The Fed can’t stop it

It appears nothing can stop the relentless rise of the major stock indexes – not even the Fed can in its determination to follow the market by raising interest rates.  One of the big mysteries of the markets is why do so many people slavishly hang on every syllable the Fed utters as if they believe they direct the markets with a magic wand.  They don’t and rarely have.  If you want to know where the Fed’s interest rate intentions are heading, simply look at the charts.  They are always late, anyway.

I focus  on the Dow for my stock market analysis because I have found it gives mostly excellent tramlines, Fibs and Elliott wave patterns, despite it containing only 30 issues. And what an incredible EW pattern it is tracing

The near-vertical rally off the Trump low on 8 November is in a clear EW pattern with my labels marked on this 2-hr chart.  The important point is that this rally does not appear complete in the near term. I expect one more push up into new highs before purple wave 5 of red wave 5 of red wave 3 terminates and the market is able to turn down in a red wave 4.

Of course, the round number 20,000 level is acting as a magnet and many pundits are expecting the market to hit it (it hit the 19,965 high last week – only 35 pips shy).  That consensus makes it problematical as an exact target in the near-term, at least.

But warning signs of an imminent turn are appearing. Below are three case studies that I believe give clues that a major turn is nearby.

Focus on Facebook

Facebook is one of the notorious FAANG gang that has reportedly held up the Nasdaq all by itself.  On 3 December I noted it had put in a Double Top at the $134 level and from that high in November, the share has traced out a lovely five down.  This is the chart I showed then:

Not only that, but wave 4 rallied to plant a solid kiss on my lower blue tramline.  On the date I took the chart (in real time), I noted the A wave and the market had dipped to make what I forecast to be the B wave.  That was the position on 3 December. The implication is that my Elliott wave forecast allowed me to project a rally in a C wave to around the wave 4 high at around $124.

Let’s see how this forecast is working out.  Here is the updated chart:

Right at the start, the market rallied in my C wave and has broken above the minor pink trendline.  Using that little piece of knowledge two weeks ago was all you needed to enter a long trade near the $115 level and the market is now on its way towards the $124 area target.

That’s what a little Elliott wave knowledge can do!  It can give you with confidence the correct direction and an excellent low-risk entry point where stop losses can be tight.  It can also give you likely targets (that can change according to market action subsequent to entry, of course).  The EW theory is the only method that can offer all these benefits, to my knowledge.

Is Old King Coal being usurped?

A while ago, I pointed to the remarkable rally in US coal company shares that were supposed to heading for the scrap heap.  Yes, the most hated and despised energy source on the planet was rising like Phoenix from the ashes (ouch!).

Coal prices had been clobbered to death – that is, until early this year when investors suddenly realised that China and India were still burning mountains of the stuff for energy production (thermal coal), and China was still making steel in volume (coking coal).  Stockpiles were perilously low.  And that’s when the rally got into gear.

Here is the updated chart I showed:

This is the chart of KOL, an index of coal shares. From a low at around 5 back in February to a recent high at 15 represents a very decent return of 200%.  And all totally against consensus which was that the coal companies were dead outfits walking.

But has the trend exhausted?  It certainly appears so having met the red line which is the  still-downsloping 50-week MA on a divergence in MACD.  Not only that, but the trading volume at the spike high was exceptionally large – and a sure sign of buying exhaustion which when it comes at the end of a strong trend, indicates trend termination. That is a classic blow-off.

Another recent example of a trend that ended at a volume spike was Deutsche Bank. In this case the trend was down and at the low, volume spiked in a similar blow-off:

And that little observation enabled me to advise VIP Traders Club members to buy DB with confidence around the 12 level.  It is now trading at 18.30.

So, if it appears the rally in coal stocks is running into a headwind, can the same be said for other industrial commodities following the superb rallies we have seen in recent months?

Has BHP Billiton topped?

This is one of the largest miners on the globe and has its multiple fingers in the earth’s crust on every continent. It is one of the bellwethers of the global mining economy. In August, it had the distinction of recording the largest loss in its history of $6 billion.  But what a time to buy!  Of course, by then the share had started its recovery off the February lows where I first became bullish on it.  I had a Chart of the Week (COTW) piece on 22 February right new the low!

With copper and most of the other base metals, coal and even crude oil substantially higher, could this be the time to take profits and even go short?

The shape of this year’s rally is an A-B-C, which is corrective to the main trend which is down.  The alternate interpretation is that wave a is 1, wave B is 2 and we are in a third wave up.  But the market has hit the Fib 38% resistance (yellow zone) and also T3, which is the equidistant and parallel tramline to the main tramline duo that enclosed the bear trend channel off the 2014 high.

This combination is powerful resistance and odds favour at least a decent pull-back.  There could be more.