Will they – and by how much?
With markets all agog for tonight’s Fed decision on interest rates and tomorrow’s BOE announcement of rates in the UK, I though I would have something for my VIP Pro Shares members that highly amused me. In fact, it was another coffee-spluttering moment!
I have been following the advertising giant WPP for some time for VIP Pro Shares and watching as its bear run continued. It has been in this downward trend for some time as investors gradually lost faith in it. But with sentiment so negative, I believed it was due for at least a decent relief rally that could be traded.
Yesterday, I sent members a Trade Alert advising a buy recommendation. This was the chart I showed to bolster my bullish view
From the £19 high back in March, the decline has been relentless but along a beautiful wedge pattern in a clear A-B-C. Three-wave patterns are always counter the one larger trend – in this case, up. And at the £13 area, they had reached the Fibonacci 38% support level on the long-range chart. I was therefore alert to a likely reversal. Even ‘bad’ news would likely create a ‘sell the rumour, buy the news’ event.
And lo and behold, the results were considered very bad by the usual suspects with sales projected to be flat. And right on cue, the shares rallied hard on the news.
Of course, 99.999% of market pundits could not believe their eyes – how could a share rally on such dreadful news? Here is one typical amazed comment: “The reaction to the latest downgrade was a bit odd. After an initial 1pc fall after the analyst call the shares ended the day up 3pc.”
In journalist-speak, ‘a bit odd’ translates as “I have absolutely no bloody idea why they rallied”.
And in typical fashion, he tries to explain it away by this: “Evidently Sir Martin’s sales patter is still among the best in the business. You can’t blame investors for struggling to get a grip on WPP. There are so many moving parts and the company provides the market with so much data that it can be difficult to see the wood for the trees.”
In other words, he has given up trying to understand the market;s reaction using his ‘news makes the markets’ paradigm, as well as a traditional fundamental data analysis. But what this person will not do is deeply question his belief system in the light of yet another signal failure to understand the reaction.
However, if you believe, as I do, that markets will tend to rally after a long bear trend when sentiment is bearish to an extreme (and vice versa for bull runs), only a small short-covering buying can produce a turn.
Traditional market analysts believe in the straight-line theory – that what has just happened will continue to happen. If a share is in a bear trend, it will continue to move lower – particularly if some ‘bad’ news emerges. But time after time, this proves to be totally wrong. A glance at some charts should prove that to anyone with an enquiring mind. Markets turn when the vast majority are looking the other way. They are zigging when they should be zagging.
In reality, market moves are fractals – self-similar waves up and down that respond to changes in sentiment. That is why the vast majority of pundits are wrong-footed at market turns. And we should be pleased they are – because that gives us the fuel to start a counter-trend push to our benefit. Hedge funds, who are mostly trend-followers, have the largest financial fire-power by far are most at risk at these turns.
And here is another share we are trading – Marks and Spencers where we have an ongoing campaign to short this share
From the 2015 high around 590, the trend has been down with clear Elliott waves. The spike low at 260 last summer was wave 3 low and from then, the market has been in an A-B-C relief rally (counter-trend) with the C wave meeting the extreme resistance at the Fibonacci 38% and the blue trendline. This is also solid chart support, meeting the lows (red arrows) of 2015 and 2016.
The 390 level was thus likely to be very stiff resistance – and a likely turning point. And so it proved.
And recently, the market rallied to touch the blue trendline again and is heading south in a large fifth wave. I believe odds are good for a re-test of the 290 low.
And today, news emerged that a new system will be available next year for the big food brands to sell to consumers direct at lower prices and by-pass supermarkets. Ouch! Already, Tesco is down a ton on the news (another share we are shorting).
With interest rates front and centre, I am sure Saturday’s post will have a few items of interest.
You can have a three-week Free Trial to my VIP PRO SHARES service. Details here.