Weekly Wrap

ANNOUNCEMENT

My book Tramline Trading is edging ever closer to publication day (next month). It contains my very practical ideas, methods and many tips on trading.  It arrives in paper and ebook formats – and we are planning an additional exciting venture: an email alert service that highlights promising patterns in various markets.  More details as and when.

You can pre-order the book from Amazon now.  

Are we seeing the beginning of the collapse in asset prices  that I have long been waiting for?  In my Wednesday MW Trader email, I spelled out some of the reasons why a major top here would fit in perfectly with the extreme sentiment picture.  And there is one more factor that I believe will be dominant when the downdraft really gets going.

And that is the fact that the rally has been taking place on wafer-thin volumes, despite all the talk of HFT (high frequency trading), which surely must pump up volumes artificially as the computers switch in and out in less than the blink of the eye.

Now when volumes are thin in a rising market, that means short selling likewise is weak.  The bears are obviously still in hibernation, biding their time.  That means that market declines will not be met by masses of short covering.

Which means the market will be driven largely by long liquidation – the most powerful selling force in the market.  The leverage in the stock market is massive – and with a falling market, investors will be forced to sell holdings to cover their margin calls – and salvage what they can from their paper profits.

This is just one reason why I believe the collapse will be historic.  There will be few short covering on the way down simply because there are so few short sellers at the top (myself excluded – see later).  Of course, there will be many attracted to the short side as the market falls, but by then the market will be way lower than today and big counter-trend rallies will take out many of these johnny-come-latelies.

That is why I expect the first major leg down will be relatively one-way, as opposed to previous rallies off major tops where deep upward retracements were the norm.

What happened at the Dow top Monday?

And last week provided yet another example of how markets turn ‘unexpectedly’ with no shock from the areas that most observers are watching (for example, the economic numbers).  All of a sudden, the civil wars in Iraq and Syria has added a hefty supply-worry premium to crude oil.  WTI jumped to the $110 area – and didn’t we all think that fracking would drive energy in the US lower?  That wasn’t supposed to happen!

In another department – US politics – the shock win by the Tea Party Republican has set the cat among the pigeons.

Rather appropriately, his name is Dave Brat.  Is it brat by name and brat by nature?

Business as usual is no longer assured – and that could have a very large bearing on budget negotiations, and hence on the Treasury market (see later).  We shall see more shake-ups in politics as the bear market gets in its stride.

Here’s my prediction:  ‘Throw the bums out’ will be increasingly heard across the globe as we head into 2015.  We saw that here in the UK with UKIP winning the euro elections.

We are on the cusp of major changes in the global order.

DOW

At the 16970-ish high, the market completed several fifth wave tops to terminate the 2009 – 2014 rally, which I still maintain was a bear market rally.  Here is the hourly:

 I have news for that guy – the market will decide when to raise rates, not you.  Anyway, this political fluff was met by the credit markets not with a massive decline in bonds, but a rally!  You couldn’t make it up.

But cable did benefit – but that was on the cards before he spoke –Monday’s final thrust morphed into a classic “V” pattern.  This is a pattern I use for entering counter-trend trades and I explore how I do so in my book Tramline Trading. I am now short from the 16,900 level at the apex of the “V”.

Note the lovely neg mom div at the top – a vital clue that the top was nigh.

The rest of the week was spent declining to the Fibonacci 38% support level in a lovely five-wave pattern.  That should be wave 1 of a larger pattern that will morph into a wave 2 up and then a major leg down in wave 3.

As for wave 2 – I believe it should be a shallow retrace, but next week will give the game away.

I am positioning maximum short for a historic bear market.

GBP/USD

Hey – interest rates will be rising sooner rather than later – so said a BOE flunky yesterday.  as my chart shows:

From the May top at 1.70, the market has traced out a lovely A-B-C and within terrific tramlines.  That set the stage for the tramline break – and the rally stopped right at my third tramline – a major target.

Odds favour a double top here (US dollar index is in a third wave up) and I am now short.

T-BONDS

Despite all the negative press, Treasuries are refusing to lie down:

I have a superb tramline (green) and went long on the upside break (against sentiment).  The 50% Fibonacci is providing stiff resistance, but if it can push up through it, we are on the way to test the 138 high – and beyond.

A rush out of equities and into Treasury safety should do it.  I remain long.

GOLD

Another market that is moving against sentiment very nicely:

Bullish sentiment was in single digits at the lows, but as always, this is a great set-up for a contrarian trade.  Market is approaching upper tramline, and I expect stiff resistance from here.

I remain long but will be looking to add on a decent dip.

ROLLS ROYCE

Last time, I showed RR as a great trade set-up, and so it proved (as a short-term trade):

A long trade was indicated on the tramline break.  The rally to the Fibonacci 78% was on a large neg mom div – time to take profits!  This could be done either at the Fib level, or at the apex of the “V” (pink bar).  Either way, a very decent ten-day trade gave an excellent profit.

Now with the market having dipped on the cancelled order news, is it time to look at another long trade again?

FEDEX

Now I’m on a roll with off-beat markets, take a look at Fedex:

Fedex has been in a major bull market for years, so I am interested in finding its top and position early for the bear trend.  If 144 is the top, it occurred on the large neg mom div, which is a constant theme in my work, is it not?

I have lovely textbook tramlines on the hourly with the break last week.  Odds are high the top is in.

Enjoy your weekend!