Stocks surge – but for how much longer?

I have started to put videos on my Facebook page – tramlinetraders – that are timely and cover important aspects of how I trade using my Tramline Trading methods. These are live in real time as I record them. My latest covers Tesla and BP .

Also, I am planning an online seminar soon, so watch for news.

While the Dow/S&P/Nasdaq continue their strong relief rallies off the 24 December lows, my Pro Shares members – get your 3 week Free Trial here – are enjoying the ride! Yes, I rarely mention individual shares we trade in my sister service, but I will today because it illustrates the supreme importance I place in wave patterns. They determine whether I am bullish or bearish (or neutral).

We have been trading Facebook since last year. According to my analysis, the bull run was on its last legs going into the summer. I was waiting for a suitable low risk spot to short – and the end was swift. When the company issued a big miss on its 26 July consensus, the shares flash crashed from $218 to $165 in just a few hours. That was far too swift to act, of course.

But as the dust settled down, I noted that the decline has taken it to the lower of my tramlines

Those tramlines had been in effect since 2014 and thus represented very reliable lines of support/resistance. Any deviation out of the four-year-old trading channel was likely to be significant. So when the shares shot above the upper line, it was either the start of a new bull run or it would be a ‘buying climax’ provided the market quickly dropped back inside the channel, which it did with the Flash Crash.

That action confirmed the ‘overshoot’ was in fact a buying climax and when the shares tested the lower tramline, that was my signal to advise short sales at the $170 area. I noted that as the year progressed, MSM coverage was getting bleaker with claims the platform was ‘encouraging evil’ and a’ negative influence on the minds of the young’.

Of course, that accompanied the downturn as the increasing negative bearish sentiment was the mother of the downtrend. But note the position of my T3 tramline (equidistant from the other two). That line is usually an area of support and thus I was looking for a good reason to take profits on shorts and perhaps go long to reverse my position.

And in late December, I noted the gloom-and-doom MSM articles had plumbed new depths as the shares touched the $123 lows – and that was my signal to start looking for an escape from my winning short trades. So earlier this month, I advised covering shorts at $140 and going long to reverse position.

If you have ever reversed a position from short to long (or vice versa), you have probably considered yourself crazy at the time – and become very nervous. If I was wrong and the shares continued their decline, I would have lost on two counts – first, on a losing long trade and second, on a missed opportunity to make more profit on my original shorts. Ouch!! The stakes were high.

But when the trading gods smile on you, it can work beautifully, as it did here (the shares trade at $150 as I write).

As the Dow surged yesterday to new highs for the move, I am wondering if we will witness a similar ‘buying climax’ soon.

The Dow rally is nearing its end

This is what I mean – a buying climax would put the icing on the cake, as it did with Facebook.

I have a lovely wedge pattern for my wave c of 2 with a thrust up late in the week. And it is approaching the Fib 62% retrace of the entire move off the 3 October ATH on a strong momentum divergence. This is a textbook setup – provided we see a rapid move down back inside the wedge.

At the Fib 62% 24,900 zone, we have another moment of truth.

I feel next week should either confirm my forecast – or deny it.

Only read MSM financial journalism for fun (or disgust!)

There is no doubt that the standard of financial journalism has declined markedly over the past few years. I treat today’s efforts as a branch of the entertainment industry – in common with politics and sport (but that’s another story).

The Wall Street Journal was the paper of record when I started trading but now, it is a shadow of its former self. I spotted this howler last week in articles placed one above the other on its home page.

I think most of us can agree with the old advice: ‘Never believe everything you read in newspapers’. As you know, I enjoy MSM howlers, especially the finest examples – and I have one here for you from yesterday’s WSJ.

“Business leaders put climate worries at top of their list”

and directly underneath it

“Trade War tops list of worries for business leaders”

Huh? Maybe they talked to different business leaders, or maybe it was all made up anyway. Who can tell?

Another Brexit tit-bit from the Telegraph: “Brexit turmoil – investors gambling with the pound are just flipping a coin”. I guess this is simple confirmation bias for their readers who have no clue how markets really work and believe trading is akin to gambling and flipping coins. Yes, guessing heads or tails has a 50/50 outcome, but flip 1000 times and you will get close to 500 heads and 500 tails (unless the coin is ‘fixed’ of course).

Sterling had been in a bull run for some time (see last week’s post) and the ‘most important UK Commons vote in a hundred years’ produced a nice dip on Tuesday but did nothing to change the trend. In fact, it pushed up to a new 1.30 high on Thursday. That is an almost 6 cent rally off the January 2 Flash Crash! Nice short squeeze.

Of course, the MSM pundits try to explain market moves after they occur by invoking seemingly relevant events and data points. It makes a great story. But as I never tire of saying, these events and data points are the result of sentiment trends already in place. They put the cart before the horse – and end up in a right muddle.

Why are stocks rising from the Christmas Eve massacre? Because sentiment has improved from the uber-bearish state then. And the news is following this uptrend. China has just announced a gargantuan injection of liquidity on Thursday – after the Dow had recovered a Fibonacci 50% of the entire move down off the October 3 ATH.

Note they did not do that on Christmas Eve when sentiment was max bearish and stocks were on the floor. They waited until sentiment had improved. They followed the market up. As I showed before, central banks do not lead – they follow.

Gold is correcting

With shares in full flight, gold’s lustre dims. But it is important to examine the character of the correction. Is it collapsing with large down gaps or is it a relatively minor orderly decline? So far, it is the latter – and was one I forecast for VIP Traders Club members who are long. In fact, we started accumulating long positions near the summer lows

As the market climbed, I expected the Fibonacci 62% level to be hit and that was where taking profits would be a prudent move. As it happened, that was achieved as the Dow was making its early January lows. But note the very minor correction (to yesterday’s $1290 low). Compared with the Dow’s almost 62% upward correction, gold has hardly budged. That is a crucial observation.

And it implies when the Dow turns back down in earnest, gold will resume its upward march towards my next target around $1320 with higher potential to around $1350.

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