Weekly Wrap – Is this it?
My post yesterday pointed to the classic five waves down in the Dow (and S&P) on the 15-min that I was looking for. And yesterday’s action confirmed this picture with continued losses.
In EWT, a mini five down off a major rally top is a sign that the trend has likely changed.
The odds really are piling up that last week saw the highs and the next big moves will be hard down over the next few weeks/months. The buy-the-dip crowd will get slaughtered – and they are thick on the ground. Weekend press will contain soothing words, such as “this is the expected healthy correction, so just rotate from the winners into the laggards, which are much better value”.
To some, calling the top will seem a preposterous statement – after all, the economies are recovering with the UK being touted as the big leader in Europe, despite the EZ weakness (but sovereign yield spreads of Greece, Spain, Italy, Portugal, Italy are very low). Interest rates appear to be on course to remain very low. Inflation is under control – although who controls it is a matter of some dispute.
But as the best policy is to leave a party just when it is in full swing (with happy memories intact and you are still standing), the best time to cash out of equities is when things look rosy (and you have happy memories and your account is still standing).
When bullish sentiment is extreme, get out!
Chart after chart has told the story – when sentiment is uber-bullish, markets top out (and vice versa). It is pure suicide to go long when everyone else is bullish. This is the hardest concept for many to take on board. How easy is it to get swept up in the bullish hysteria where you read only bullish commentators and dismiss the bearish ones.
Also today, there is no shortage of pundits who advise rotating out of the high-flying tech names and into solid dividend payers (such as in the Dow). The mania to own shares at any cost remains solid. Virtually no-one is advocating simply cashing out. That is why I like this stance – it appeals to my mischievous nature, I guess.
When markets hit rock bottom (in a year or two), you will read pundits telling you to steer clear of equities (as occurred in March 2009 at the 5,500 Dow low) – and that will be the time to fill yer boots (if you have the funds, that is – and you will have by cashing out). But most investors will not have any funds to buy then because they will be still nursing huge losses all the way down, and then dumping at the lows where the bearish mood is at its height.
Here is a wonderful chart that tells a typical journey that many private traders/investors often embark on:
This is what many traders do – they trade emotionally. They would do much better if they used a reliable system, such as my tramline method.
Are you a trader or an investor?
It is well said that the difference between an investor and a trader is that an investor is trying to figure out the market, while a trader is trying to figure out him/herself.
The hardest part of trading is managing your biases, and mastering your own destructive impulses. That is why you cannot expect to survive as a ‘seat of the pants’ trader – one slip and your’re toast. You must have a system – and a solid risk management strategy.
You will be able to read how I operate my system in my forthcoming book: Tramline Trading (details out soon). It contains my five favourite set-ups (one of them is outlined below in the Dow).
GOLD
My MW Trader emails have been relaying my analysis of the gold twists and turns. I have been able to anticipate these turns (and take profits thereby) because I have used EWT (and sentiment measures) to position correctly. Remember, using EWT correctly is a skill and just as any other skill, you learn by doing.
I have taken profits on two counter-trend long trades recently. My latest trade was a break-even short trade where I was taken out at my stop by the huge spike rally of last Thursday – and that was a corker of a reversal. That was the C wave low I had been expecting.
After this C wave low, I expect a rally – and am now long:
I have a terrific tramline trio and my Fibonaccis drawn in. The potential is for a further rally to where the upper tramline meets the Fibonacci 62% level. This could occur on Monday if the market reacts strongly to the latest Ukraine tensions. In fact, Monday’s opening should give a clue to this budding rally – if a large gap up, then the $1330 high is within reach.
Sentiment remains mixed with DSI bullishness depressed while COT shows hedge funds 2-to-1 bullish. These are ideal conditions for a volatile market.
Eventually, the market should move back down below my c wave low and then stage a big rally – but this picture could change at any time. Stay tuned.
DOW
I have another five down (to my new w1 low), slightly larger scale than yesterday’s. Here are my tentative EW labels:
On the 15-min chart, I have waves 1,2,3 and a building w4. My w3 contains another smaller scale five waves (green lines) with a PMD at the fifth sub-wave low. Nice.
My Thursday trade was a great example of how I trade the “V” pattern (this is one of my favourite patterns I cover in my book). The rally into Thursday moved into a new rally high, then a small dip, then another rally to about the same high, and then a decline past the apex of the “V”.
Placing an entry stop order just below this apex often catches the initial decline off the highs and you are in at low risk (protective stop just above highs). Note the rally carries back to the resistance area (pink bar) and then fell heavily to confirm the top.
OK – what do I expect now? There are two options as I see it. We could see a w4 bounce on Monday and then a big move down in w5 before a larger corrective rally.
Or, the market could decline from the off in an extension of my w3. But where is this current decline likely to end?
Here is the hourly:
I have good tramlines and we are in a large w3 down. Next target is the lower tramline. But if this is indeed a third wave, the support at this line won’t hold and the w1 low will beckon.
The next few weeks promised to be exciting!
USD/JPY
This is a market that is in synch with stocks, more or less. They are both liquidity markets and respond to the same major force of changes in money/credit available.
Here is the long-tern picture:
The w5 high (after the final thrust from the textbook w4 wedge) was made at the same time as the Dow high in late December. I have my waves 1 and 2 and now waiting for a break of the pink major support zone to confirm the third wave.
When this support gives way, it will be down, down, down – in harness with shares.
I believe the bullish Nikkei investors will also suffer in this coming collapse.
GOLDMAN- SACHS
In the coming depression, shares in the financials will be hit very hard. We are seeing that in the share of the company people love to hate – Goldman:
On the hourly, I have a very interesting tramline pair and last week, the market rallied to the upper line and is bouncing off it. Note the two lovely momentum divergences which heralded trend changes. The momentum divergence is one of my best friends and often alerts me to an approaching trend change.
It sure looks like a solid short to me.
Have a great weekend!
