The quiet before the storm
Stocks held up in the early part of the week but I suspected it was just a ‘dead cat bounce’ and wrote this in my Thursday Trade Alert to VIP Traders Club members: ” Another pretty quiet day in stock indexes – trading volumes on NYSE are very low – and so far the Fib 50% resistance in the Dow is holding. But is this the quiet before the storm? Many indexes appear to be starting major third waves down (with the Dow proviso below). The other indexes seem to be more poised than the Dow for third waves down (see below”).
And later that day, the indexes started major legs down. Here is the tech-heavy Nasdaq chart
It shows the last leg of the ten-year-old bull market. Let me go over how I constructed this chart with its clear forecasts.
First, I drew in the upper blue tramline since I had multiple touch points to work with – and crucially, a Prior Pivot Point (PPP). In my book Tramline Trading, I go over how important these are as they ‘anchor’ not only the upper tramline but the lower one as well.
And the bonus is that I have two PPPs to cement that upper tramline as a highly reliable line of resistance. So then I could go back to the start of the pattern at the red wave 4 low, trace up to the first rally high, then after the first decline off that high, use that low (purple wave 2) as my starting point for the lower tramline.
All I had to do then was to draw in the parallel line off it and extend it into the future – and know that that line would be significant support with high confidence. And that could occur months away!
And that is precisely what happened when the market declined on 13 May when the market met the line – and promptly staged a very hefty bounce. That was a highly satisfactory confirmation of my tramline – and of course, that little exercise was very useful and profitable information. I very much doubt if many traders had that line target as accurately as that.
Of course, that exercise highlights why I believe in my Tramline methods and why tramlines lie at the heart of everything I do in the markets.
Back in fundamental-land, the weakest tech sector has been semiconductors with shares of the leaders in virtual freefall. Here is the Market Vectors Semiconductor ETF (SMH)
From the 24 April high, it has been straight down as the US/China/Huawei affair rumbled on. The MSM has been full of ominous stories of how big the damage will be to both sides. That is entirely normal because it is the news that follows the market – not the reverse.
In fact, last month the US/China tariff spat was in full flow – yet Nasdaq and SMH were making new highs! There is often a lag between the market and reality, especially at major turning points. And this was a prime example.
But now the SMH has met the Fibonacci 50% support – which is also the area of the previous purple wave 4 low. These are usually turning points as they act as support. My view is that next week we will likely see a bounce develop in SMH and Nasdaq (and the other major indexes).
Whether that develops into a more substantial rally phase, we will have to see. The only thing that could amend my view is that on Tuesday we see a major gap down. That would really confirm my third down thesis.
VIP Traders Club members are short the Nasdaq from 7590 (latest 7300).
Has the dollar topped at my target?
I have had an upper target for the dollar for several weeks – and last week that target was hit. My ducks seem to be all lined up now for a dollar decline
In fact, since the February 2018 low and as the counter-trend rally got going, I set the Fibonacci 62% retrace at the 98 area as my long-range target. That target has been in place for about a year. Plenty of time to set limit sell orders there!
Not only that, but I already had a blue trendline working which capped all rallies with no exceptions. I was gaining a lot of confidence in that line – and when it was hit it again last week, I expected a sharp rebound off it.
And that is exactly what I got – the line, even after two years, acted as a very strong line of resistance.
One of he MSM journalists I avidly follow is AEP in the Telegraph. Last week he had a major piece on the dollar, the Fed and markets – The Fed has spooked markets with an ice-cold warning.
Basically, he is very bullish dollar as he claims the Fed has hinted last week that it would be forced to raise rates, not lower them as markets expect.
When I read that, I knew we were likely at or near a dollar high. Why? Because AEP has been acting as a wonderful contrary indicator over the months. When he issues a gloomy report, it usually coincides with an upturn in that market – and vice versa. His timing is usually immaculate.
You see, journalists issue firm opinions only when a trend has been in force for some time. They feel safe in their stance as they are not going against consensus. They dare not stick their heads above the parapet – it could be a career-losing move. And if they are wrong, they have the excuse that everyone else thought so – and ‘nobody could have predicted the actual outcome’ being the usual plaint.
And that matches the actions of most traders/investors, who likewise seek reassurance from others. Very few wish – or are even able – to go against the herd. We are social animals and the herd feels safe. Any person (or a springbok) straying outside it is likely to be picked off by the lions!
But that is precisely what must be done if you wish to be a profitable trader/investor. But you have to get your timing spot-on – and that is where having a reliable trading system such as mine is essential.
The Bitcoin ‘Flash Crashes’ are for buying!
We have been long Bitcoin since February and riding the wonderful resurgence from the dead last winter. Back then, most commentary was neutral to bearish, but I spotted a terrific contrarian buying opportunity as minor resistance zones were broken (take a Free Trial to my VIP TRADERS CLUB for the full history and analysis of our trades).
And today, with the price having more than doubled since our first trade, there is considerable commentary about its potential – with some wild forecasts for $50,000. Normally, this would be a yellow light flashing hard into my eyes – and so it is. But I believe there is plenty of upside remaining.
For one thing, MSM headlines pointing to the surging rally remain pretty thin on the ground. I will become really concerned if AEP issues a bullish piece! And for another, it appears the wave pattern has not completed its wave patterns.
There was a monster Flash Crash on the 17th – and who knows why. All kinds of conspiracy theories swirl when this happens. My advice is to read it for entertainment purposes only. You are not likely to gain any useful trading insights from it.
And since then there have been a few minor Flash Crashes – all of them dips to buy. My labels are my best guess forecast that we are starting a final wave 5 up that should reach above the $9k area. But after that, stay posted – we may be looking to take major profits.
Bank shares are terrible investments
That is a view I have held for a very long time. We are holding a long-term short in Barclays for PRO SHARES. Many investors hold UK banks as income producers (current yield 4.3%), but will that yield come under some pressure?
The global economy is slowing with the US/China spat/war a solid headwind. And the housing markets are drying up with mortgages getting harder to push, even with government interference, such as Help to Buy schemes.
UK unemployment rates have been hitting record lows – and this is the ideal classic scenario at market tops. Remember, markets top out when t hings appear rosy, not when they are on the skids. That is why I always look for short trades on rallies, not declines.
This weekly chart shows the huge wedge that has built up since the 2009 Credit Crunch low. Note that despite the millions of QE pounds pumped into the banks and the record low interest rates charged by the BoE, the shares have ranged from the 2009 low at 50p to a mighty high of 390 in 2010.
And since then, the waves have been getting progressively shorter and last week, they touched the lower wedge line at the 149 level. Remember, wedges act just as a coiled spring getting wound tighter and tighter. The move out of them is usually extremely rapid.
My next major target is the 2009 low at the 50p area. But before that occurs, the economic news will deteriorate with unemployment levels rising sharply.
VIP Pro Shares members are short from 208.
Sleepy corn is waking up
Corn is not a market that normally excites the blood of UK traders – but maybe it should now. We have been seeing record low prices of late with huge stocks overhang. But with the huge late rainfalls in some of the US growing regions delaying plantings considerably, the picture is suddenly appearing much less bearish. Here is the long term weekly
One notable feature is the wedge (cf Barclays above) in force since 2015. As with Barclays, a wedge/coiling spring usually resolves with a sharp break out of it.
So a tightening domestic position combines with a future US/China easing(?) could send all grains and especially soybeans rocketing. Hedge funds have been big shorts but last week were seen scrambling to cover positions and go long while the commercials have been selling into the rally as prices gained 20% last week.
This could be a very exciting market this year!