Big tramline breaks in the Dow

The Dow has crashed through one line of support only to run up against a stiff line of resistance, says John C Burford. Here, he sets his target for his latest trade.

The 'Barack bounce' didn't last long, did it?The Dow is down around 500 points from last Wednesday's high and has broken through support. Let's see what the picture looks like this morning.

In my Wednesday post, I noted the pick-up in volatility recently then, the market had bounced off my upper tramline once and was heading for it again. I decided to sit on my hands. But minutes after signing off, I had a terrific opportunity for a trade. So out my hands came!

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

See the below chart for theposition early onWednesday. The market had made it back to the upper tramline, and my question was whether it would dart up through it as the election results were confirmed.

Recall I had identified the move down (red bars) as a potential A-B-C move, suggesting rally extension, not a new down move.


(Click on the chart for a larger version)

Advertisement - Article continues below

But when the market failed to follow through and drop back to the tramline (which was uncertain), an initial short trade was indicated with a protective stop just above the 13,300 high of the day for a very low risk trade.

This is the grey bar on this hourly chart:


(Click on the chart for a larger version)

As we now know, the market started selling off in earnest and when it broke the significant low just below the 13,250 level, that was the clincher and the second bite of the cherry.

Trader tip: This is a classic example of one of my best entry signals. We were at the upper tramline (resistance).If this tramline could hold further rallies, the confirmation would come if the most recent low could be taken out.This is an excellent spot to enter resting entry stop orders.

The big problem is, of course, where to place protective stops for a low-risk trade.That is why I like to probe entries closer to my suspected turn to have those low-risk entries.But for more conservative traders, the above entry method is ideal.

Advertisement - Article continues below

Very formidable support

OK, let's fast forward to this morning:


(Click on the chart for a larger version)

The critical 13,000 support zone gave way on Wednesday as the market headed for my lower tramline with a tremendous overshoot on Friday.

Currently, we are bouncing around this tramline. Shorter-term traders will be looking to take at least some profits off the table here for a very tasty 500-pip or so profit.

Now, we are on a major short-term tramline, and so we must expect a bounce at some stage perhaps back to kiss the 13,000 support?

Advertisement - Article continues below

It is time to take a step back from the hourly chart and see where we are on the daily:


(Click on the chart for a larger version)

Here are the tramlines I am working with currently. We had the centre tramline break last week, so that indicates the major move is down and my target is the lowest tramline in the 12,000 region.

But first, the market must negotiate the support provided by the complex congestion zone from the summer's trading.This target is also where the major June low lies.In addition, this is precisely the 50% Fibonacci retrace of the entire move up from last October's low.

I expect this to be very formidable support.

I am often asked why I amtrading from the short side. I refer anyone to my 5 November study of the Nasdaq for clues!

Advertisement - Article continues below

A stupendous Elliott wave

Finally, here are my ideas on the likely Elliott waves:


(Click on the chart for a larger version)

The September-October highs were the big C wave top.The current move off this top is wave 1 down (unfinished).The next decent bounce will be wave 2 up, followed by a stupendous wave 3 down which should carry the market below the critical 12,000 low.

This is the scenario I shall be looking for and trading accordingly.

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

Advertisement - Article continues below

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.



Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020