How I took a major profit from the Dow yesterday

Despite the incredibly fast-moving and volatile markets, precise Fibonacci ratios are still being observed, says John C Burford. Which is great news for traders.

Stockmarkets are at a critical juncture. If they don't start a counter-trend rally soon, more severe declines lie ahead. But I have a clue that such a rally is imminent (see later).

I am hardly the first to comment that stockmarkets have been exceptionally volatile in recent days.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

For instance, on Wednesday the Dow moved by 580 points and the FTSE by 257 points with big intraday swings.

But despite such incredibly fast markets, precise Fibonacci ratios are still being scrupulously observed in separate markets and as you know, Mr Fibonacci is one of my best trading friends.

Advertisement - Article continues below

The Dow is a US-based index and the FTSE a UK-based one. On the face of it, they should have their own distinct characters.

And if the stockmarkets follow the economy (as so many believe), then the UK market (whose economy is allegedly one of the best performing among the OECD) should be relatively buoyant. But the US economy is considered to be lagging, and so the stockmarket should be relatively weak.

But almost on a tick-by-tick short-term basis, they are in total lock-step. How can that be? Even the pundits have noticed: at the Davos shindig, the IMF's deputy director warned that "asset markets have become dangerously correlated", and that liquidity (which supports them) could dry up.

He added: "If everybody is moving together, we don't have liquidity at all. We have to be ready to act very fast."

That is what happens when everybody tries to escape the burning theatre at the same time plenty of panicked sellers but few buyers.

But note his last sentence is that a warning that central banks are girding for another massive dose of quantitative easing (QE) as ECB boss Mario Draghi indeed hinted? If that rumour got around, we shall see a major snap-back share rally, be assured.

Advertisement - Article continues below

If more QE (or even negative interest rates or "helicopter money") is advocated, this will follow the age-old central bank practice that if a massive dose of medicine doesn't help the patient, even more is sure to be the answer. Naturally, this will not end well, and some of my MoneyWeek colleagues have set out ideas to help you protect your wealth. Tim Price has won awards for his defensive investing nous, and his newsletters are well worth reading if you're worried about the future of the markets.

Correlation is not just a long-term phenomenon


Here is the 15-minute chart of the Dow I took yesterday morning at 7:00 am:


The chart patterns are virtually identical but why is this? Surely, if stock markets follow the general economy of the country, that cannot be.

I have marked the Fibonacci 50% and 62% retraces of the previous wave areas where I always look for possible turn-arounds with the 62% level being my top choice.

And here are the same charts one hour later:


It is as if they are joined at the hip which they are of course (from the same pool of liquidity).

Advertisement - Article continues below

Note that both markets turned at precise hits on their Fibonacci 62% levels. Isn't that pretty?


I took partial profits here for a 200-pip profit. Since I was using my split bet strategy', I was still holding partial long position with the stop moved to break even with a guaranteed profit of at least 200 pips, and possibly more if the Dow moves higher.

Here are the results as of 6:00 pm (you can check the trade times are genuine from the date line on top left of charts; I took them all in real time):

Now the market has poked above the old high at 6:00 pm and is a great place to take a final profit of about 400 pips for a total profit of 600 pips for a terrific day trade.

This type of trading is totally independent of any macro-economic considerations. You do not need to figure out the meaning of all the data and pundits' pronouncements. I am only trying to find the path of least resistance in the immediate future. That is the essence of swing trading even on this small scale.

I mentioned above that I believe a relief stockmarket rally is on the cards. Here is the Japanese Nikkei 225 index daily chart I took yesterday:


The trend is definitely down, but at the 16,000 level it has hit major long-term support at the junction of the Fibonacci 38% level and the chart support/resistance line marked. All of the major tops in 2013 and 2014 were stopped at this level and now 16,000 has morphed into major support.

Advertisement - Article continues below

Note also the momentum divergence into this week's low a sure sign a rally lies ahead and this is what we are seeing this morning. That low was a great area to take at least partial profits on your shorts. As I write this morning, the index is up over 400 points and touching the 17,000 area.

What is the upside potential for stocks? The Nikkei could extend to kiss the underside of my blue line (a typical event) and that would certainly set the bears running! But volatility will continue and short-term trading will remain very worthwhile.

Before I end this email, one more point: crude oil is in a hard rally this morning is this the bottom? I hope to cover this market next week.




The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020
Small business

Furlough: what does it mean and how does it affect me?

Many companies have “furloughed” employees after they have shut down because of the coronavirus. But what does furlough mean and how does the scheme w…
30 Mar 2020