The Age of Extremes

We live in an age of extremes. 

In the UK, we had the wettest winter for many years and at the opposite extreme, we now have the driest and sunniest Spring since records began.  With this weather, who needs foreign holidays?

And politics remains highly polarised with Mr Trump remaining as a lightning rod for extreme views.  Here in the UK, we rarely stray from the subservient, but I have noted a growing push-back against the lockdown arrangements with even a certain Mr Cummings is in hot water for testing his eyesight with a 60-mile drive to a beauty spot in glorious sunshine.  Hmm.

And over in the USA, race riots are emerging again – these erupt especially when economic conditions for Afro-Americans are poor.  There is little doubt that the pandemic is hitting low wage workers the hardest.  And the catalyst for these riots is once again savage mistreatment of a black man by the local police.  Shades of Rodney King in 1991 in Los Angeles, where I was living at the time.

I have often said that America is a land of extremes. If you want to see poverty, drive around the Appalacian Mountains along the back roads.  And if you want to see luxury, drive along Collins Avenue in Miami Beach (and admire the superb art deco houses).

And I have been commenting on the amazing extreme bullish sentiment now stalking the stock markets.  One more tell-tale sign was the news last week that private US punters were piling into the battered shares of the now bankrupt Hertz rental car giant. The shares have plunged from $20 in February to the current 50 cents – $1 range.  But last week, Hertz was the most traded share on popular US platforms!

Maybe they know something the bankers and accountants don’t – but I doubt it.  And this raises an interesting point about trading.  The above punters are clearly gamblers.  To my mind, gamblers will bet on almost anything such as who will score the first goal in a football match and at what time.

These ‘investors’ are taking a punt in the belief that such a long-established familiar name in US commerce cannot possibly go down the Swanee. But commercial history is littered with companies disappearing from the stock lists. The Dow Jones Industrials started life in 1896 and only one name remained intact until recently – General Electric – and that is now being removed.

No, this widespread punting on anything that moves by the reinforced army of sofa punters – reinforced as it is by the widespread furlough schemes – is a clear demonstration of the extreme bullish sentiment prevailing today.

When all those ex-workers have exhausted their appetite for Netflix bingeing, and with no sports to follow, the excitement of share trading is a natural magnet that is a very tempting diversion.  Particularly when they see markets are going up!

And one popular area for small guy speculation is in buying call options.  This activity is promoted as a ‘safer’ way to trade since your maximum loss is limited to the cost of the option (the premium).  And here is a chart showing how trade volumes in call options (expecting rising markets) is still exploding

chart courtesy www.elliottwave.com

Volumes started exploding this year and only paused during the Corona Crash. It reached a high at the February Dow ATH, but marvel at the surge as the Dow crashed and then rallied off the March 23 low.  While the Dow has only recovered 50% of the Corona Crash, call volumes are still zooming ever higher! 

The punters are falling over themselves in putting their money where their hope is as they look to the sunny uplands of the future without the pesky virus spoiling their activities. They are displaying an extreme case of ‘recency bias’ and ignoring the devastation that is lying around them.

That’s what I call a sentiment extreme – and a telling divergence.  And is one more clue that the rally end is nigh.  It is a fact that the small trader/investor fills his/her boots right when markets are poised for a decline.

Another clue is the rapid growth in new customers of the largest US online brokerage firms.  One very popular one – Robinhood – gained 400,000 new accounts in March alone, mostly young customers with little or no equity experience. What little ‘research’ they have done is very likely to include the mantra “Never Fight The Fed”.

And with the Fed pumping a potentially infinite supply of dollars into the system, Wall Street will end up with most of that with the result that shares will never go down again.  Of course, that argument ignores the rather large elephant (or is it a woolly mammoth?) in the room – the March Corona Crash which the Fed failed to backstop!

Yes, the public can always be relied on to latch on to one simple investing idea to create the herd and the bull run – and that idea is later proved to be false but only when markets fall.

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Did stock indexes top out last week?

I have been tracking the progress of the bear market rally wave patterns and on Thursday at 2:30 pm, the Dow made a high at 25,840.  That high completed five wave patterns at several degrees of scale – and is a possible final wave 2 top prior to a large wave 3 down.

Of course, there are no certainties in making forecasts, even when you have the Elliott Wave Theory at hand.  But if that was indeed the high, it would satisfy my prediction that a reversal would arrive when lockdown restrictions were eased and we could look forward to a lot more freedom of movement.

Holidays could be planned, shopping would resume – and family and friends could get together again, albeit in restricted form.  Hallelujah!

To show this, here is the FTSE showing the final wave off the 14 May low on the 1-hr

That wave is an A-B-C with the C wave sporting a five up – and right on the Fib 50% retrace of the entire Corona Crash. This level is always stiff resistance.  A sharp break of the two blue trendlines would be further proof the high is in at 6240 and a test of the B wave low at 5900 would be my next target.

And here is the big picture showing the clear wave pattern

The ATH was made two years ago and since then, we have had two 1-2 patterns which was finally resolved this year with the massive Corona Crash which was a clear wave 3 of 3 type.  The current relief rally is wave 4 of 3 and when it t ops, we shall be in a very strong wave 5 of 3 down to new lows.

Odds favour the wave 4 top here but if not, the next level for a likely turn is the Fib 62% around 6,500.  But I set that at lower odds.

The Dow has retraced a Fib 62% but the S&P has moved above its Fib 62% while the Nasdaq has retraced over 90% as the public has zeroed in on the large cap tech names.  Here is the 4-hr Nasdaq chart

showing the relief rally also in an A-B-C but this time, the C wave is an ‘ending diagonal’ which sometimes appears at the end of a long stretch, as it does here.  Only a sharp surge above the upper blue line and into new ATHs would cancel out this scenario.

So, it appears we do not need too much time to identify the start of the major waves lower.

A geometry lesson in a Wheat field

The Wheat futures market is one of the oldest and largest US ag markets, we are trading it in the VIP Traders Club – and the charts are displaying a remarkable set of relationships all based on simply drawing straight lines, which happen to be parallel.

With wheat crops in the UK and Europe currently suffering in the drought and heat, we have been long for some time and I wanted to show how markets often put in highs and lows right on extensions of trendlines/tramlines making forecasting price targets at the lines possible

Note the centre blue tramline which I put in first.  All of the lows after 23 March were set on the extension of that line, making the line a very reliable line of support.  The parallel line below it also sports accurate touch points and is a similar line of support. 

The line above it passes through the top highs and is a line of resistance.  The market currently is approaching that line and so a forecast can be made that when it hits it, further upward movement will be resisted.

If the buying force is strong enough, it will punch above it and the line will then become a line of support.  That is useful information since long trades made at or near that line, once it has punched through, are low risk.

And that is the very best kind of trade!