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I never fail to be impressed by how the market follows sentiment – and the Elliott waves. Of course, they are conjoined like Siamese twins, and a lot of my job is to monitor the ebb and flow of sentiment. When sentiment becomes extreme, that is usually a great time to pounce on the market.
Sadly, sentiment is a mood and is not amenable to exact measurement. All we can do is infer from various sources how bullish or bearish the majority of participants are. It is not an exact science.
And since global tensions have ratcheted up recently with events in Ukraine, Gaza, Syria and Iraq highlighted, the markets have been following not only the EWs, but the ups and downs of international tensions.
Last week, the Israeli bombardment of Gaza ceased when a truce was agreed that seems to be holding. This is the longest truce since hostilities began. Check lower tension and more positive sentiment.
Also, US air strikes in northern Iraq has allowed more people to escape from Mt Sinjar. Check more positive sentiment.
Until yesterday, the Ukraine situation has calmed down, Check more positive sentiment.
Is it a coincidence that this better sentiment last week accompanied big stock market rallies? I think not.
One of the most-watched public sentiment measures is the AAII survey of mom and pop US stock market investors (aaii.com). Last week (as of 13 August), bullish sentiment jumped a massive 9% to 40%, while bearish sentiment declined an even more impressive 11% to 27% (neutral reading was up 2% to 33%).
This was buy-the-dip mode on steroids!
But it matched the EWs (see my MoneyWeek Trader email of yesterday on the Dow). The dip to the 16,300 low last Friday was on a clear five motive wave pattern. What follows five motive waves? Yes – an A-B-C relief rally.
The Dow waves matched global events beautifully. The next big wave down in stocks will be matched by a corresponding flare up in tensions in one or more of the hotspots – or even come out of left field in a region that few are looking at.
Yesterday’s US Consumer Survey also showed a decline in this measure for July. This measure is going nowhere and topped in June. Does the US consumer know something stock investors don’t?
In terms of economic news, the eurozone continues in its death spiral with depression conditions spreading. Even mighty Germany is rapidly slowing (as I have long forecast).
But the ‘shock’ reports that Russian convoys were attacked late yesterday sent the markets in a spin. And it will be developments like this that will dominate the headlines.
I have covered the Dow in detail recently, and here is the DAX which I covered last week. European shares have been touted recently as great investments and naturally, Germany is near the top of the list. But the technical picture is weak. Here is the daily:
The market did bounce off the support, but there was little follow-through. I resisted the temptation to try a long trade. The week’s bounce was far smaller than in US shares – and that is a big negative for DAX.
If a decent rally does get under way, a kiss on the tramline is possible.
When support gives way, the 8,000 level looks probable. I shall be looking for a short trade very soon.
Japanese shares likewise have been heavily touted of late as investors believe the Abenomics will get Japan out of its persistent deflation mindset.
This is a terrific picture – for the bears! My superb tramlines have been broken with a five down. Last week, market rallied in a clear A-B-C with C wave terminating at the Fibonacci 62% level. Big momentum divergence on the way up, too. This is as close to textbook as you will ever see.
The plunge is wave 1 and last week’s rally is wave 2. If the market moves down from here as I expect, we will be in a third wave down – and fireworks will ensue.
I shall be looking for a short trade very soon.
Last week, I took major profits on shorts and went long. I am not expecting a major up move here – and this is why:
We are in a complex wave 4 up! These are tricky to get right and because I expect a new move down in wave 5, I shall not be over-staying my welcome here.
We are in a major third wave up in the US dollar – and it is always iffy trading against currency third waves. But I am pleased I did take profits on my shorts and will be looking to re-short again.
My best guess last week was for a continuation of the rally towards the $1340 level, Sadly, Mr Market had other ideas and yesterday, the market reversed down. I was half expecting that because COT was showing overloaded spec bulls. This is a formula for sharp declines:
The market moved down from my small wedge to the major uptrend line, where there was a bounce into the close.
I am not clear where the market is now heading. Clearly, the bullish case has been damaged, and it is an open question whether it can recover, even in the face of more unrest in Ukraine (and elsewhere). The big line in the sand is under my line.
But my long-range forecast remains intact: an eventual move below the $1180 lows towards $1000.
Have a great weekend!