Stock market turning points - are we there yet?

[WallStFoxy]

2 hours ago, Mercury said:

I don't know that @Foxy in fact I can't find any evidence for round numbers being at all relevant,

@Mercury

Here's another one for you 27400. 👿

 

[Mercury]

I'm kicking myself @Foxy  If only I'd know it was that simple all these years...

🧙‍♂️

[WallStFoxy]

2 minutes ago, Mercury said:

I'm kicking myself @Foxy  If only I'd know it was that simple all these years...

🧙‍♂️

Ha Ha Nice one @Mercury . 👿

[Mercury]

Another small leg up to complete a 1-5 wave count and another test on the daily upper channel line?  There is also a 1/4H channel, a break of which could coincide with some short term support.  NMD on multiple time frames.  This could be the market top but probably only a wave 3 (blue) to take price back down towards the lower daily channel line.  I guess US open will tell the tale?

[Mercury]

Turn looks to be in the offing if we get a break of short term support.  With a small 1-2 done, assuming we don't get short retrace that powers the market on to fresh highs, we can anticipate a reasonably lengthy move down to at least the 27,000 mark and possible the 26,500 support levels (what was that about round numbers @Foxy...!).

At this point I would be laying this as a larger retrace (A-B-C to the test the daily chart channel lower line and then likely a fresh ATH) but time will tell.  And this bearishness on stocks could give an added stim to Gold/Silver, which if USD bearish turn is confirmed could get a strong boost.

 

[WallStFoxy]

 

23 minutes ago, Mercury said:

Turn looks to be in the offing if we get a break of short term support.  With a small 1-2 done, assuming we don't get short retrace that powers the market on to fresh highs, we can anticipate a reasonably lengthy move down to at least the 27,000 mark and possible the 26,500 support levels (what was that about round numbers @Foxy...!).

@Mercury

I'm not sure, need to see how the session ends this could be a sling shot through 27,400. I will go long if it turns back up today and may be short tomorrow if it stays low over night. Like the round numbers but I think 27,000 will find support if not before. The Big Bear may be lurking I don't know, but it will have break a couple of strong support levels first. 👿

[Mercury]

EoD price action was Bearish and broke through that ST support level with other markets being more Bearish than the Dow (more to go for the Dow to catch up?).  After a bit of consolidation bearishness has crept back in ahead of the US open.  A break of the next ST support brings up the 27000 level but, depending on how the move goes, the market could go into another consolidation at the 27000 level and if this constitutes a Flag type formation then 26500 is a likely end to this phase.  With no clear EWT or PMD I don't see the bearish move completing yet.

[WallStFoxy]

@Mercury

I don't like the look of this, double top @27,400 then three lower highs. We could still get a bounce at or above 27,200 but if that breaks I think we may see that 27,000 and that could open the door to the Bears for the rest of the summer. 👿

[Mercury]

@Foxy, looks like the market already answered your question.  However there is still a scenario for the down side move I alluded to recently in that the whole of the move up since last Thursday could be a retrace A-B-C.  The price action is different on SP500 and Nasdaq but still consistent with a retrace before a larger drop.  This kind of pattern is something I have observed at many tops on stock indices.  I am not calling an absolute top here as it is more likely to be a temporary move that sets up a final flourish but of course it could be the end...

Given that the Dow topped out at CoB today at the Fib 88% this offered a very low exposure Short, which I couldn't resist.  The price action just after than is encouraging, especially on the Nasdaq.  I guess we should know soon enough whether we get the Bearish move or another higher high.

Not sure I agree about this opening the door to the Bears for the Summer (well define Summer I guess) but if this is a turn down we can anticipate a few weeks perhaps, depends on price action and of course we have the Fed thing next week...

[Mercury]

Looks like the making of a turn to me now.  Small 1-2 retrace completed overnight and followed up with a fast break lower.  The exposure on my trades here is very low so the risk is worth it given the potential reward if we see a larger retrace to the lower channel line on the daily chart.  First up though is another test of the 27050 support zone.

[Mercury]

The Dow is still holding bearish against the recent ATH top despite fresh ATHs from Nasdaq and S&P500.  It is possible the latter has topped out last in this move on Friday.  Looking at the Dow it looks like a possible ATH top has occurred, which could be either a medium term wave 3 or a long term wave 5 termination of the Bull.  The former is more likely at this stage but you never know.  There is decent NMD at this turning point and a plausible 1-5 wave count up from the pennant breakout.  The subsequent move has broken through the lower line of the ascending channel.

Looking at the 4H chart we can see the top and subsequent move more clearly.  There was a small 1-5 up to compete this phase of the rally followed by a small 1-5 down and A-B-C retrace (brown 1-2 or A-B) and then backed up by a small 1-2 and then price broke the channel line and completed with a failed retest of the channel line.  From a fundamentals perspective this could either be fear of lukewarm Fed action next Wednesday or actual lukewarm Fed action.  Time will tell as usual.  For now I remain tactically Short. 

[Mercury]

Yesterday's FTSE 100 performance seems like a classic case of M&A over exuberance to me with some defensive stock price action thrown in.  The FTSE was completely out of sync with all other indices and while US large caps did make a show of rallying it was a rather thin affair.  Early morning price action on US large caps is suggesting a more bearish stance, bear in mind these markets aren't even live yet. Price action on the Nikkei and Hong Kong has been bearish of later too.

FTSE looks to have completed (possible another small leg up) a large scale wave 2 at or near the Fib 88% on the Just Eat push.  The price action so far is consistent with an A-B-C form but the current rally is in an expanding triangle form, suggestive of that over exuberance I mentioned and of a move end.  similar set ups are visible on SP500 and Nasdaq in recent days.  There is a triple top NMD in addition to EWT set ups and an unclosed gap below.

 

[Mercury]

On the Dow I have the following.  That Daily chart channel I posted earlier looks to have a confirmed breakout with a failed retest and drop away this morning after a near mini double top turn in the resistance zone.  Other large caps following suit.  There is NMD at the ATH turn and a nice 1-4 count to the top.  Is it THE top or just another retrace before yet another ATH?  Don't know yet but I am still Short and adding on the current move.

 

[Mercury]

The Nasdaq is looking particularly interesting, not just because this whole bull rally has been momentum stock led and the Techs are the kings of momentum (which is investment speak for not making much or any profit, yet...).

On the Daily chart you can see a near perfect ending channel form with a classic a-e structure.  A breakout of the lower line will be an important moment (will it hammer down through this area or put in a quick retest?).  There is strong NMD at the ATH, which is in the 8000 zone that I have had as a key top out target for some time (years) and an unclosed gap below.  Again, I don't know if this is the top top but there is a good chance so worth taking for me.  A test of the daily chart support trend line with be a key moment.

On the 1H chart we can see an uncanny resemblance to the Dow but crucially the Dow was ahead of the Nasdaq so this is not a case of exact correlation but to markets separately describing a turn scenario set up on different timings.  The 1-2 (brown) hit the Fib 88% resistance zone in both cases with NMD and then put in a series of 1-2s (provision at this stage).  Where the 2 markets are different is that the Dow has already broken its up sloping channel where as Nasdaq has not yet and the 1H channel up on the Nasdaq was expanding (like I mentioned on the FTSE post).  All in all this is a bearish set up but it could, of course, be a short term retrace.  Time will tell.  For now I am Short and will monitor events in the run up and aftermath of the Fed rate decision. 

[Mercury]

Lastly the big one.  The SP500.  This was the last one to turn and has so far only put in 2 EWT 1-2 moves (not 3) on the 1H chart and is only just breaking out of its 1H channel, which is also an expanding channel.

Looking back at the daily chart it is uncannily similar to the NASDAQ with a potential ending channel (a-e form) and strong NMD at the ATH and that 1-2 falling just short of the Fib 88% area.  We are looking for a confirmed break of the 1H expanding channel and then a break of the daily chart ending channel and then a test of the daily char parallel channel (green lines).

 

[Mercury]

The DAX traders are really not liking something today...  This market performed bearishly yesterday compared to the FTSEs ebullience and while the FTSE has not quite given up surely it will in the face of so much current bearishness elsewhere?  We are seemingly getting a little bullishness short term right now but your would expect that.

[Mercury]

Dax has approached the daily channel line (lower) rapidly, crashing straight through all the ST support levels.  This channel line test will be important and the oscillators are suggesting there is more to go in this bearish move before we get a sniff of over sold levels.

[Mercury]

Back to the start.  Looks lie FTSE may have keeled over with a small 1-2 move followed by a drop.  If this is set for a move down to join the other indices, and why wouldn't it? (Just Eat? 🤣), then the next leg is likely to be a decent duration.  I am Short FTSE100 now to join my US large Caps with close stops just above the high.

[Mercury]

US large caps took a tumble through their respective 1H/4H chart ending channels and appear set of a period of bearishness.  I would imagine the daily 200MA is a reasonable first target, which would be around about the lower daily chart channel line on the Dow.  A hold or breakout to the down side at this juncture will be critical to assessing whether this will be a "buy-the-dips" play or something else.  The speed at which the market moves down to test this zone may also be a factor (fast is bad for bulls).

On the European side, we have seen some bullish dip buying on FTSE100 and Dax especially this morning, which is fairly common in the first hour or so even in a bear market.  That is coming off now in the second hour given an opportunity to sell the rally for the Bears.  Interestingly the Dax put that rally in on a bounce of a medium term daily chart lower channel line.  A break or hold of this zone is important for stocks I feel.  FTSE isn't quite at its daily channel line. 

[Mercury]

Are we there yet?  Every time there is an all time high and a sudden drop that question pops up and no wonder.  Buy low sell high right?  But wait, this time it's different!  Yeah right...  The rate cut may have been somewhat insipid but it was still a cut, first in 11 years the MSM is saying, of course they have been at rock bottom for most of those 11 years (that goes into the "so what?" file).  Most people seem to expect the Fed will have to cut more so what isn't it buy, buy, buy?  Yeah Trump tweets and blah blah blah I get it...  Still if the single most important factor for the Bulls is rate cut then...

I entered stock indices Shorts at various points on the US large caps and FTSE100 last week and still hold them with stops at break even.  Yesterday I cashed in my continuation trades, including a couple of nice ones on the Nikkei and Dax on the late rally (got to keep the account ticking over!).  These markets are broadly in correlation but they appear to be at different stages now with FTSE, Dax and Nikkei having topped already (potentially...).  At least it can be said that while US large caps have made ATHs the others have not (yet...).  I have analytical cases that support this being the final top in US large caps but also contra scenarios whereby we see more ATHs before the end.  Flip a coin?

One immediate question to be answered is whether the bullishness we saw at the close on Friday was a precursor to an end of the move lower and a rally in the now classic (since algos took over the world anyway) spike reversal.  However pretty much all the past spike reversals were fast spike down and rebound candles on the weekly charts.  This weeks candle doesn't conform in my opinion.  If you look at the FTSE, Dax and Nikkei their candles are even less bullish (well clearly bearish actually).  Look also at the daily candles for Friday and again only the US large caps show any kind of spike and these are still bearish candles (red).  So the late Friday rally, which may be a sign of an end to the bearish run, looks more like a relief rally to me.

Rather than look at the US large caps through I wanted to post on the Russell 2000.  If you don't know this market it is smaller cap stocks (AKA momentum stocks).  I do not trade this market but do analyse it for early warning clues as smaller cap momentum will keel over before the blue chip and FANG brigade.  As discussed previously, various sectors on the FTSE100 are already showing bearish signs (Retail and associated consumer goods, property etc and Banks have been bad since 2008 of course).  While the FTSE100 may have peaked in May 2018 the all share looks to have peaked in Jan 2018 (i.e. earlier) with smaller caps seemingly weaker than the 100s, as I would expect.

So what does the Russell show us?

The monthly chart (data in IG only goes back to 2007 but that is ok as this move is a separate bull phase) shows a 1-5 (purple) bull phase.  Alas the wave 5 end could be a wave 3 so we could have a 3-4-5 (red) to go.  So it all depends on whether the small caps are leading or lagging the large caps.  My premise is that they are leading and keel over first as the US large caps are the go to momentum indices globally (especially the FANGs).  Note the red line on the momentum indicator, which is at long term lows. A break of this would be very bearish.  Check out the attached RealVision video for a much more sophisticated and expert description of this concept, truly illuminating.

https://www.realvision.com/tv/shows/the-expert-view/videos/a-sea-change-in-market-momentum

The red line on the chart is the top of significant resistance on either side of the ATH peak (possible top).  It has offered very strong resistance to all attempts to break out to the bullish side on this side of the peak (see daily chart).

On the weekly chart I zoom in to the end game price action.  You can see that the potential wave 5 (purple) ATH occurred on NMD and the rally up from pink 4 was also in a clean 1-5 pattern.  Alas the bearish move down to Christmas Eve could be described as either an A-B-C (it was on large caps) or a 1-5.  If the former then the Christmas turn was a wave 4 (red); if the latter it was a wave 1 (purple) - the beginning of the end.  While the US large caps rallied to new ATHs the Russell has been doggedly reluctant to break that resistance zone (red line).  The price action since Christmas looks very much like an A-B-C unless that A-B (pink) is really a 1-2 bullish retrace, in which case we are in for a massive rally that would last several more years...  The rally topped out at the key resistance area (wave 2 (purple - provisional) on massive NMD and significantly the momentum of the first stage of this rally (to a wave A? - pink) was much greater than that seen in the rally to the ATH.  In fact it was the highest weekly momentum on the chart and yet it did not break that resistance nor carry the market to a fresh ATH...  The wave 2 (purple) may also be completing a perfectly proportional head & shoulders formation (alas the neckline is not horizontal but that can be attributed to the very bearish Christmas move as the stock markets showed the first real signal of skittishness (fear!).  Price action since that RS shoulder looks like a smaller scale 1-2 (pink) - see daily chart- that topped last week but there are at least 3 plausible scenarios:

1. We have seen the ATH and a 1-2 and now the market is on a long term bear footing that will break through all support on a fast journey south
2. Wave 2 purple is actual a wave A and therefore we will see a higher wave 2 (purple), possible around the Fib 76/78% level, still in touching distance of that significant resistance, before the big one.  This could coincide with another leg up to fresh ATHs on the large caps.  The wave B (pink) might already be in or more likely is yet to come, lower still
3. Wave 5 top is not yet in on this market and we see a strong rally, perhaps up to the resistance trend line to make a fresh ATH - Large caps go through the roof..?

Moving on to the daily chart to see the the recent price action more clearly.  Here the move down from wave 2 (purple) is in a 1-5 and the move back up to wave 2 (pink) is in a complex A-B-C.  We had NMD at each of the 3 failed attempts to break that monthly chart resistance zone, which forms a smaller H&S formation (not that relevant for me but potentially adding to the Bearish sentiment (could be continuation either of course but with the NMD..?).  RSI and Stochastic are not yet oversold (more to go yet?).  If it is to be an A-B-C down to a lower wave B then price must carry to below the recent May low.  If it is a 1-2 (pink) it will carry a lot lower.

Finally the 4H chart, which also boasts NMD at the pink 2 turn, is showing a potential 1-5 down.  The turn and rally yesterday could be either a wave 3 (brown) or the beginnings of a FLAG consolidation formation.  The Fib 76/78% is a decent support zone candidate for a wave 1 (green) turn and the resistance level around 1550, the Fib 38% could provide a barrier to both the current rally move and any potential wave 2 (green) rally.  If we do see price action sketching out according to this road map then a much stronger bearish move is on the cards, which would most likely go on to test the long term channel line.  This may fit with the large caps testing their respective channel lines or even a breakout.

So in summary then, the Russell 2000 is signalling a bearish phase, which, unless the price action early next week rallies strongly through 1550, is at least going to drop to make a lower wave B before any rally to a new wave 2 (purple) and may yet turn out to be signaling that the big one has arrived.  I would not be surprised to see a small rally back to test the 1550 area in early price action but if this is repulsed and we see a new lower low on the bearish move I think that much stronger move lower is in the offing.

Trading approach: I am holding my higher up Shorts one the US Large Caps and FTSE100 at BE to await price action signals and will look to add on any decent pullback and turn and/or a clear break lower.  After that the 1450 support zone may offer some challenge before the long term channel line but I will worry about that later.

 

[Mercury]

I am Short the FTSE100.  Based on my analysis I think the FTSE, DAX, Nikkei and Russell 2000 have all topped out already starting with the FTSE all share in Jan 2018 (also the Hang Seng & China 50) and ending with the Nikkei in Oct 2018.  Only the US large caps have posted new ATHs.  So one of 2 things will now happen:

1. US large caps go on a massive rampaging rally to infinity (or thereabouts) and other indices are lifted to post fresh ATHs, OR
2. We have seen a progressive tipping point starting with smaller caps and China and progressing through the other indices over 2018 that is a harbinger of US large cap capitulation and when that happens the whole house of cards collapses.  Big time!

As a "registered" bear on stocks I don't need to tell you which one I think is the most likely.  The perennial problem is spotting the final turn and getting in as early as possible to take advantage of a once in a lifetime opportunity.  I get a lot of stick for my bearishness, which I ignore; you can't let people get into your head or they will impact your psychology, which is a killer.  I understand that people don't want to believe the gravy train is nearly over but for those with a truly open mind the opportunity could be staggering.  So why wouldn't a trader be conscious of this and be alive to the possibility?  The answer lies in emotions of course, not being able to give up on the perma bull bias.

Don't get me wrong, when the bull opportunity is there I take it, as I did in January on US stocks.  Where I different vs the buy the dips acolytes is that, as a swing trader, I am looking for the turns ahead of time and alive to going both ways as the price action and indicators in my methodology suggest.  The different between me and others is that as I have a Bearish bias long term my Longs are tactical where as my Shorts are strategic positions.

With stocks at all time highs and also valuation levels (on various metrics); with economic indicators keeling over; with unprecedented central bank manipulation, which has not helped the average person, only the super rich (and now we still need more to support the house of cards..!), and with fundamentals that are indicating recession or worse on the way, the stock market maxim of buy low sell high is flashing in neon lights.  Yet people aren't paying attention to the warnings, well not enough of them, although some very serious players are and these are people you can't really ignore.  But this can turn on a dime, as the Americans say, and given the nature of this particular bull market they probably will.  So each time I see a potential turn like that I am ready to get Short, stop protect at break even and wait and see.  I have been at this for a long time now and each time I have been thwarted but if I don't lose much, or at all, then I live to fight another day and one day I will be right...

Did that day come last week?  The likelihood increases with each failure, rather than decreases.  People you point to the many failures as evidence that the bull will continue are just evidencing their bias, their hope.  All bullish trends look bullish until they breakdown.  As @elle said in another thread, all trend lines are destined to be broken.  All trends are destined to fail, all Bulls are slaughtered by the Bear in the end.  In short: "The trend is your friend, until the bend in the end".  At the point of a turn, such as last Oct 2018, the buy the dips boys will start to talk up a "healthy" correction.  As if losing money can be healthy, utter nonsense.  A 20% correct is good they say.  What they really mean is it kills off some of the herd so they, the perma bulls, can get rich on their failure.  But that is a topic for when we get there, for now I want to focus on whether we are at the turn yet or not.  If we are we should see a strong move down but we will get a relief rally, that may well look like a "healthy correction", before the major wave 3 kicks in.

So looking at the FTSE 100 I see the following.

On the monthly you can see the previous 2 bull tops and the Central Bank induced bull that ran up to May 2018 on the FTSE100.  Just as with the Russell 2000 (see previous post) there is an EWT argument for another leg up but the other indicators belie this scenario.  Still it is possible so care is needed until confirmation of a turn into a Bear market.  The interesting difference between the FTSE100 (and the Russell 2000 and possible the Dax and Nikkei) and the US large caps is that the 1-2 relief rally (purple) has already happened so the next move will be a strong wave 3 down.  In reality all the stock indices have effectively gone sideways since 2017, just following different patterns (divergence, which you want to see at an end of trend) with US large caps slightly stronger than others.  NMD is present at the major turns in the bull, including the ATH but until the channel line is broken the trend change cannot be declared.

Looking at the weekly then, last weeks' candle is about as bearish as you can get on this market at a turn (i.e. the candle of the turn.  Usually it bobs around a bit but this candle hit the Fib 88% and rebounded like the euphemistic falling knife (wanna catch that? No me neither).  On the devils advocate side, if the A-B (pink) is a pennant then a rally would make one or both of the red lines above the previous ATH but that falling knife will have to be caught by a lot of buy the dips people to be stopped and reversed.  There is strong NMD at the turn and a credible A-B-C wave form and RSI/Stochastic are overbought.  No wonder we got a bearish move...

The daily is interesting in that we have a 1-5 up to the wave A (pink) and A-B-C to the B (pink) and a 1-5 up to the Wave 2 (purple) that ended in that hugely bearish weekly candle, so that is a classic A-B-C form to the wave 2 (purple).  On the daily chart that bearish move broke through the channel lower line with force (a likely ending channel), again with NMD at the turn and Oscillators over bought and the turn fell short of the Fib 88% (marginally) and didn't make it to a touch on the upper line of the channel, all bearish signals.

On the 4 hour chart things get really interesting.  So far this move is straight down and shaping up to be a fast 1-5 form.  We aren't there yet and my wave 3 (brown) placement is provisional, it could show lower.  Either way a 3-4-5 from here would mark a larger wave 1 (green) and at that point we can expect a relief rally.  If this shows and then drops again below the wave 1 (green) the case for the Bear increases significantly.  It is a process of constant evaluation, this is why there is never a bell ringing moment at a major trend change,

In summary then, On the FTSE (and the Russell 2000) the case for a Bear market turn is strong and increasing but not yet confirmed.  I think we will see some short term consolidation early next week, either a retest of ST resistance (7450; chance of 7500 but I think that will come later) and drop down for another leg OR a Flag consolidation before that further drop.  Any shorts I might take would be tactical for now as I am anticipating a larger wave 2 (green) retrace rally and when/if that concludes with a turn back down that will be the time to consider longer term strategic Shorts, leveraging my early Shorts and entering a pyramiding strategy.

 

[Mercury]

Well that was an exciting few days if you are of a Bearish persuasion.  A good hauls of points for the brave, and fortune, it is said, favours the brave, or is it bold, well same thing.  At the start of the move I didn't know whether this was a Bull ending top or just another buy the dip.  Looks like the latter at present for me, unless we get a sharp reversal back through support in the coming days.  For now I am assuming another leg up but I do feel, if there is another leg up, that this bearish move has put us on notice of things to come and how quickly they will play out.  For me it was a good dress rehearsal, and profitable as well, perfect.

What happens next remains to be revealed but I would be looking for an unsettled period of whipsaw price action rather than a rocket.  I have a strong parallel channel on the Dow and am targeting 28000 area for the top, subject to price action revisions of course.  Regardless of that a break of the lower channel line will be a key indicator of a turn.  I will be trying to catch it a bit earlier than that though.  Let's see.

 

[Mercury]

Meant to add the 1H chart to the previous post showing a possible retrace back down in a 1-2 form to kick start that rally.  This looks like it could be a mini version of the Christmas bottom and rally.  A break through the 25,200 support zone, channel line and previous low brings up a whole other scenario...

 

[Mercury]

Looks decidedly like a 1-2 retrace move and now rallying away.  If correct price should carry beyond the previous high in short order as this would be a wave 3.  If this happens then that exhaustion spike I was referring to in my Gold/Silver thread could come off.

 

[Mercury]

That is a hell of a weekly pin bar candle on this week on the SP500 and other US large caps.  The week isn't over though and my question is whether or not this is sustainable?

If I look at the 1H chart the SP500 has hit the Fib 62%, a classic retrace level, which is also on a zone of wave C, wave A equivalence, another typical feature for a move turn.  The market dropped sharply after the close last night and I went in on a Spec Short.  The overnight price action didn't resolve anything but this morning the European markets are looking a little bearish early on.  Based on the Weekly candle I think the market should end the week a bit lower at a minimum.  Based on technicals we could either be seeing a larger A-B-C with a higher test next week or a smaller, although not small, A-B-C completed to bring up another bearish phase and break through recent lows.  In addition to the above technicals I also have a valid A-B-C (red labels) and NMD at the turn and possibly a small 1-2 done with a larger wave 3 down in the offing.

[WallStFoxy]

That should just about cover it!! 👿

[Mercury]

The US large caps did indeed drop off on the US open as I had suspected but then rallied back hard (at least on very short term chart time frames.  This is exactly the kind of Whipsaw price action I was talking about expecting to see in a final phase of the Bull.  On US large caps I am minded to favour one more final ATH but I think it will be a rally full of more whipsaw price action, very hard to trade unless you are riding the micro waves as a day trader scalper.  I will be staying on the sidelines and waiting to see how price action develops, plenty of other markets to make a buck on in the meantime...

I think it could be much easier to track some of the other markets that have (probably...) already made there bull market tops.  I charted the FTSE last weekend (see above) so will continue with that but I could just as easily use the Dax, Nikkei or Russell 2000.

IF the ATH back in May 2018 was the top of the market and the drop down to Christmas 2018 was a wave 1 (1-5 form so likely) then the rally and turn at the end of July was a wave 2 (purple) concluding at the Fib 88% (a lower high).  This rally was in a clear A-B-C form so supporting of a retrace rather than motive wave.  Price turned and dropped dramatically in an almost vertical drop, very bearish and what one would expect of a turn in to a major wave 3 down.  The move down to the recent low was a definite 1-5 which is aligned to a wave 1 down (outside chance it could be a larger scale B that would bring up a slightly higher wave 2 (purple), maybe a double top but the price action does not support fresh ATHs for me.  FTSE100 has been consistent less bullish that the US large caps, well everything has been.  I think it is only now a matter of time before US large caps give it up too.  So if the recent low was a wave 1 then we should now see a retrace counter trend rally in an A-B-C format.

If, as I suspect, we either see fresh ATHs on US large caps or a very strong retrace (think Fib 88% or double tops) and if this is an ending move for US large caps with a lot of whipsaw price action then other markets are likely to also see whipsaw price action but in a narrower range.  Therefore I will be looking to see if we get a complex retrace on FTSE, DAX, Nikkei, Russell 2000 etc.  If I see this emerging in the coming month these markets could offer credible top out insights into US large caps, which are the markets I want to trade Short in due course.  Retrace turns are easier to spot that ATHs or ATLs because we have support/resistance zones to work with.

I have mapped out a roadmap on the FTSE 100 as an example of the kind of thing I am looking for.  I have no way of knowing in advance how this will play out, which is why I will probably not trade it until we get to the end game.  This is a way to monitor the stock indices to spot the next major turn.  If you were of a scalping persuasion though, such a route map might help support whether you favoured longs or shorts in the short term swings.  This is not my thing so I will let it play out and ensure I arrive at the critical moment in a good frame of mind and with my account balance in good shape to take advantage of the big one.

Are we there yet?  No but maybe in a few months...

[Mercury]

Well we got the wave B I was looking for, or it is a wave 2 setting up for a massive rally to come, time will tell.  And it was a deep one on the Dow, stretching to the Fib 88% and getting stopped by the daily chart lower channel line, which now looks like an excellent line of support with many solid failed tests and turns.  The nature of the move was such that I favour this for a wave B but can't rule out the perma-bulls scenario based on technicals alone, for that I turn to Fundamentals, which have been aired many times before and more recently there have been a spate of serious players coming out to call for a recession and/or uncertainty that would spike Gold.  For me Gold can't do its thing until stock keel over so I don't buy the scenario that Gold and Stocks will fly together again.

There is almost always quite a lot of volatility on a wave B, and we certainly had that  in fact the whole move from the 6 Aug bottom, that halted that big slide right on the lower channel line, was full of whipsaw price action.  The rally up formed what looks like an A-B-C to me and ended at a level where the Wave C was equal in length to the Wave A, a classic EWT marker for an A-B-C form move.  After this we got a fast 1-5 down in wave B and a sharp 1-2 retrace ending last night.  The interesting thing about this 1-2 retrace is that right after the wave B was stopped at the Fib 88% and lower channel line the wave 2 (brown) was stopped at the Fib 76/78% level.

If we look at the 15min chart we see this turning point more clearly.  The 3-4 on the way down was in an A-B-C form and the 1-2 on the way up was similarly so.  Not only did the wave 2 (brown) hit the Fib 76/78% on the 1H chart off the Wave A (green) but also it hit the Fib 76/78% off the wave 1 (brown).  This kind of double Fib hit is very strong if price bounces away sharply, which it did and I chose to take a Long off this bounce with close stops for a low exposure trade.  When price rallied away hard I move my stops to B/E and hold it now for the medium term.

Interestingly on the FTSE 100 and Dax we saw a new lower low, which is very bearish for me and confirms my view that the move down was a wave 1 off a larger wave 2 top (end of the Bull is in on these markets I am almost 100% sure).  What I will want to see on these markets now is an A-B-C retrace to a smaller wave 2 and turn (regardless of whether US large caps put in a fresh ATH or not) and then a break of the recent lows and that will seal the argument for me.  A break of the lower channel line on US large caps will also be highly significant but I think that is a few months off yet.

For now my projection is for stocks to rally away from the current area and I will be watching for retrace move signs to assess for a turn back into that big bear move I have been tracking for a couple of years now.  In the short term I am content to take advantage of the rally in swing trade fashion.

[dmedin]

2 hours ago, Mercury said:

Well we got the wave B I was looking for, or it is a wave 2 setting up for a massive rally to come, time will tell.

 

How can you take advantage of swings when it takes time to see what manner of wave it is?  (By which time, the price action will have come and gone.)

I have a stack of books six feet high to read and study, my concentration and mental powers are fading as I get older and I have a job to go to.  I don't know if I can manage

[Mercury]

Time is a problem @dmedin, no question.  It seems there are people on the forum who devote 100% of their working time to trading but most of us must juggle it with other things.  Frankly I am not one of those who even wants to be sitting in front of the charts all day, it would drive me nuts and it is only really necessary is you are trading very short time frame charts.  I did try it at first, mostly because I had no trust in a system, or the market for that matter.  Mostly I had no trust in myself and for good reason, I had not put in the work and taken the time to gain the experience.  And I lost and lost.  Where else would you see people diving into something they have no training and experience of and risking their hard earned capital.  "Down the dog" maybe...

But then I stopped and decided to take a different approach.  Everything I read led me to a simple conclusion.  Professional or retail it doesn't matter, if you are competing against the high frequency algo traders and prop traders you need to take a different approach.  It seemed to me that most, if not all, of the people who had been on this journey and successfully broke through the early days of losses and stumbling about and frustration and negativity did a few things in common as follows:

1. Got a grip on themselves and the emotional part of their brain that was driving them to jump in at wrong times without a clear premise.  This is chiefly about controlling the fear of missing out syndrome and dreaming of another life.
2. Took the time to study and develop a methodology for analysing, trading and managing their account in a professional business like manner.
3. Changed the way they traded to few bigger better at longer time frames.

I am sure there are people on this forum who will disagree and tell you that you can make money on day-trading and scalping but if it doesn't suit you then don't do it.  It didn't suit me, I couldn't see the woods for the trees down at 5mins etc.  So I tried something else and it works much better for me.

When asked about his rules for investing Warren Buffett replied, "don't lose money".  It was a bit of a joke but there was a serious message there, the key is to limit losses and ride winners so as to max your profits.  In this way you don't need to worry about hit rates and pushing the 50/50 coin toss to 55/45 in your favour.  You just need to win big and lose small.  I will typically lose 8 out of 10 times but I scratch quickly if price action does not go according to my thesis and move stops to break even as soon as possible.  If on the 9th or 10th try I hit it then I am a net winner.  Trading is a long term activity.  The key to success is to be net ahead over a year not a day or a week.  You cannot think in terms of getting a regular income, it just doesn't work like that.  Also you have to take some profits when offered to keep your account ticking over or you risk running out of runway.

 

Regarding your point on wave recognition, it is a problem but it is the same for everyone, professional and retail alike.  It is called price discovery, the market participants watch the evolution of price and take into account other factors (like fundamentals)  and create a premise.  Then they test this premise by placing a trade.  This is simply how it works.  In terms of my specific comment, I really don't care at this point whether US large caps have just made a wave B or a wave 2 as the next wave in either case (C and 3 respectively) will be in the same direction, which is up.  I will assess the price action as the move develops and make decisions about when to cash and when to reverse later based on my analysis.  Deciding when to cash is where you want to be, not that it is much easier than anything else in trading...

EWT note: an A-B-C can look very similar to a 1-2-3 (or 5) so context is critical.