We’re over the cliff edge now!

In the blink of an eye on Thursday at approx 10 am UK time, the rocket-propelled Nasdaq started the biggest slide it has experienced for decades.  The charts of the big name tech FAANG and other issues (including Tesla, more below) resembles the North face of the Eiger.  And that is steep.  The game has now changed.

And the striking thing about the timing is that there was no apparent ‘news’ at the time to prompt such violent sell-offs.

There was the usual run of poor pandemic-infused economic news, but that has been discounted by the bulls for months (if not years).  And the Fed was quiet at the time with no earth-shattering announcements or even ‘leaks’.  No major war had been declared and no vaccine was proved to be worthless.

So what happened?  Did the teenage Robinhooders run out of credit?  Did Mom and Dad finally discover their offspring was using their credit cards to prop up Tesla options?

If so, the result is disastrous for all Tesla bulls

The shares are down 25% off Thursday’s high already. But for anyone following the Elliott waves, the end was certainly nigh with the final fifth wave off last month’s wave 4 low carving out a lovely ‘five-wave continuation’ pattern (see my text pp 38-39, 144-145) which usually lies about half-way along a thrust, as here.

Using this knowledge, after the pattern completion, you could have estimated the final high, of course.

So this manic buying binge is now resolving into a vertical selling plunge, which is the usual way markets go when everyone is finally all in.  Now they are scrambling to be all out!  There really is nothing new under the sun – especially in markets.

So as Tesla (and several others) are the litmus tests for the multi-decade stock mania, odds are very high that era is now over.  We have gone through the looking glass and into a new paradigm. Down the line, many will be advising their friends not to touch common shares with a barge-pole. That will not occur right away of course but for most. buying the dip will still be the strategy of choice.

And it will be a losing strategy.  Before, buying dips was the path to success since 2009.  Now, selling rallies will be the way to go.  But old habits die hard. And shorting as a wealth-producing strategy is off the radar to most investors. The only practical way we retail investors/traders can achieve that is via the spread betting route.  And that is what I have been doing in readiness for this event.

The Dow has made its final high unconventionally

I have long been somewhat puzzled by the wave patterns in the Dow (not so much the S&P and Nasdaq). I have been calling for a wave 2 rally to end since the March wave 1 lows assuming the February high was the final wave 5.

But as the market moved higher into August, that view was looking increasingly dodgy, to say the least. Both the S&P and Nasdaq were into new ATHs and it was only the Dow that remained. I was receiving emails telling me how wrong I was and to get long as this baby was going to the moon!  Believe me, it was tempting – and we did go long recently as I suspected a scalp trade would probably catch the final leg up.  We caught 1,000 pips from that one.

But I was still committed to a bearish medium-term view since all sentiment indicators were at extreme levels – and these are rarely wrong in flagging reversals.  But the reversals may take some time!

And on Thursday afternoon, I pounced and shorted the Dow around the 29,000 area for clients and members and caught the plunge just as it started.

As one swallow does not make a summer, a down day does not ensure a bear market, so I am on high alert for confirming action.

I noted that on Thursday the February gap had been filled and the market was then free to reverse.  That was one of my targets I set in March but frankly, I did not set great odds on it being reached.  Such are the surprises markets can throw at you!

So here is my new roadmap on the weekly

Big wave 3 was set in October 2018 and from there, a massive three down in a ‘flat’ correction in huge wave 4 to the Corona Crash low.  And the rally off this low is huge wave 5 that ended on Thursday at 29,200 – 350 pips shy of the February ATH at 29,550.

It is thus a very rare example of a ‘truncated fifth’ which falls short of the previous wave 3 high.  In my experience, I have seen less than a handful of such patterns.  If interested, see Elliott Wave Principle by Frost and Prechter pp 34 – 35.

Trading note:  Despite being wrong on direction from the March lows, we have lost very little trading capital.  How can that be, you exclaim?  That is because most of my short trades were taken at minor highs from where the market initially made a decent correction and then reversed back up.  That enabled us to move our Protective Stops (we always have one) to the Break Even level and avoid a loss.

So you see that trading is not all about guessing the market direction, important though that is.  Having solid trading tactics is an essential element.

With the 1,000 pip Dow decline, we have recovered much of the losses since March (our stops were generally 100 pips or less) in just two days.  Add in the profit on our occasional long trades and we are in great shape to exploit the coming bear.

That is how a trader thinks and is quite different from that of an investor and normal retail trader.  The trader’s first thought is not how can I make a profit, but how can I avoid a major loss?

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It’s now an ‘Everything down’ market

Prior to Thursday, financial markets were all rising in unison, pretty much.  Stock indexes, Bonds and Currencies were all in synch thanks to central bank policies of injecting massive liquidity into markets.  That, allied to the overwhelming positive sentiment created the great bull markets we have been amazed by.

But now, markets are declining in unison with Indexes, Bonds and Currencies trending lower.

I have been calling for a reversal in the much-hated dollar for a while and a major low was put in on 31 August.  We are now long dollar/short currencies.

And T-Bonds made a wave 2 low and is moving up in a third wave

A clear break above the pink trendline will send yields up to the 2% area.  Remember, the vast majority expect rates to be held for ‘longer and lower’.  Mine is a true contrarian position.

And the dollar is on the march with the euro in decline – much to the surprise of the dollar bears.