Whipsaws galore in the Dow
Stocks continued along their new-found volatile tracks last week with the Dow plunging to my target at 25,200 on Monday and then recovering swiftly to a high of 25,960 on Thursday – another target I set beforehand. But if you were trading off the news, as so many do, you would have been whipsawed to death. I did not suffer that fate as I have set precise targets for the swings, both up and down, that were uncannily hit pretty much on the nose. I largely ignored the news.
Whole journalistic careers are built around trying to come up with plausible reasons why the stock market did what it did. They certainly don’t get paid for making accurate forecasts (they can’t, anyway). That is why I dismiss what they do – except to get a reading of sentiment. When enough MSM pundits lean one way, I tend to take note for a contrary position.
As a fierce critic of such outpourings, I came across several prime examples of headlines that got it 100% wrong.
Thursday morning, Trump banned Huawei (pronounced: ‘who are we?’, curiously). That would normally be expected by the MSM pundits as a reason to expect a sharp Dow decline. So did it? Of course not! – Dow surged 300 pips – but it did follow my roadmap I set out in the Nasdaq last week instead (see below)!
Another headline read; ‘Futures rebound despite Trump’s Huawei ban‘. The weasel word ‘despite’ rears its ugly head again! Anyone trading off the news would surely have had their head handed to him/her.
And another beaut: ‘Nomura explains why stocks are up the last three days‘ Why did they not tell us that three days ago?? It doesn’t take much effort to come up with a plausible story why the sun rose this morning.
And yesterday, this was the news on the EU auto tariff battle: “White House confirms EU car tariffs delayed by six months“. That was pretty bullish news, right? So stocks surged, didn’t they? In fact, they slumped 200 pips. That’s what I mean by perversity!
This is the Nasdaq chart I sent to VIP Traders Club members on Thursday 9 May
That set my downside target in the 7300 region and then a decent bounce. This is how it panned out:
It panned out precisely as forecast – to the letter. How’s that for highly useful precision analysis? And I don’t need to ‘explain’ what happened, except to say the lower ‘tramline’ acted as a magnet on the downside and then major support to the upside.
Anyone being influenced by the Trump/China/EU/Iran/Brexit news would be left foundering – unless using a contrarian approach such as mine.
Alibaba is losing his magic
The Chinese economy growth is in decline. Massive cash flows out of the country has weakened the yuan to a near-record low at the round-number 7 to the dollar. In fact, it closely matches the Turkish Lira in its savage decline. And China shares are plunging as overseas investors are in dump mode. Perhaps they smell capital controls are coming.
A few weeks ago, I started to get interested in the e-commerce giant Alibaba for my Pro Shares members. This company is the China equivalent of Amazon – and latest results appeared decent. But share values do not live by results alone! So my interest was in setting up a bear campaign.
I had noted the five down off the ATH back a year ago and I was anticipating a three up to follow the Christmas lows. And when the market punched up to the $196 level on 3 May and then fell back hard and broke below the minor blue trendline, I pounced to kick off my bear campaign. The building momentum divergence was also a big factor in my decision.
And since then, the market has dropped below the b wave low and is heading south. VIP PRO SHARES members are on board.
The Alphabet is shrinking
Notable fact: Of the FAANGS, only one has made a new high this year. That share is Alphabet (Google) – and it only made a slight new high in April by a whisker before being slammed hard. So let’s take a closer look – here is the daily chart since 2015
The huge rally where the shares doubled in four years traversed the channel contained between my tramlines with very accurate touch points – that is, until October when the market broke down below the lower tramline. It then swung up and down around this tramline, which is typical action when a long and strong bull market is rolling over.
Here is a closeup of the highlighted area
And because the shares squeaked to a new high last month, I am able to label the last few waves up as an ending diagonal, which is a pattern that signals the start of a major thrust down. Last week, the shares bounced but I believe this kiss attempt will be the final kiss goodbye before a savage decline sets in.
Day-trading the Dow
I specialise in swing trading where my ideal trade is to take several hundred pips out of the Dow in a matter of a few days/weeks. But recent action has actually changed the rule slightly – now, it is possible to take that kind of profit out of trades lasting only a day or so.
So I will offer some ideas for those wishing to ‘day trade’.
Stock indexes lately have produced very zig-zaggy charts. Here is the Dow 2-hr
The waves are highly over-lapping and therefore the key is to use the usual Fibonacci relationships between successive waves to project tops and bottoms for your entries and exits. Note that the waves up and down stretch for 200 pips and more, so just capturing a 200 pip move at £10/pip results in a tidy £2,000 profit. As they say, that beats a savings account! But the big difference is that you have to work for it.
To show what I mean, here is a closeup of one wave pattern on the 10-min chart (which is my preferred scale for short term trading)
The market was falling hard on Monday so that alerted me to the inevitable bottom. I sensed that any rally off that low would be sharp – and worth trading. And when the ‘a’ low was set on Monday at 6 pm, the market started a rally and carried to point b (at 6 pm Tuesday) and started a decline. That was when I set the Fib levels using those two points as anchors.
I wanted to trade long here to take advantage of the likely recovery off the a low. I then proceeded to look fora decline to one of the Fib levels as usual. I was encouraged when it looked like it would be a three down – perfect!
Normally I would expect a turn back up from the 62% level (my favourite) but since the decline then was quite sharp from heavy selling, I decided to wait to see if the 76% level could reached – and luckily it was. That was the lowest level I would allow for my long campaign.
So that is when I went long at 25,335 with a 35 pip stop. The market then started a very strong rally – and note the precise hit on the 76% level. The rally swiftly carried to the area of the b high in five hours. That was a great place to take at least some profits for a win of 400 pips (£4,000 on a £10 bet).
Or, I could have held on for further gains to the 25,900 area for a mammoth 600 pip win in just over a day (you can do the maths).
Of course, this is at odds with my longer-term bearish view where I believe the major trend is now down (but punctuated by sharp rallies). But it shows that if you are exceedingly nimble, short term trading can certainly be rewarding in this volatile market.
But at some stage, this type of trading will be non-productive when we see a major long and strong third wave in progress where large downward gaps will open up. But for now, you can make some hay!
Gold sinks but will rally soon
I have been running long gold positions with success but recently, the normal ‘stocks down/gold up’ relationship has broken down and gold dipped sharply late last week. The waves have been very tough to figure out with no clear direction for many months, but this is my best guess:
We are inside a mammoth wedge and in the final E wave before a massive surge higher. But I see more downside first to my target around $1250 which is on the Fibonacci 50% retrace of wave D.
And if my forecast for a massive rally ahead is correct, that should coincide with a stock collapse. Watch this space!
