The bull trap is closing

Stocks surged last week – into Friday’s record high unemployment data showing a stunning 15% rate.  Who said second waves in bear markets are easy to trade?  It certainly wasn’t yours truly.  They often advance much further than logic suggests – and we have a great example working today.

And also a stark reminder that markets do not follow the news – they follow sentiment,  And bullish sentiment over the lifting of lockdowns is sky-high. And now the market expects imposition of negative US rates to ‘solve’ the burgeoning economic collapse.  Gold and silver surged on this rumour.

Yes, bullish sentiment is running at steam heat as happens in second waves. The venerable US Investors Intelligence survey of financial advisors is pushing the 60% mark – not far from historical extremes.  In addition, CBOE put/call ratios are declining to values near the extremes found at the February high.  More calls are being bought than puts as investors believe the rally can only continue.

These factors are entirely consistent with second waves that are about to top out.  Odds favour the third wave down will start soon – perhaps next week.

In fact, I anticipated yesterday’s surge as one of my two main short-term options. And the preferred one as it targeted a Fib 62% retrace of the previous wave – and the 62% level is my favourite correction.  In fact, by the close it slightly exceeded it.

Here is the more representative S&P

I see two main options: the first being a turn down in the next few hours Monday or Tuesday in wave 3 from a point under the blue trendline.  The second option is a further push up towards the Fib 76% retrace over the next few days.

With those differing  time-scales, we should know next week which option is favoured.  Watch this space.

Of course, the background elephant in the room is the ongoing pandemic.  All sorts of scenarios are being painted for how we will function after lockdown.  And all of them involve great restrictions of movement for a long time to come. So how can things get back to ‘normal’ given these impediments?  I fear the Sainsbury Shuffle is here to stay as the country’s top dance moves.

Already, the crippled budget airline industry will almost certainly not regain the glory days of cramming as many bodies into a plane as possible. We have reached peak cheap air travel. And as for UK trains, fares were already exorbitant. 

Commuter fares into London at £6,000 a year or more?  Many will realise that money could be better spent on the house or the children – or in the wine cellar.  A wake-up call for the train operators many of whom will not renew their licenses and the rail network will be re-nationalised (and lose money again!).

That makes HS2 the white elephant I have long described it as.

And today I read that it may be necessary to book a time slot to arrive at the station to avoid crowding! That’ll work a treat I am sure.

So with stocks surging as investors get excited over the future company earnings they see before them, I ask where is the demand? Yes, tech companies are well-placed for the new stay-at-home culture but most others are not.  The retail, travel and hospitality sectors are shot.

The public mood has now turned more fearful – and that is always a bearish influence. There is fear of catching the virus and also fear of not having a job to go back to. So I maintain my overall bearish outlook.

Many pundits are expressing disbelief in the great disconnect between the real economy and stocks. Here is  just one example. The Fed is pumping trillions into the economy (note it is not the banks this time around getting the bail-outs) and paying people not to work (as we are in the UK).  How sustainable is that? 

There is much conjecture that the Fed will do a Japan and start buying equity ETFs.  That may happen but I believe a huge wave 3 crash would be first needed for them to go nuclear.

So the wave 3 down is poised to kick  off in style.  And it will be longer and stronger than the February – March Corona Crash.  The bulls have just walked into the biggest trap of my career (and theirs!).  Thay are making the very same mistake they did earlier this year at the ATHs.

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Gold has gone nowhere for a month

Despite all the feverish speculation of the hugely bullish impending  negative US interest rates to come very soon, Gold has gone precisely nowhere for a month.

It is, in fact, forming a lovely wedge.  And as I see it, we have two main options (as stocks have – see above).  The more bullish option is for a thrust up out of the wedge to poke above the solid yellow trendline in the final wave 5 to form an overshoot.  It would then retreat sharply to kick off a major bear trend.

Or it would remain inside the wedge and then start the decline.  If that is the correct option, the decline would likely start next week.  A good break of the wave 4 low at $1660 would verify the new bear trend.

Why am I bearish when most expect gold to soar to $3,000 – and beyond?  Here is just one representative sample article.

But the major factor in my bearish call is the state of market sentiment.  The latest COT of futures positions shows that hedge funds (trend-followers) are an incredible long 304,000 contracts and short only a measly 28,000 for a better that 10/1 net long.  This is a huge accident waiting to happen.

While the market has been in this no-mans-land of indecision, we have avoided trading it for the VIP Traders Club. 

There is one aspect of trading that is rarely mentioned by the pundits.  And that is knowing when to trade and when to sit on your hands. 

In American poker terms, you gotta know when to hold ’em and when to fold ’em. It is vitally important to only trade when you have a low risk opportunity for good profits.  And that knowledge comes from using a reliable technical system, such as my Tramline method.  The Elliott Wave model is the best way I  know of visualising likely roadmaps ahead.

I have targets for the gold collapse – take a Free Trial to my VIP Traders Club to discover them.