I have a ‘full house’ sell alert

If you’ve been following the well-publicised Morgan Stanley “Full house buy alert” advice over the last few weeks, you might have been tempted to dip your toe into the stockmarket.

But just when you thought it was safe to get back into the stockmarket, another shark started circling.

Of course, the shark I am referring to is the VW car emissions scandal. When I first heard of it, I immediately recognised it as a very big deal. Of course, we have had car scandals before, but these have been mainly the result of omission (an honest mistake). But this is one of commission (a very dishonest and deliberate act intended to deceive).

You can read all the details elsewhere, but to me, this is one more nail in the coffin of the bull market.

Incidentally, I have a theory about well-publicised, definite market predictions issued by famous finance houses: they are almost always wrong, and timed spectacularly poorly, usually just before the market shoots the other way. Could this be because the firm wants to unload doomed stock onto less sophisticated investors?

Another reminder that markets move news, not vice versa

Because it is sentiment (or social mood) that drives markets, this very negative event is the result of a worsening mood. But most observers, if they comment on sentiment at all, will have it the other way around. They will say that the scandal has dented sentiment. I say it was the inherent negative mood that has resulted in the scandal.

When you see things in this light, many usually inexplicable market turns suddenly become understandable. And when combined with use of basic Elliott wave theory, this knowledge can help put the odds of success firmly in your favour.

On Friday, I covered the very negative reaction of the Dow to last week’s Fed non-news that interest rates weren’t about to rise. I have been waiting for signs that the market was losing faith that the Fed could keep stock prices elevated. The market has overwhelmingly believed that it could do just that – but I wasn’t so sure.

I knew that just one little slip would cause the whole house of cards (debt) to crumble. And last week’s stockmarket decline in response to what was normally considered ‘bullish’ news was the tip-off I was looking for.

The move occurred with immaculate timing just as my waves C and 4 were completing. This is the chart I showed on Friday:

Dow Jones spread betting chart

The August 24 plunge low was my wave 3 and since then, the market had been tracing out a complex wave 4 up. When wave 4 terminated, wave 5 down would start. During this wave 3 period to August 24, pundits were bearishly commenting on the collapse of Chinese shares – and the mood was ugly.

But as the market stabilised in wave 4, more were expressing confidence that there were massive bargains to be scooped up in the dip. But this bullishness has set up more fuel for the declines to come in wave 5. It’s a cruel world!

The buy-the-dip boys got burned

A declining stockmarket is a reflection of a worsening of sentiment from bullish to bearish. And in a bear trend, we see negative stories emerge such as the VW escapade, because the news follows the market.

So, how are the buy-the-dip boys doing now? This is the hourly chart this morning:

Dow Jones spread betting chart

Oops! Since Thursday’s high, the market has declined by almost 800 points (4.7%) and has broken below my lower wedge line – a very bearish move.

Remember, I like wedges! When they are broken, I have a handle on a major target – and that is at the start of the wedge. In this case, that is the 15,500 – 16,000 area.

But my main target is when wave 5 ends as it should under the wave 3 low at the 15,250 area.

Germany and Japan have it even worse than the US

Of course, German shares have taken an even bigger knock because the Dax is the epicentre of the current storm. Below is the index as it stands today. Note that my Elliott wave labels are slightly different from those in the Dow, but broadly follow a similar pattern with an A-B C pattern to the wave 4 up:

Dax spread betting chart

Yesterday, the market came within a thick whisker of matching the wave 3 low at 9,320 area. And from the wave 4 high, the market has fallen by almost 900 points (about 9%). I well recall that German shares were heavily touted not so long ago. Ouch!

And here is the Japanese Nikkei – another market that has been heavily touted. That index too sports a very bearish picture:

Nikkei spread betting chart

Of course, there is a huge spill-over from Germany to Japan, because they both have massive car industries, which are suddenly under tremendous pressure.

In all of the above markets, my forecast is for further weakness as wave 5 develops. But when the low is in, I expect a massive rally phase (which should coincide with a similar move up in commodities).

Long-term traders who are short from much higher up can look forward to taking massive profits as wave 5 terminates – and possibly position long. That will be when pundits proclaim the end of the bull market, of course. And the only way is down. Timing the lows need not be more complicated than following the headlines.

So, maybe Morgan Stanley, having unloaded their shares, will be poised to buy them back at the wave 5 low. That is, if they follow my basic Elliott wave roadmap. But I doubt they will – and that gives us ample opportunity to profit against them.