It is always extremely hazardous forecasting when a manic bull trend is turning, especially in real time! As the famous philosopher and baseball legend Yogi Berra said “ It ain’t over till it’s over“.
And the famous atomic physicist Neils Bohr said: “Prediction is very difficult, especially if it’s about the future”.
Many analysts have been shorting the indexes on the way up for many months – and getting their heads handed to them. Their big mistake has been using the fundamental data which on the surface has appeared bearish (weak US growth after 2009, ballooning public and private debt, weak retail sales, high valuations, etc).
As my readers know, it is not the news and fundamentals that drive markets, but sentiment (or social mood) – and as the data on positive sentiment has shown, this has been riding high for a very long time. When social mood is positive, stocks are sought and bought. When it is negative, stocks are shunned and sold. It’s really that simple.
The evidence for positive mood is all around us from the pervasive over-the-top manic futuristic forecasts for the electric vehicle revolution – and tech in general – to continued bullish investment advice in the MSM and even to the record low VIX Fear Index.
Bull markets only turn when sentiment turns, although there is often a time lag where the markets continue rising as mood sours. But the key driver are the Elliott waves – only when a pattern is complete will the market turn. That is the key input in my analysi – and that is telling me we are very close.
So with humility in the foreground, here I go with my case that odds are now swinging towards a major turn down ahead. Of course, if I can pinpoint a major turn early in its development, I can exit long positions for large profits and then accumulate more profits on the downside. And which trader would not like to achieve this nirvana?
I follow several global stock indexes and many have achieved major resistance targets at the same time. This is not a coincidence.
Here is the Japan Nikkei 225
The whole rally of 2017 has the clear appearance of an ending diagonal/wedge with the correct five waves and with wave 5 sporting its own five up – and on a huge momentum divergence. Last week the market tested the upper line of resistance. This is about as textbook as you will ever find that signals an imminent reversal – provided the market starts to trace out a small scale five down very soon. Of course, a sharp thrust up next week would delay the turn – and set up a possible overshoot.
But with other major indexes at very similar points of heavy resistance, The odds favour a turn down very soon. Note the different wave patterns in these indexes, but all arriving at the same point.
And here is the German DAX
No ending diagonal here, just a straightforward textbook five up along very accurate tramlines. And last week, the market pushed up into a new high on a strong momentum divergence. Remember, waning momentum means the trend is getting tired and to prepare for a turn down.
With last week’s new high, I can start to look for a possible top – and here is the 4-hr showing wave 5 in close-up:
And again, I have a clear five impulsive waves with long and strong wave 3 and an almost complete purple wave 5 (probably needs one more down/up, but not certain). And we have a large momentum divergence to go along with the above charts.
The key level for the bullish case is the 12900 area and breaking below that would set up a more extended turn down.
Here is the S&P chart updated from last week
Bingo! Last week’s surge took it to precisely my upper pink tramline! So will the S&P turn down here? Here is the 4-hr close-up
By my count, we have reached the wave 3 high and the next move will be a sharp wave 4 down – which would be verified by a move below the upper blue tramline in the 2540 area.
Finally, here is the Dow
Note the wave patterns are not identical to that of the S&P, but here I have a superb wave count and very accurate tramlines. And the market hit its upper tramline last week to match all of the previous charts! Is this a coincidence? Also, I have another large momentum divergence into the high. So according to this count, we have wave 3 of 5 in place and wave 4 down should start next week.
This conclusion is totally in line with the other charts I have shown.
Last week I showed the small cap Russell 2000 and with last week’s surge, I now have a five up that should be complete.
So what other market can provide further clues that a major stock market turn is at hand?
Gold hits my main target at $1260
Gold has been in decline from the $1357 high where hedge funds were at a record long position and where VIP Traders Club members took major profits on longs. I prepared them for the decline and set the $1260 area as my preferred target. This was the chart I showed last week
I was looking for one more dip to complete a major down leg before a decent rally could be staged. This is the chart updated:
And yesterday, gold hit my target zone on the button and quickly reversed to close on a daily key reversal. Note the large momentum divergence that suggests the bounce should be pretty good – and my first target is the $1300 area.
If this pans out, it will indicate a risk-off sentiment that goes along with a declining stock market. Many say gold is a flight-to-safety market. Actually, it is real money (not the fiat stuff we have in our pockets and bank accounts). I call it a flight to reality.
Another indicator I watch is the US dollar, which has been moving up of late. But has it started to turn down again?
The Dollar gains as forecast but a dip approaches
While hedge funds were at record high euro bullishness last month, the dollar staged a ‘surprise’ rally – at least it was a surprise to them, but not us
The rally is a clear five up and has hit my 94 target (which I gave to VIP Traders Club members previously). Note the strong resistance at 94 as it is the Fibonacci 23% retrace. After a five up comes – yes, a three down (euro up, of course).
So with a weakening dollar, that also will put downward pressure of US stocks.
So, putting all of this together, I now have a strong case that stock indexes will turn lower in tandem very soon. And this will set us up for my Trade of the Century.
If you wish to follow the twists and turns in real time, why not join us and take a two-week Free Trial to my VIP Traders Club. Details here. This is a terrific time to trade because major trend changes are afoot!