Weekly Wrap
“The party’s over,
It’s time to call it a day
They’ve burst your pretty balloon
And taken the moon away”
Song lyrics by Jules Styne (1956)
Market Commentary
Stocks are gradually rolling over. Yesterday’s 350 pip plunge in the Dow broke one of my short-term support levels and the 2 March high remains The Top at 18,280, as I have maintained. The extremely large swings from that top have been testament that stock market tops are usually not spike affairs, as is common in gold, but are gradual roll-overs with large up and down swings.
This is because the sentiment that drives stocks in a bull market is one of growing positive feelings about the future, based on investor’s feelings about their reading of projected future economic (and financing) conditions. And these projections are based on what has recently transpired and what has pertained in the recent past. In other words, the Fed has supplied unlimited zero-cost funds for the big guys to speculate with.
This has built up a mountain of complacency, of course. With the Fed ‘guarantee’ to support stocks as far as the eye can see, who is foolish enough to bet against that and position short? And who needs to buy hedging protection? Nobody. The shorts have been decimated (except for we merry band of tramline traders!).
This positive sentiment is only gradually dissipated, leading to a two-way fight over ten rounds. Bottoms, which are often spiky, are made on maximum fear, which is a more intense emotion than hope.
Will the dip-buyers have enough funds to push markets higher – again?
But this expectation that the market cannot decline more that a ‘normal’ dip (which is to be bought anyway) has placed the market is an historic vulnerable position simply because there are no shorts to cushion any decline by covering (buying) their positions. This means the declines, once started, will be far deeper than usual.
So what could upset the bulls’ apple cart? One factor would be the taking away of the 100-proof punch bowl of liquidity from the merry party-goers. Just one sign that the monetary authorities are going to tighten will move the fingers closer to the panic (sell) button.
And this is what we glimpsed yesterday with the Dow plunging by over 350 pips in just a few hours.
China’s bubble is bursting
The Shanghai stock market, which I have mentioned before, is in a bubble that the authorities are wary of and yesterday they decided to start tightening by imposing new rules on trading on margin – the rocket fuel that has propelled Shanghai into the stratosphere by the gambling-addicted locals.
These small measures sent jitters around the world with Nikkei, Hong Kong – and especially German DAX knocked sideways. Some Chinese ETFs lost 5% yesterday.
If this butterfly wing flap of Chinese ‘investors’ can produce this gale across the world, imagine what will happen when the Fed suggests that it will need to unload some of its gargantuan assets? There is increasing talk of US rates rising this year, too. And that day may be closer than many think.
Today I will cover a few stock indexes and leave my very successful campaign in the US Dollar to next week (as I have forecast, the dollar is making a rapid retreat).
DOW
On Thursday, as the market was making its recent rally high, I had this chart:
The brown line is my tramline drawn off the 2 March high and on Thursday, the market poked above it. Normally, that would be considered bullish – and a buy signal. But the pattern leading up to it was a potential five wave zig-zag pattern (see text Tramline Traders, pp 38-39, 144-145) I have seen before at the end of a similar bull run.
That encouraged me to look for a head fake (see text Tramline Traders pp 71-73). What would confirm a head fake? Why, a move back down under the tramline!
This zig-zag also sports a solid tramline pair (green lines) and I forecast that a move below the lower green line would be a sell signal to position short – and reduce longs. There was also the looming large neg mom div.
That was the chart I posted to my subscribers on Thursday. And this is the result to date:
But the market was not quite ready to give up the ghost as the second head fake showed. But my original idea for a short trade placed in the pink zone was spot on and the market plunged through my lower tramline and my trade was elected. The descent was rapid.
Yesterday’s low was very likely wave 1 of a five wave pattern with the bounce late in the day my wave 2, which should end early next week, if it hasn’t already.
But – wave 2 upward retracements have been uniformly deep – sometimes to a Fibonacci 78% or greater of the previous wave. We must be prepared for this possibility.
But with bulls now on the run, will the buy-the-dip algos fire up another rally again? There is solid overhead resistance on the hourly, but that remains a possibility.
And the picture on the daily chart is equally compelling:
As on the hourly, I have a potential five wave zig zag in formation. The hourly one has completed and the daily pattern will be when the market breaks the lower tramline in the 17,500 region.
Again, with the large mom div at wave 5 this is an exact mirror image of that on the hourly chart. Markets are fractal, remember! And this is a stunning demonstration of that fact.
Next week promises to be of crucial significance.
DAX
German stocks have been the subject of super-manic buying in recent months. Everyone and his dog has been jumping into them. Germany is the engine of growth for the EZ – right? And the EZ will start to grow again later this year – right? And boy, are they are cheap compared with Chinese, American and even UK shares – it’s a no-brainer!
But buying a market just because it trades on lower P/E ratios than other markets is a very poor rationale for an investment strategy, particularly after a massive bull run when sentiment has built into a manic assumption of a one-way bet. What if the elephant in the room – aka mountainous and climbing debt – suddenly becomes a problem?
Take a look at the daily:
I have a completed five motive waves complete with a large neg mom div. and wave 4 was tested on yesterday’s 350 pip plunge. That is the sight of bulls panicking.
Even a minor Fibonacci 50% retrace would set the DAX back to at least the 10,500 area.
We are now short.
HONG KONG
Remember, this is not a proxy for the Shanghai market, which has risen exponentially based on the domestic boy traders (yes, Chinese teenagers are playing the market using massive margin).
Here is the weekly going back to the heady days of the mid-2000s:
This is a classic EW chart pattern. The five down was met with a textbook A-B-C – with the C wave finishing at the Fibonacci 78% retrace. The next big move is now down.
But where to? To at least the fifth wave low of 2008 at the 12,000 area – a decline of about 60% from here.
I covered the Nikkei last week, showing we are in the final fifth wave up.
That should be a doozy of a trade!
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VIP TRADERS CLUB NEWS
VIP Club members are positioned well in various markets:
Dow Short from 18,020 yesterday. Also short DAX
GBP/USD Took partial profits yesterday at 1.5030 for a gain of 400 pips from entry at 1.4630.
EUR/USD Took partial profits yesterday at 1.0825 for a gain of 200 pips from entry at 1.0625
Gold Still long from $1195 and $1166
If you would like to receive my trades in real time as I make them, drop me an email at ttburford@gmail.com and I will send you details of membership in my VIP Traders Club.
Have a great weekend!
