History repeats itself in the Dow Jones

Today is the day Fed watchers have been waiting for with bated breath – Janet Yellen, the US Federal Reserve chairman, is scheduled to utter words at 3pm UK time that they believe will put another rocket under stock markets. By the time you read this, the words will probably be out there for all to digest.

Naturally, the key question they want answered is this: what is the Fed’s intention regarding the Fed Funds short-term interest rates, which have been on the floor since the ZIRP policy started.

Of one thing I am sure: Yellen’s statements will be couched in the usual mumbo-jumbo that Fed chairmen are known for.

I have news for the Fed-watchers: interest rates are set by Mr Market, not Ms Yellen and pals. What Yellen says will have little bearing on the path interest rates will take, except possibly in the very near-term as emotions run high for a few hours.

Actually, I am hoping for a ‘bullish/dovish’ statement (along with every investor and their dog), but for the contrary reason that it would set up the possibility for a ‘buy the rumour, sell the news’ event. It would cap off a most remarkable rally off the 8 August low – a rally I alluded to in my last post on the Dow of 15 August.

Proof that history does sometimes repeat

Let’s start with a quick recap – I had this daily chart a week ago:

Dow Jones spread betting chart

The big decline of the previous week was starting to turn around from a precise hit on the Fibonacci 50% level. The market was possibly starting a rebound rally then.

I noted the possible similarity between the position of the market then and that in February, when the market staged a hefty rally and went on to make new highs.

And that is precisely what has transpired – a repeat of history. Here is the updated chart:

Dow Jones spread betting chart

The ‘buy the dip’ crowd were aggressively out in force, as they have been since 2009 and pushed stocks back up. This was a vivid demonstration that history does sometimes repeat.


MONEYWEEK TRADER

MoneyWeek Trader is our FREE spread betting & trading email offering you the very best tips, secrets and guidance from our trading expert, John Burford, who has years of first-hand experience.

To start receiving John's emails three times a week (plus occasional promotions), enter your email address below:


The market offers an excellent trade setup

But now the market is entering my kissing zone, which will be a major test of the strength of the rally.

Momentum is already back up at levels where previous tops were made. Although it is possible that the rally could continue its relentless climb from here, the odds are swiftly diminishing for this outcome.

I have noted that when the Fed had previously made a much-anticipated announcement, the initial reaction was generally bullish. But within a short period, the market made a major top and a substantial decline ensued – big enough for a very profitable short trade.

I wonder if a similar setup will present this time?

Are we getting close to the top?

Let’s take a look at the Nasdaq for any further clues.

This index has been the strongest of all US indexes as speculation has concentrated on tech shares. The faith investors/gamblers are putting in the ability of projected new developments in tech and biotech (and social media) to produce years and years of above-average dividend growth is astonishing – it is a veritable mania.

Here is the last wave up in the Nasdaq from the April low:

Nasdaq spread betting chart

There is a clear impulsive five-wave pattern with a long and strong wave 3. The August rally is my wave 5 (and has had no down day in 11 trading days) and now momentum is practically off the scale.

The universal expectation that the Fed will keep supporting shares has reached fever pitch. The belief is that the Fed will not allow a sell-off in shares, as that is the main arena for wealth-creation that they support. We shall see whether or not the Fed has such amazing powers when the next sell-off gets under way.

The interesting feature of the chart is that at the current 4,052 level, wave 5 = 1.618 times wave 1, which is a common wave relationship. Also, the market has met my upper tramline – a region of considerable resistance.

If my Elliott wave count is correct, the top cannot be far away.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading
Advanced tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Trading with Fibonacci levels
Trading with 'momentum'
Putting it all together

• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.

 

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

One Response

  1. 22/08/2014, Bronco Bill wrote

    Yes John, and don’t forget the other two helping hands to start off the rally.
    The Dow hit and bounced off the 200 day SMA and also guess what, it was in the Full Moon window (yet again) by a couple of days.
    Looks like the S&P could try and make it to 2000.

    Now that would be a nice round number to really be able to call a top before the serious decline some of us believe is coming, and if it doesn’t happen, it should.

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Faster and faster...

The frenzied pace of the high-tech revolution

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.