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Stock indexes are back in foggy no-mans-land with the two-day pullback on Thursday and Friday.  So I am back to where I was in my post of May 12.

On Wednesday, it appeared they would fall off the cliff by breaking the neckline of my potential Head and Shoulders reversal pattern then forming.  I emphasised that it would take a solid daily close below that neckline to confirm the turn – and that did not occur. So with this recovery, I must put that reversal idea on ice (at least for now).

And the recovery was in the face of last week’s Fed ‘surprise’ that they may well start raising rates in June.  To me, that is a sign the odds have now switched back to my bullish scenario.

On May 12, I showed the Russell 2000 chart.  Recall this index is composed of low-cap high-risk shares (compared with the large cap Dow components).  I use it as a measure of ‘animal spirits’ and a proxy for market sentiment.

I showed the terrific wedge pattern but now, I have a lovely tramline pair following the wedge break and kiss:

Last week’s rally has taken it to the upper tramline.  A clear break above it would herald a further rally and that could occur early next week.

And here is the Dow

Again, I have lovely tramlines and the crucial observation is the overshoot on Wednesday following the Fed news.  I have found that often, a clear overshoot is a signal for the market to move back away from the tramline with force – and that certainly occurred late last week.

It is a failed breakout. Also, the decline took the shape of an A-B-C and this is counter-trend, suggesting the next move is up.

One other supporting clue is that the Daily Sentiment Index (DSI) which was pushing 90% bulls at the April highs has dropped back to a recent 48% bullish reading.  In other words, the market has become much more bearish in the decline – and that could support a decent rally phase.

As I warned, markets are becoming more volatile with wide swings (and failed breakouts) – and a good reason to trade small (if at all) and this is the advice I have been giving to VIP Traders Club members.

 

Silver pulls back from $18 high

Silver was a hated market back in December at $14 – and that was when I started to get interested in it.  The DSI bulls had dropped into single figures and was forming a fifth wave base around that $14 area.

We then rode the super rally off the January breakout and recently took major profits near the recent $18 highs.

But now, every trader and his dog just loves silver (after it has rallied by 30%, of course). Seekingalpha.com articles are laden with reasons why silver will go to the moon – and will even outperform gold.

My loyal readers will know that this is a situation I love – and gives me the opportunity to take a contrary stance.

The classic buy signal was given on the blue trendline break following the enormous momentum divergence into the December low. and following the kiss on that line, the market took off northwards and entered a tricky consolidation phase which was a classic five wave continuation pattern.

This is not to be confused with a five wave impulsive pattern – and I cover this pattern in my book Tramline Trading (pp 38 – 39, 144 – 145). And this pattern also contains a forecast for a likely price target. In fact, it usually lies about halfway along a major wave and if you measure up from the low to its centre, my price target is then in the $17 -18 area.  Bingo!

Also, going into this high was accompanied by a momentum divergence – and I had enough information to tell me to take at least some profits off the table because odds were swinging heavily towards a pullback scenario near-term.

With DSI bulls on silver (and gold) pushing new highs, my outlook is for an extended consolidation phase lasting a few weeks to reduce the bullish excess.  The first rally to the $18 level is an A wave and the current decline will be a B wave when it completes (where bullish sentiment will be low), leading to a new move up in the final C wave.

And at this C wave high, bullish sentiment will be off the scale again.  And the merry-go-round of sentiment will have completed another cycle as it drives markets up and down.

To swing trade effectively, forget the ‘fundamentals’ and focus on the waves, tramlines and Fibs – and sentiment, of course.  That is all you need.  Everything else is clutter.

VIP Traders Club members took major profits near the $18 high.  To join us, click on this link.

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