Last time I suggested the 10 May ATH in the Dow was likely a major top.  Despite the market still trading well under that level, I am becoming less convinced a major sell-off is imminent. And in the meantime, both the S&P and Nasdaq are making new ATHs so unless we do see a sharp pull-back very soon, the Dow is likely to match them.  Here is the Dow

The sharp decline in my ‘c’ wave of 1,800 pts in the previous week took it to below the ‘a’ wave low and the rapid recovery last week appears impulsive and if my a-b-c wave labels are correct, we are in a third wave up that should take it above the ‘b’ wave high and quite probably above the 10 May ATH.  Note the three-wave pattern in my ‘b’ wave which is typical.

As I write, the market is pushing up above the combined chart and Fib 76% resistance around 34,400.  This pattern of corrective three downs is a well-established feature of the post Corona Crash rally from March 2020.  If I had known that back then, I would not have wasted energy looking for tops!  In my defence, I have identified temporary highs where the odds of pull-backs were in my favour.  This is the only market sector I have failed to profit from – most of my commodity and currency advices have been spot on.  But not getting the stock indexes right is very annoying and frustrating, believe me.

Of course this is a radically different picture from that shown last week which had a bearish prognosis.  But the strength of the rally off the ‘c’ wave low on 21 June is telling me it wants to move higher and is discarding the more bearish implications I outlined before.

With this in mind, we can view the 1,800 pt correction earlier this month as just that – a small correction to the ongoing bull run.  As I mentioned previously, the Fed seems to be trapped into a perpetual low rate strategy with the market following along.  Another hint of tapering would likely produce another dip to be bought. that’s all.  Investors continue to believe the Fed would not dare make a real move to raise, nor the Treasury to stop buying the tsunami of new government bonds.

And I note many more pundits are back to worrying about the gargantuan levels of debt building up in the ‘debt bomb’ that will blow the whole house of cards up – a familiar theme. We can be pretty sure that this particular brick in the Wall of Worry will not explode any time soon – there are too many Debt Jeremiahs calling for this. Sharp setbacks usually occur when most are looking the other way.  And the Debt Question has been around a long time – investors have largely ignored it.  Of course, one day, they will take note.

Despite the low yields, investors are still lapping up Treasuries like there is no tomorrow (recent auctions of size have been well snapped up) – but we all know there will be a tomorrow, but not just yet it seems.  So where do I now see the Dow heading?  A simple measure of recent waves sets the 36,000 region as a likely target with higher potential.

Of course, that is not the only brick in the Wall of Worry.  There is the little matter of the inflationary price increases in many commodities and in final consumer and producer prices. Crude oil is on a tear and this is the one key input cost for much of industry. Our long positions in Crude and Natural Gas are paying off in spades. But so long as the money printers keep working overtime, money supply growth keeps feeding the share rally.  Where else can the wads of fresh cash go to find a home? TINA lives!

And under the surface there are major tectonic shifts in the positioning of traders.  Latest COT data reveals the Large Specs (hedge funds and other institutions) were very short until last week when they turned the tables and switched to very long. Their original shorts were largely hedges against portfolios but last week, they went full bull, lifted many shorts and threw caution to the winds.  The swing was about 20% of their shorts – a massive change of stance.  As a group, they have suddenly made an even greater commitment to the bull case.  And that done near ATHs – a massive positive commitment.

But all of this is storing up the fuel that will eventually send stocks plunging in a savage bear market.  But the bulls remain in charge – for now.

One point often overlooked – who is doing the selling?  For every trade there is a buyer and a seller. If many hedge funds have turned from bear to bull as the COT data indicates for the June 15 – 22 week, the S&P dipped hard and then rallied to end up about unchanged all the while the massive swings in positioning were taking place. 

One other point – I have used Tesla and Bitcoin as my two standard bearers for the current speculative mania in financial markets (not to mention the real estate booms).  Both are considerably off their ATHs – but not the US stock indexes.  So which is correct?  Will Bitcoin and Tesla regain their footing or will stocks move lower to join them?

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Gold – which way now?

Gold made its ATH last August at just over the $2,000 mark. Since then, it has been in a major correction taking it to the recent low at $1,675. Which must be a big blow for those traders to believe the textbooks that say the PMs follow the US dollar in a contra fashion.  According to convention, if the dollar rallies strongly, the PMs will decline.  Why this should be so is a mystery.  Presumably, a strong dollar implies interest US rates are rising and this increases the cost of storing the PMs and puts pressure on their prices.

I have never bought into that one and believed there are many other more important factors at play, such as the wave patterns!  One other old saw is that Gold is a safe haven in times of market turmoil – also patently untrue.

In fact since last August, the dollar has been in headlong retreat and gold has matched that move.  Dollar down, gold down has been the pattern, 

This is my EW picture that shows the market is likely starting a third wave of 5 up. But a weekly chart can only show the big picture and is useless for pinpointing accurate trade entries for spread betting on margin.  It is good at revealing the major trends and likely turning points.  Here is the daily

The market has dipped in an a-b-c to the Fib 62% retrace which is a typical target for a reversal.  That sets the odds high for an imminent surge back up in a third wave that should top out above the wave 1 high at $1920.

Only a move below $1730 would rescind my forecast.

 

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