The view from the peak
I will be away next week and so this will be a brief post during this ‘quiet’ Thanksgiving week. I expect much more life next week.
The grind higher in shares has been wearying, has it not? This year, I have been able to catch many of the minor tops in the Dow (and other indexes) in the rally, but they have proved temporary. The key take-away is that we have lost little trading capital in the process as we have a unique risk management plan in place.
This reminds me of a successful trader I once knew. He was amazing because his favourite strategy was to locate a strong bull market and when he judged (by instinct) when a pull-back was due, he would short. Then, when it had dropped and he sensed the turn-up was due, he would cover his short for a profit.
He was such an extreme contrarian that trading with the main trend never entered his head! He would have hated it.
He totally relied on ‘gut feel’ and was the only trader I know who made profits by consistently shorting a bull market. But it is not a system I recommend to most.
Yes, we have had a roaring bull market this year. The Dow is up 5,700 pts (31%). The long-term average gain is around 4%. Don’t you find this year’s performance is slightly out of the usual and into the Twilight Zone? It is in fact about eight times greater that normal!
But we have lost very little capital (and actually made some profits) in our shorting campaign this year! That is because we have that unique risk management tool in our bag of tricks. It’s a life-saver.
Here is our latest foray into trying to get the top nailed:
Last Tuesday, I advised short sales at 28,010 and was gratified to see the market rapidly descend to the lower pink trendline around 27,700 – a dip of around 300 pips. So far, so good.
Because VIP Traders Club members have access to my money management rules, they were enabled to use my Break Even Rule, and no matter what happened after entering the trade, no loss would accrue on that trade.
As it happened, the market did manage a rally off the pink trendline to Wednesday’s ATH at 28,190 in what some are calling the China Trade Talks market. When Mr Trump and /or the Chinese utter an encouraging/discouraging tweet over trade deal prospects, the algos roar into life and send markets higher/lower. At least, that is the picture painted by some. And it may be true!
But as the market moves ever higher, divergences are getting mightily stretched. Two weeks ago, I opined that the major top will arrive on or before Christmas. Because the last major low occurred during the Christmas holiday period, wouldn’t it be poetic if the upcoming major high could occur during the current Thanksgiving holiday?
At the same time as I study the movements in US, UK, EU indexes, I watch very closely the China stock markets. And these have been powering higher, despite the rapidly slowing economy in yet another demonstration that hope for more ‘stimulus’ from the central bank trumps economic reality.
Here is the weekly chart going back to 2014 and the Double Top pattern really stands out – provided the market does not push above the lovely round-number 15,000 level where the two tops were made. And what a beautiful demonstration of the often-observed fact that markets frequently meet major support/resistance levels at big round numbers. And you cannot get a bigger round number than at a thousand mark (unless it is at the ten-thousand mark)!
And off the second high the first move lower is a five (new trend down) with the wave 2 recovery back to the early November high at 14,400. That recovery is a three and with the strong momentum divergence, odds are high the wave 3 down has started.
Bitcoin and Ether roar back to life
Last week, I wrote that Bitcoin and other cryptos were in their Last Chance Saloons for a big rally to start. And last week, the Last Chance Saloon was the shot in the arm they needed and this was the chat I showed last time
The market was heading lower towards my lower blue wedge line and this is the current picture
One reason I expected a sharp bounce off the lower wedge line is the nature of the decline off the June 13,800 high – it has been a series of highly overlapping waves. That is a textbook sign of corrective action. Once the correction is over, the uptrend can resume.
We managed to get back on board at the low last week in Bitcoin and Ether.
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