Sometimes, it is the lower odds option that wins out in the markets. 100-1 long shots do win horse races. But as Damon Runyon put it: The race may not always be to the swift nor the victory to the strong, but that’s how you bet.
Since the summer when the Dow was trading under 26,000, I have had two main options for the roadmap ahead. The main one at the time was for a top and then a sharp wave lower to below the 21,500 area. The second was for a continued push up the the 28,000 region – a full 2,000 points above the summer market – and then a collapse.
And yesterday, that milestone was reached with the Dow pushing up a high at 28,020. DOUBLE BINGO!
This, despite weakening internals on the way up – including the near record put/call ratios, the new high/new low ratios and the usual momentum oscillator, it has been the second lower-odds option that has won out.
As a vivid demonstration that the usual signs of a nearby top are there for all to see, here is a chart of the Dow set against both the VIX and the Put/Call ratio (inverted)
chart courtesy www.elliottwave.com
Note the positions of the vertical dotted lines. They correspond to Dow highs and the VIX and Put/Call ratio lows. And today, we have a low in the VIX and the Put/Call ratio where previous Dow highs were made.
With low Put/Call ratios prevailing, investors are buying many more calls than puts and this shows they are on balance looking for further stock gains. And the main reason is that they are seeing the Fed suddenly and semi-furtively engaging in more QE – this time by buying short dated Treasuries, not the usual 10-yr and 30-yrs as before . Many are calling this Not QE.
Of course, this is QE4 by the back door – and as night follows day, investors are connecting the dots and assume the Fed is propping up asset prices again. Do they know something we don’t? Except that this time, the 30-yr T-Bonds are being left on the shelf – and are in a strong decline with the Number One buyer absent. The Bond Bubble has well and truly burst. Stocks are next.
But anyone trading the Dow against me last summer would now be making out like a bandit. However, I would say that this is the only market where I have been a contrary indicant this year.
Yes, VIP Traders Club members have taken sometime huge profits in currencies, metals, T-Bonds, and others this year. In most cases, I have nailed precise low risk entries where the risk to stops is low. That is the key to successful swing trading.
The other key is to ride the swing as far as possible – and that I have been able to do as we take some profits along the way at key levels.
But now with the Dow at my target zone, where do we stand?
This is the updated chart I have posted before showing my trendlines and tramlines in the classic a-b-c pattern in wave D.
The question is; When is the turn coming – is it very soon? I’m sure you are asking the very same question! Given the precarious state of the VIX complacency and the record low Put/Call ratios and the ongoing QE as well as my 28,000 target being achieved, my best guess is that it will appear before Christmas time.
Why? The Fed has pledged to cease buying T-Bills in January and if so, the short term yield will explode with the main buyer retired. And any surge in short rates will hit stocks very hard. But for now, the sudden Fed move is keeping stocks levitated.
Money managers may be herding beasts, but some are not stupid. These will preempt the above events and start taking profits before January – probably in December. And if short market rates start to advance (they are at 1.6% currently) soon, stocks will surely take note.
That sets my best guess for a Dow top sometime before Christmas – exactly matching the major C wave low last year that occurred right inside the Christmas holidays!
Watch this space – and if you wish to follow the market into the approaching major high, take a Free Trial to my VIP TRADERS CLUB here.
Are consumers running out of steam?
Have we reached Peak Stuff? Seems there is a growing trend to buy less stuff and have more ‘experiences’ instead. This is resulting in weaker retail sales from China to the USA to the UK (Germans have always been leaders here). At the same time, credit card balances are still growing at a greater pace than wages/salaries.
So, something has to give, right? And since Western nations’ GDP is made up 70% or so of consumer spending, have we reached peak GDP growth?
I see there are signs the super-charged China GDP forecasts are coming in at a paltry sub-6% range. So has the building boom reached peak madness? The Chinese see housing as a financial asset, much more than we do. Prices of their second, third and more homes must keep going up to keep them happy. But there are signs prices are falling in some cities – and the natives are getting restless. That should spread.
And Friday’s data on US import/export prices are still on the strongly deflationary side with price declines larger than expected. That, in spite of the Tariff War!
The game that Trump and the Chinese are playing with their market-moving Tweets – is it on or is it off? – is designed to keep stocks aloft. If I were a conspiracy theorist I would say they are in complete collusion on this to allow stock bulls to Buy the Dips!
Of course, the vital Christmas consumer spending season approaches and it could be a game-changer – and that is another reason for suspecting a major top around then.
It’s not just consumers that are maxed out. Yesterday, it was disclosed US Industrial Production in October had contracted by a huge 0.8% – a drop not seen since 2009 at the height of the Credit Crunch.
So how did the Dow Jones Industrials respond to that dramatic and crucial data point? It resumed its upward thrust to my target of course! Seems the Fed’s ‘Not QE’ trumps everything, even savage economic contraction!
But of course ‘Bad News is Good’ still reigns supreme. However, as can be seen from this 17 year chart, the two traces have been remarkably in synch over the years, but not now. Hmm.
Adding to the gloomy picture, US freight shipments continue to decline. This is a leading indicator and suggests US GDP growth could turn negative in a few weeks. Double Hmm.
A Vegan Sausage Roll, anyone?
Greggs is a mighty presence on the UK High Street – and one of the few national chains there that is flourishing. And one of its success stories is the fabled Vegan Sausage Roll that was rolled out (apologies for the pun) earlier this year to widespread curiosity.
Strictly in the interests of scientific research, I have sampled one and I confess it wasn’t unlike a ‘real’ one. And with the fad towards eating less meat, it fits in very well with this zeitgeist.
But what interested me was the chart patterns. Trading results were due out on Monday last and on the previous Friday, I noted the classic reversal setup
Investors have loved this share for months so much that a strong bull trend was established rising to the July £25 high and from that rather over-stretched area, the market descended in a clear three to the classic Fibonacci 50% retrace of the previous wave and on a very strong momentum divergence.
That is the perfect setup for a low risk/high prob trade that we all know and love. It was time to pounce at £17 and I advised PRO SHARES members to buy. Of course, I knew the results were due out on the next trading day, but I was confident any near-term dip would likely be contained. Many traders/investors would not have placed such a ‘high risk’ trade just before important results.
As I have shown over and over, it is often the seemingly ‘high risk’ set-ups that are really low risk – provided you have read the charts correctly and have a sensible stop loss in place.
And the results proved that the revolutionary Vegan Sausage Rolls were hugely popular – as were the shares, which zoomed up on Monday to my first stated target at the ‘b’ wave high at £21 on the day for an instant gain of 23%. Nice.
So I am wondering what other any new vegan products are in the pipeline. Will it be a Vegan Pork Pie? Or perhaps a Vegan Beef Slice? The mind boggles.
Bitcoin is out of favour – what now?
I love situations such as this. Bitcoin has gone nowhere for months. It is largely off the MSM’s radar except for a few rather bearish articles I have spotted recently. The argument goes like this: Who needs cryptos when stocks are making new highs? That sets it up for a renewal of the bull trend.
But that observation is not sufficient for me to get excited about pinpointing a contrarian trade. As ever, it is the charts that help me point the way – and here it is
There are several important features here. First, I have a lovely down-sloping wedge that usually resolves in an upward thrust. Then, the move off the June $13,800 high appears corrective with highly overlapping waves. That implies when the correction is over, the uptrend will resume with force.
And there is the lovely momentum divergence at the fifth wave low – and that also implies a strong reversal.
And we have seen the first episode of that reversal with the 26 October gap. This month, the decline has just filled that gap and is poised for a renewed upthrust after doing so. A clear break of the upper wedge line appears on the cards.
We are trading Bitcoin for VIP TRADERS CLUB and also ETHEREUM which shows broadly similar chart patterns.
Odds are high that when stocks start their huge E wave lower, the cryptos will surge. These markets will hit the MSM headlines again – but only when trading much higher.