When your plan goes wrong – change the plan

On of the great advantages of using the Elliott wave theory is that when an odds-on forecast goes wrong, there are precise levels which will warn you of that – and then you can take evasive action. Such an event occurred at 12 noon UK time on Thursday in the stock indexes. Let me go over the details as I believe they are instructive.

I had been expecting one more push up in the indexes all week based on the form of the price action. Scouring the MSM headline sentiment, I formed the opinion that many were expecting a larger advance . Several prominent gurus were forecasting higher levels – and that was a clue that bullish expectations had become more widespread and a warning signal (to me).

Here is my Dow roadmap issued at 7 am Thursday to VIP Traders Club members:

Since the first of the month the market had traced out a wedge pattern that typically occurs just prior to the final thrust up to complete the wave ‘c’ of 2 as shown. As Thursday morning progressed, the market did move higher to follow that forecast and reached a critical point at 12 noon.

And that point was at a minor trendline joining the recent highs. If my roadmap was correct, it should then have moved sharply higher to capture the masses of buy stops just above the line.

But at High Noon, the trendline resistance held and the market started falling (on no new news, apparently) and when it broke out of the wedge pattern in the afternoon, that was the signal it had failed. Evasive action for the bulls was indicated! The market then plunged into Friday’s close as bullish expectations were totally dashed.

Here is the action in the Dow:

And that was a clear indication that the wave 2 relief rally was well and truly over. And my long standing forecast for a wave 3 of 3 down had started. In fact, it started a little earlier than I had expected but that is another reason why the next wave down will be very long and strong.

Interestingly, on Thursday and Friday, over 90% of the stocks in the S&P 500 closed down on both days – a very strong surge in selling that is typical of third waves. And this is just the beginning.

So here we are with my revised roadmap in the S&P (similar in all US indexes):

Near-term I expect to see a relief bounce to start early next week (another wave 2) and then another plunge which should be one of the strongest to date.

So to recap:

• We are in a bear market and the rallies off the May lows were bear market rallies. These are the trickiest in the book (outside of fourth waves) to time. Unless experienced in these waves, it is best to avoid trading long but to look to keep shorting on rallies.
• The EWT offers likely roadmaps based on price chart patterns of the waves. If a high probability forecast fails, it gives precise points where it has indicated a failure and evasive action can be taken (and positions reversed).
• Importantly, bullish expectations were pretty high into Thursday noon with some gurus confidently expecting major rallies to persist. Psychologically, that was the ideal time for the bear to re-assert itself. Remember, markets exist to disappoint the majority, as the old market saw has it.
• Many expected the US inflation data would moderate on release of the latest monthly data on Friday. Instead, it surprised many by moving even higher on the month. Many analysts are now forecasting a much higher 75bps hike by the Fed on Wednesday. My guess is that if that does not occur and they keep to their stated 50 bps raise, a rally in shares would ensue for another wave 2. And this would provide yet another opportunity to position short.
• My heading is When your Plan Goes Wrong – Change Your Plan. For many, that is easier said than done. It requires a very rapid change in psychology and for some, that takes a long time (if ever). This subject requires a whole book. But if you compare trading the markets that can (and often do) turn on a dime with batting at cricket. At the crease, you do not know the balls’ trajectory before it leaves the bowler’s hand. You must be flexible in your response. If a bouncer, you must duck in time for obvious reasons. If full length, you must plan on a drive or a defensive block. You have a only one second to make that decision – and just the wrong choice could be your undoing.

The US Dollar displays clear and lovely waves and Fibs – and is at a crossroads

The Dollar Index has been in a major bull market for well over a year and bullish expectations have built up to very high levels. And no wonder – the basic story of the Fed wanting to raise rates to ‘combat’ inflation grabs the headlines. The major currency trading against the dollar is the euro and that has been held back by the reluctance of the ECB to do the same.

In fact, the dollar has climbed to match the highs in previous years – here is a revealing chart I posted to VIP Traders Club members last month It shows that the current level is at major resistance.

I made the case that further upside progress was unlikely and any move by the ECB to raise euro rates would likely top out the dollar. Note that on the two previous occasions, the moves down started major five wave bear trends.

Here is the recent shorter term action:

The high was made at 104.90 on 13 May and since then, the market edged lower in five clear waves to the Fib 50% retrace of the previous advance wave on a good mom div. That was a clue the market was about to re-test the old high and indeed has traced out that rally in what appears to be an a-b-c three up to the Fib 76% retrace. This is a Moment of Truth.

The final surge on Thurs/Fri was inspired by the ‘surprise’ strong US inflation data. This 76% level is about the maximum extent of the rebound if my labels are correct. And if so, we should expect a major move lower in a strong wave 3 soon. That will be my roadmap until proven otherwise.

And what will it take for me to be proven wrong? Of course, a further surge up and above the old 104.90 high. As mentioned, there is now talk that the Fed will raise by 75 bps on Wednesday and not the planned 50 bps.

Because the Fed is a mammoth organisation with multitudes of committees, and they have to consult back and firth with other central banks (and their own government), it takes weeks/months for them to form/change a policy on rates. It is a mammoth oil tanker that will not be turned off course.

If correct, they will stick with the 50bps and that could be enough to induce dollar selling/euro advancing. We shall see.

A brief long term look at Wheat

Only a few visitors from Mars will have failed to notice the extensive coverage in the MSM to food price inflation. It is everywhere. Normally, the Wheat market is well off the radar of most traders, but not now. In fact, I brought the potential for stunning gains to the attention of VIP Traders Club members last year.

But in recent weeks, the Wheat explosion has cooled as I explained in my previous post (possible Russian sales to their friends who then can re-export to the West at enormous profits).

Above, I pointed to the wedge/triangle in the Dow – and here is another in the weekly Wheat chart:

It has completed four waves inside the triangle and if this is a valid pattern, the price should start surging upwards once more. Note the low momentum which indicated oversold.

But from the lesson on the Dow, a failure would be indicated if the market breaks below the lower line of support, and the game would likely be changed. That is my fail-safe level.