Making more hay in the Dow Jones

On Wednesday, I noted that the Dow had fallen in four waves. That meant the decline had not fully run its course. Those wave labels enabled me to reverse my position and go long in anticipation of the big rally which is now in progress.

Today, I want to show you how to do this. When you read Elliott waves (EW) correctly, it can provide vital forecasts that can help you extract major profits from the markets.

How to know when the market is about to rally

On Wednesday, this was the hourly chart:

Dow Jones spread betting chart

I had everything in place from an EW perspective: My wave 3 was long and certainly strong, and the wave 4 was weak. This is typical behaviour of an incomplete pattern. That’s why I felt confident that there was a new low still to come.

Because I also follow the Nasdaq in parallel with the Dow – a practice I recommend you also do – I noted that a new low was indeed being made late on Wednesday. And this low was a spike move – a quick move down and then an equally swift move back up.

This was the chart I took early on Thursday:

Dow Jones spread betting chart

The five waves down are very clear – as are the five sub-waves within the fifth wave. On top of that, there are two positive-momentum divergences working. The larger one is between the waves 3 and 5 as marked, and the smaller one is between the waves 3 and 5 sub-waves of the larger wave 5.

To me, this was a massive signal that the market was about to rally.

On Wednesday I wrote: “As of this morning, my best guess is for a slight new spike low in the next few hours, and then a rally of some magnitude can begin.” The chart above clearly demonstrates that we had the spike low (see the pigtail on the lowest price bar). And it occurred within my expected timeframe.

My forecast then was for a rally to at least the Fibonacci 50% level (pink bar).

This is the position in the Nasdaq this morning:

Dow Jones spread betting chart

As expected, the market has rallied and has already reached the Fibonacci 38% level. Now it’s heading for my 50% target.


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The spike low is an important signal

Let’s get back to the Dow, which is the market I trade. I had already taken partial profits on my short trade earlier. And because my forecast called for an imminent reversal, I was on high alert to do the same for my remaining position.

The spike low in the Nasdaq was enough for me to tighten protect-profit stops. So that’s why I moved them to the 15,420 level, which was just above the most recent minor high:

Dow Jones spread betting chart

That trade gave me an additional over-1,000-pip profit. But that’s not all. Because of the clear message that the market really wanted to rally, I reversed my position and went long at 15,420. And when the market rallied to my tramline and then moved above it, I felt confident a vigorous rally was in place.

And this is the position this morning:

Dow Jones spread betting chart

The market has rallied to the Fibonacci 23% level and into chart resistance. That means it is now short-term overbought with an extreme momentum reading. Because of this, I have taken a profit on my long trade on one half of my position at the 15,640 level for a gain of 220 pips. This is in addition to my profits on the previous short trades.

Why this trade is a win-win for me

OK, so now I am holding one half of an in-profit long trade and my protective stop is now at break-even. What do I expect now?

Dow Jones spread betting chart

This is my best guess as of this morning. Later today, all eyes will be on the US employment data report. And that will likely increase volatility. Because the market has already rallied in anticipation of a ‘good’ figure, the odds favour a decline following the report from near current levels in a B wave. There, it should meet support and rally again in a C wave, which may extend to the Fibonacci 38% level near 15,800.

Of course, the market may love the data and rally further, thereby aiding my long trade. So it’s a win-win for me.

Why this is my most bullish interpretation

Looking back at the Nasdaq chart, a C wave rally in the Dow implies a rally to the Fibonacci 50% level. This level is also where the wave 4 has its top. I’ve found that this is a common target for counter-trend reversals.

This is my most bullish interpretation for the near-term. But because we have a clear five down in all stock indexes, I do not expect this rally to last. In the meantime, I am making hay on my long trade while it lasts.

I hope you see how a study of Elliott waves can hone your trade entry skills – and get the direction right into the bargain.

• 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. [xyz_lbx_custom_shortcode id=11]

 

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7 Responses

  1. 07/02/2014, neill wrote

    Hi John
    Great call re the bottom of the Dow I was short and tried to buy but missed the order!!
    Lots of people here are sceptical re your trades (understandable really)
    Dont think it helps that by the time the ideas get published its quite late in the day
    An idea for you?
    Why not email out the trades you are doing so we can see them at the time?
    If i recieved your next 10 trades and they were good I would then happily pay for more!

  2. 07/02/2014, Bronco Bill wrote

    Did anybody notice last Monday…. the day of the big drop.
    The Dow finished up 116 points below the psychological important 200 day MA.
    Tuesday and Wednesday was spent banging heads up against it and on Thursday a burst through, with a follow up today.
    Phew! that was close.
    It is said that Bulls live above the 200-day, Bears live below.

  3. 08/02/2014, anne wrote

    i think that despite the move down, the Dow remains bullish. what do you all think? excluding John of course. anne

  4. 09/02/2014, Bronco Bill wrote

    If you make any (bullish) bets anne just make sure your stop-loss is (guaranteed).
    If a major trend change in direction from 2009 has not allready started (confirmation has yet to be shown on my monthly charts) then I believe it will happen this year and there are many reasons out there now which could cause a sudden drop at any time.
    It is a shame that more comments cant offer an opinion on the markets direction other than expecting a free ride off John..and he like the rest of us, cant be right all of the time.
    What was it ol’ Jesse L used to say, “The markets are never wrong, opinions often are”.

  5. 10/02/2014, IJ1 wrote

    Bronco – to take you up on your proposal for some input from comments, does anyone here watch the Russell 2000?? I will first confess that i’m not an expert on TA. i use it to an extent but combine it with fundamental analysis, and have “investments” as well as trades. Anyway, the Russell trades at 47x 2013 earnings, and analysts project 100% earnings growth for 2014! From a fundamental point of view, this seems crazy, and only a super-boom of unprecedented size in the US economy can justify these valuations. In other words, US small caps are a screaming short if these expectations are dashed. From a technical point of view, this is now really interesting, as we’ve seen a break of what must be a historic rally since late 2012 till January this year in terms of the narrowness of the channel, and shallowness of the dips. my interpretation of the chart is that this latest leg since 2012 was purely momentum driven. The break means the momentum is gone, and many of these trend-followers could bail out very quickly, sending the index tumbling. I’m looking for shorts in the 1120 area. Would be keen to hear any thoughts from those more technically savvy than me.

  6. 11/02/2014, Anonymous wrote

    I will go long here FTSE100 that will break 7000 level this year atlast. :)

  7. 11/02/2014, Anonymous wrote

    if all around the world stock indexes climbs above 20000, then why not Dow. I hope this go above 20000 level when and how i don’t know but you will see it before 2017 till then don’t sell just a humble advice.
    Regards

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