Weekly Wrap – I’m now long
Don’t you just love the antics of the stock-owning public? Talk about Wrong-Way Corrigans. Last week the AAII survey of mom ‘n pop investors showed bullish sentiment plummeting to 28% – a level where big rallies have started before (and is currently in progress). Also, in January, retail investors pulled a record amount out of stocks and put it into bonds as they panicked in the face of the emerging markets meltdown.
This is just in time to see a big move down in Treasuries! This goes into the You couldn’t make it up department.
But guess what? I was shorting the Dow near the top in January when the bullish sentiment was extreme and covered last Wednesday near the low when the AAII investors had dumped their shares in a fit of bearish sentiment. I took over 1000 Dow points out of that little campaign – and I detailed it here on my blog. And now I am taking a decent profit out of the two-day bounce as the buy-the-dippers get stuck in as well as the hapless squeezed shorts.
It was the same story in gold recently. The public hated the stuff in December with bullish sentiment in low single figures. Now it is trading $100 higher. No doubt, the majority of specs are shorting into this rally. Meanwhile, I went long in early January and remain with my position.
In my MoneyWeek Trader emails, I have been detailing my Dow campaign as an exercise in how to use Elliott Waves to make firm predictions on the gyrations in the market. While I have been negotiating the twists and turns, most traders have been caught flat-footed both on the initial 1200 point Dow plunge and now on the vigorous rally. Just when most are convinced all hell is breaking loose with that 1200 point plunge, the market springs the trap and motors up 450 pips, trapping the late shorts.
This process is repeated time after time in market after market. And I am certainly glad it does, as it affords me terrific profit opportunities.
And the reason it does is because of the unchanging facet of human nature that drives markets – the duality of fear and greed. Greed drives ’em up and fear drives ’em back down. When they get too greedy, there is nobody left to buy. And when they panic, there is nobody left to sell.
Most traders zig when they should zag. But if everyone traded well, we wouldn’t have any opportunities and I would be out of a job! We can’t have that.
The secret of good trading? All you have to do to make money is to sell to them when they are greedy and buy when they panic. Forget fundamentals – they have been absolutely useless to me for figuring out where the market is headed (for a swing trade). Just understand what the others are doing – and trade against them at turning points.
Do fundamentals matter?
Not to swing traders! Today, the non-farms jobs grew by a measly 113,000 vs an already weak consensus of 181,000. The unemployment rate nudged down to 6.6% which is what the Fed wants. These would normally be considered weak figures and guarantee no change in the Fed tapering policy, yet the Dow rallied 190 pips. As my American friends say – go figure.
But it is an understandable reaction when you consider the technical picture (see the AAII sentiment number) when sentiment had turned very bearish, thus setting up a short squeeze.
Remember, markets exist to disappoint the majority. Be a trader in the minority!
DOW
This was my best guess yesterday which I have updated to the close of trading:
I shorted above 16,400 and reversed position at 15,420 for a large gain on my short. With the five down, I reversed and now I am long. Friday’s rally carried to the Fibonacci 38% level on overbought momentum and I expect a decline early next week in wave B. Now I am not sure how large this B wave will be, so I shall be playing it by ear, But then, I expect a rally to a new high in wave C which could carry to the 50% retrace near the 16,000 level.
The five down is my large wave 1 and the C wave high will be my wave 2 and when that tops, the market will collapse in a large wave 3. This will be a very destructive period and I expect daily losses of 200 – 300 pips a common event. But wave 2 will be accompanied by cries of “The worst is over! Bring on the new highs!” These believers will be sorely disappointed when wave 3 gets going.
So how shall I play it? I am currently long and will either take profit on the A wave high, sit out the B wave and perhaps go long again for the C wave. I will be on sharp lookout for the C wave top and then position aggressively short for the wave 3 ride.
This first leg down was a prelude to the big show to come. My medium-term target remains the 14,000 area.
EUR/USD
Has staged a bounce – right off my third tramline support:
So last week, I tightened my stops and took a reasonable profit out of my short trade.
The short-term waves are indistinct so I shall sit and watch for now. But on any sign of weakness, I shall be back in aggressively short because I believe my third tramline will break at some stage.
USD/JY
I had been short and took profits near the low (it trades like the Dow!) and went long on Friday. But the rally has carried to Fibonacci 38% and into heavy overhead chart resistance.
We should see an A-B-C rally just as in the Dow with the C wave carrying up to the 103 area, possibly. But the long-term trend remains down and I shall be looking to position aggressively short again.
COT data shows hedge funds were short squeezed on the drop to the lows, which is setting up the required bounce.
GOLD
Is edging ever closer to my first major target around $1300:
Sentiment has improved recently from the bombed-out bulls in late December, and this could be enough to propel it above the critical $1280 level next week.
COT data reveals very little change on gold, but in its sister metal, silver, hedgies and the small specs have ramped up bearish bets considerably. This reinforces my target expectations!
I remain long.
Have a great weekend!
