Two lessons in chart reading…

dAs you know, my view is that 99.999% of traders/gurus/pundits have the cart before the horse in how they believe the financial markets function. They believe that when a bullish or bearish piece of news hits the markets, they must react accordingly. But as we know from experience, they often act in a perverse way.  Amazingly, despite this, they still cling to their erroneous world-view.

Last week we had two great examples of this in action in the crude oil and cable market.

So today, I offer my reasons why making money in the markets involves reading the charts rather than the news.  Acting on the news most often gets you into trades at just the wrong time as they go the other way.

As OPEC and other oil producers were meeting to thrash out a production cut agreement so as to buoy prices in the face  of expanding US shale production, the market was in a general rally phase.  In early May, the market was plunging but after making a spike low on 4 May at $44, a huge rally phase was born and by last Wednesday, the market had rocketed to the $52 level – a very rapid gain of $8 (18%).

And the MSM were not shy about ascribing this ‘surprise’ rally to the prospect of production cuts by OPEC and other producers at their forthcoming meeting.  But if history is anything to go by, OPEC members are notorious for breaking official agreements in the course of time, so the bears would be excused for casting a skeptical eye on it.

It was virtually straight up off the 4 May low.

But when they actually agreed to the cuts on Thursday, what did the market do?  This clearly bullish news must have gladdened the hearts of the bulls who were riding the rally and were being rewarded by guessing the outcome correctly.

But of course, the market fell heavily after the announcement in a classic ‘buy the rumour, sell the news’ event!  In hours on Thursday, the market had given up almost half of the gains:

And that gave me an opportunity to advise VIP Traders Club members to take this sharp dip to buy.  This was my advice in Friday morning’s Trade Alert: “Any dip today below the 48.80 area could be bought.”

And a little later in the day, the market duly obliged by trading down to just under my carefully chosen $48.80 target and then started a recovery to close the week at the $50 level.

So what was the MSM’s excuse for the swoon on Thursday?  It was pretty obvious they couldn’t use their previous ‘analysis’ of the prospects for a production cut that ‘explained’ the rally, as that would be madness (the cuts were announced) and be totally contrary to their ‘news makes the markets’ theory.  The only thing they could offer was the cuts were less than traders had expected!  What a cop-out!

This is also pure nonsense – did they know before Thursday what traders’ expectations actually were?  Of course, not.  They were, as always, fumbling in the dark in a desperate attempt to offer a ‘rational’ explanation for a market move that had already happened and for which they had no logical explanation.

No, the real explanation for the swoon was that many traders took the opportunity to book profits and with support levels breached (see pink bar on above chart), stops were hit and prices plunged.  To make money, you do not need to read the stories behind the MSM accounts – in fact, it is best of you avoid them entirely.  That way, you can keep a clear head and trade off the charts – a much more profitable activity!

Cable dips on cue

And another terrific example of how to profitably read charts was provided by GBP/USD last week.  VIP Traders Club members had been long from around the 1.25 area back in April and had taken profits at the 1.30 level a few days ago for a tidy profit of five cents.

I had set the target at 1.30 weeks ago as I was using this chart as my roadmap

I have clear Elliott waves and decent tramlines.  Back in April just after the b wave low, I judged we were in a typical a-b-c wave 4 correction and that wave 4 would likely turn at the meeting of the Fibonacci 23% level and the upper blue tramline.  This was an area of formidable resistance.  If correct, the market would then start a wave 5 down taking it below the wave 3 Flash Crash low at 1.18.

Here is a close up of recent action:

After several attempts to push above the blue tramline at 1.30, the market finally succumbed to the strong resistance and on Thursday, broke hard below the yellow support line (has a reassuring four touch points as marked with arrows), which was a clear sell signal.

That was when I advised VIP Traders Club members to short cable in yesterday’s Trade Alert.  By the close, it had fallen by 1.5 cents to rest on my lower pink tramline in a clear small scale third wave down.

But it was the antics of the MSM that tied itself up in  knots trying to ‘explain’ the decline.  As the pound was in rally mode, they ascribed it to the positive UK GDP data and the prospects for a Tory landslide next month. But with the pound in free-fall yesterday, the offending poll results emerged that put the Tory lead narrowing.

But the market was already heading south by then!

With the market turning down in wave 5, I would like to see a bounce in wave 4 and then a new low in wave 5, which would be the first five down to confirm the resumption of the bear trend established in July 2014.  Currencies tend to have long trends over several years and this one is fitting the bill.

Also, they often have extended fifth waves that have a close relationship to the first waves. Wave 1 on the top chart lasted about nine months.  Will my wave 5 just starting last about as long?  And how low will it reach?

My guess is that if we see wave 5 pick up speed down, then that would mean the Brexit talks with the EU will be highly acrimonious with either side going so far as to walk out (at least once) perhaps over the UK ‘divorce’ payment demanded.  If that occurs, the market will take that very badly and we will see daily moves of several cents.

I shall be keeping VIP Traders Club members totally in the picture as this develops.

If you are not a member of my VIP TRADERS CLUB, you may have missed these fabulous moves.  But my members didn’t.  I gave them clear instructions when I sent out my Trade Alerts. But there is plenty more to come, and so I invite you to join us for some very exciting rides this summer.  Details how to join here.