The New Year Effect – are major trends changing?
Wishing you a Great and Prosperous 2022!
At this time of the year it is customary to have a New Year’s Resolution. So for what it is worth here is mine.
I vow to ignore the name on each chart and trade it strictly with my Tramline methods.
Because I was side-tracked by ideology (a really bad habit), I missed a few fabulous trades last year including the incredible stock index markets along with surging Tesla (and Bitcoin). On the plus side, I nailed the huge rallies in many commodities including Crude Oil, NatGas, Coffee, Soybeans, Corn, Wheat, Cotton and a few others. The gains there have been massive and helps ease the pain of my misses.
Those major misses was a result of my failure to recognise the extreme degree of manic speculation in the post-Covid Crash period where the S&P has rallied a stunning 120% thanks to the Fed spraying funds into all corners of the markets at near zero interest rates. I failed to remember the adage – Don’t fight the Fed (but that admonition will be turned on its head this year).
The only excuse I can offer is this – I am only human.
My failure in the Dow (and other indexes) is particularly egregious. One other lesson I must re-learn is to trade with the main trend. Of course, it is not too difficult to say what the trend is (if any) in the context of the time frame chosen. But a market can be both in a major downtrend in one time frame and up in a shorter frame. Here is a current example in the euro
It does matter which time frame you are using. Of course, I like to trade as near as possible to a trend change for the simple reason that if I get it right, I can make a lot more profit than I would if I waited for more confirmation of the trend change. Joining a trend half way or more along it exposes you to a lot more risk of loss m- and you stand to make less profit. I hate that.
Contrarily, picking tops and bottoms is actually a less risky tactic for the simple reason that if you get it right, you need only to use a tight stop and can ride the trend for large gains. I hate taking risk – especially if it is large! If I can plan a lower risk trade with a sensible trading strategy, I will. Seeing red on my equity runs gives me the shivers. I advise you to avoid this nasty experience.
Of course, picking tops and bottoms is pure anathema to conventional pundits, esp those in the MSM (who only get on board a trend when it is a very long way along it). But these MSM pundits are very useful – for being splendid contrary indicators!
For instance, today I saw an article headed “After 20 years the euro is entering its most perilous decade” and argues that soaring EZ inflation will trash it. Now if that is not an invitation to back up the truck I do not know what is.
And what a perfect illustration of the general rule that when you see a strong opinion in the MSM, the trend is about over and it is usually best to take the other side.
In fact coming right at year end, if my observation that currencies often reverse a major trend at this time will be correct, odds are growing that the euro will stage a magnificent bull rally well into the year (see below).
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Right on cue, the dollar is slowly turning
The end of any year is a significant milestone for most of us. We are minded to review our performance last year and to plan for the next. For most of us, this is the only time of the year we do this. Maybe it’s the feeling of being in a Twilight Zone in the week between the two major holidays. Maybe it’s the realisation we are a year older and the clock is ticking. Hadn’t we better get our skates on and make some changes for the better? Are we any closer to our goals? And that feeling is why we have New Year’s Resolutions (see above). And is why gym memberships spike up in January!
And these feelings sweep over currency traders as well – who assess their stance in the markets and question whether the bull run in the dollar last year will persist into this. And lo and behold, this is the time when major re-assessments are made and trends are often changed in the little-observed New Year Effect.
For example in 2018, the trend started turning down in January off a major high and in 2017 the bull run turned down as it did in 2016. Recently, the dollar topped in December and last year, it made a major low in the last week of December. That is quite a consistent record.
So will it do so again this time around?
The bull run started on January 4 last year and made highs in December. Note the lovely rising wedge and the clear upward break above the upper wedge line in December. I tracked this month-long period and set a target for confirmation of a trend change when/if the market closed below that support line. And that move back under the upper wedge line occurred yesterday Friday 31 December. That confirmed the December trading as an overshoot, or Buying Climax.
It appears the New Year Effect is working this time after all! The dollar is on its way down. And only a move to new highs would cancel out this forecast.
I have started VIP Traders Club members on this path who are positioned to ride this trend. Because the trend is very early in development, I will be advising new members when and where to join it. I believe this is a massive opportunity to reap huge rewards in 2022 in the currencies.
It has been All The Same Market in 2021, will it remain so in 2022?
L:ast week I made a case that most markets have been in uptrends last year and just buying the index was all you needed to do. Many pundits have made it sound so easy that making money was simply a case of buying anything that moved. Of course, we know that is nonsense. The share indexes have been sailing northwards but there are many individual issues that are in severe bear markets. It is mainly the big name tech shares that have lead the indexes higher, particularly the Nasdaq.
But with the dollar on the turn, how will this affect share investors/traders? Normally, a weaker dollar encourages overseas investors to buy US shares. But with the S&P up 120% or so in less than two years and momentum flagging, will this buying be enough to force the index higher?
After all, we seem to be facing a more hawkish Fed as they will begin to taper their QE money printing and to raise rates three times this year (or so they say). Of course, the markets will dictate whether they carry out this pledge. But on the face of it, the bulls will be fighting the Fed if they maintain their bullish stance into 2022.
And last week, I detected at least the start of a pause – here is the Dow daily
I have been forecasting a new Dow ATH for a while and that was achieved last week at the 36,685 mark on Thursday.
And on that date, it spiked up/down and that could be a subtle signal of a Buying Climax. Since then, it has turned lower off the strong mom div and I am looking at a certain level where breaking it would confirm the start of at least a decent correction.
If stocks are turning down now on cue at year end, the decline should be rapid this month. Investors have been piling into shares with great leverage all year and a decline now would set off a chain reaction as margin calls explode in forced selling.
One straw in the wind is the performance of the major US company leading the EV Revolution – Chargepoint Holdings. This infrastructure company is planning to build many thousands of EV charging points in anticipation of the switch to EVs. But the shares are languishing back to where they started
Hmm. This is not sending a green signal for investors to press ahead with the transition from fossil to electrons.
With the world EV leader Tesla at 20% under its ATH, can this signal the end of the line for the Net Zero fantasy? It seems that if reality is suddenly dawning of the sheer impossibility of replacing fossil and nuclear with ‘renewables’, and the immense cost of upgrading electricity grids, this year will be the defining period. And immense profit will be available to those who are positioned correctly.
So, if not a member of my VIP Traders Club, study next week’s Trade Alerts and then sign up for the extended Free Trial for another two weeks on a special email I will be sending you. Happy New Year!