Weekly Wrap

ANNOUNCEMENT

In conjunction with my book publishers, we have this week launched my Tramline Trading Alert service.  This service will highlight promising trade setups such as those I have featured in my Weekly Wraps – but before they happen.  The Alerts will not give specific trade orders, but will focus on the setups that may develop into great trades.

I will send the Alerts as and when I see a good setup forming and I expect to send on average about 6 – 10 per month.

The Alerts will contain references to the relevant chart setups in my book Tramline Trading and will be invaluable if you wish to delve more deeply into my trading methodology.  Most will reference my five top chart patterns that I outline in my book.

You can get full details here.

This means that the format of my Weekly Wraps will change.  I will keep focused on market commentary, but will have few trade setups – those will be reserved for the Alert service, which will become much more valuable since they will highlight potential great trades before they happen, not after.

Market Commentary

This week, US retail stock investors decided to pile into shares, finally judging it safe to do so after four years of watching from the sidelines as it scaled the heights to Dow 17,700 .  Last week’s AAII data shows the bullish camp zoomed up to a near-record 58%. The last time it was this high was in early 2011, just prior to the biggest decline since 2008 (the B wave of my A-B-C).

The bulls are almost 20 points above the long-term average, while the bears are 11 points below its long term average, despite rising last week.

If history is any guide – and it usually is – the top is very close.  It is true that the public always fill their boots at major tops.  All along, they have been reticent about joining the party thrown by the Fed, but now the coast is clear as they see the Dow soaring into the exosphere (it has already reached the stratosphere).  What a perfect time for a top!  The oxygen is very thin at these heights.

Of course, the pros have been manically bullish for some time as they have had access – unlike the retail trader – to free money courtesy of the Fed along with their pledge to keep stocks rising.  My question is this: with both the pros and the public all in, who is left to push the market higher?  Maybe Rosetta will bring back some wealthy aliens from the comet and open investment accounts down here.

Euro set to stage big rally

Latest data from the eurozone continued the dire theme.  Virtually no-one has a kind word to say of the euro with the cracks in the EZ ever widening.  Italy is a basket case as it struggles with a vastly over-valued euro for its health.  AEP has a good summary in today’s Telegraph.

So with sentiment towards the euro at an extremely bearish level, what is the next most likely move for it?  Why, up of course!  And the market duly obliged yesterday with a late rally.  There will be more to come.

We all know the obvious reasons why the euro must fall:  weak EZ economies, imminent break-up, strong US, for sure QE start by ECB soon. and so on.  But these are ideal conditions for a major rally to squeeze out the army of bears. As Joe Granville stated: “When it appears obvious to Joe Public, it is obviously wrong”.

Trading is a very zen activity.

Precious metals

As with the euro, bullish sentiment has been in the basement, and the markets are therefore ideally primed for big counter-trend rallies.  Yesterday’s late action confirmed this forecast with a rally of almost $50 off the day’s low.  The daily chart now looks very interesting.

My forecast is this: as prices rise, the gold bugs will start to emerge from their burrows and proclaim how clever they were to ‘predict’ the rising gold price and to buy, buy, buy.  And when that chorus gets loud enough, and the most reluctant investor finally decides that gold is after all a great investment, the trend will turn back down.  It will be the reverse of the Dow story.

It’s the same dynamic, time after time.  Markets will change, but human nature won’t.  And we should be eternally thankful that it doesn’t because that gives nimble traders the edge we need to take money from the majority.  That is why I am  confident my trading methods will continue to work in any environment.

Central banks are out of ammo

I have long maintained that it is highly unlikely the ECB would start  a programme of QE by purchasing sovereign debt of countries such as Greece, Spain, Italy.  That is a red line the Germans simply  would not cross.

This is my forecast: as the euro appreciates over the next few weeks: we shall see less talk of QE, and we shall see EZ economic data ‘improve’ (statistics will be fudged, of course) and just when the rally is at its top, everyone will believe the worst is over for the EZ.  Inflation will have picked up, unemployment might have at least stabilised, and thoughts of a breakup of the euro will have faded from memory.

At the same time on the other side of the coin – the dollar – will enter a weak period with economic data appearing to be getting worse, political divisions widening, stocks retreating.

This winter promises much market action that I fully intend to exploit. It has started well.

Don’t forget to check out my new Alert service here.

Have a great weekend