourite markets. We made significant gains on the way up from the $30 lows and when it approached the $70 target, I decided to take all profits and go short. The actual high was $66.60 and from that high, the market has plunged by $8 – a decline of 12% – just when bullish excitement was reaching for the skies.
And the decline has all the hallmarks of a new bear trend
I had been tracking the lovely wedge all the way up and o n a single day, it broke below both wedge lines in a very bearish show of strength. Note the confirmed ‘overshoot’ as wave 5 was completing above the upper wedge line. Again, textbook.
So now we are in a third wave down and that will end and a fourth wave up will ensue. But the main trend is firmly down and my major target is at the start of the wedge around the $44 – $46 area. Those on the right side will reap major rewards.
Are we really in a new bear market?
As you know, I rarely cover politics, but last week’s developments in this arena suggests the answer is Yes. In a bear phase, it is common for misdemeanors and illegal activities that were ignored, swept under the carpet, or dismissed in the previous bull phase are suddenly coming out of the woodwork.
The recent flare-up of allegations about prominent Hollywood operators is a case in point. Why have so many women (mostly) now come forward? Obviously, the mood has changed from laissez faire to an atmosphere almost of totalitarianism. This harsher tone has appeared almost overnight – and that mirrors the savage decline in shares.
Just yesterday, it was reported that two prominent White House insiders ‘resigned’ when former wives made allegations they were abused while married. Leaving aside the rights and wrongs, I find it astonishing the men have been tried and found guilty on the basis of allegations that may or may not be properly defined as ‘abuse’. This seems to be happening more and more – and is a sure sign social mood has turned more negative – and that is what drives a bear market.
To some, it is turning into a witch hunt (or should I say warlock hunt?).
Why did few if any allegations of such a nature emerge when Obama was in the White House? Simple. Because social mood was positive in the bull market, and any such behaviour was kept private. Does anyone seriously think such behaviour has suddenly developed in 2018? Of course not – the difference is now it is coming out in the open.
As the bear market develops, watch out for more serious crimes to emerge.