On Wednesday, I outlined how I took a great swing profit by shorting the Dow at an opportune time. I then exited part of my position on the decline using my split-bet strategy.
That is a technique I invariably use in my trades. I cannot stress enough how important it is to bank some profits when an important target is reached. Many traders make the mistake of falling deeper in love with their trades as they rack up the gains and are emotionally unable to part company when the outlook appears brightest.
When the market starts to turn against them, those traders see their gains wiped out. That is hugely demoralising and results in poor judgement later on and often leads to traders becoming ex-traders.
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Remember, successful trading is not primarily about being proved correct in your forecast of the trend. It is about extracting profits from your activities.
I've adjusted my Dow outlook and it looks a lot better
But this week's very impulsive and strong action told me that this view was likely incorrect. I now think we could see a continuation of the current rally towards a new all-time high:
The August low now looks much better as my wave 4. In textbook fashion, I now draw in my lower tramline connecting the waves 2 and 4 lows. That places my upper tramline as shown.
The rally in my new wave 3 also looks better as it is long and strong. In fact, for much of its latter stages, it actually trades above the tramline in a demonstration of its strength.
So now I am working this new tramline set and if this is correct, we need one more all-time high in wave 5 to complete the pattern before the big bear gets under way.
I made a healthy profit then reversed my position
So that means instead of trading from the short side (which has been very successful), I shall now concentrate on the long side.
Here is a close up of latest trading on the hourly chart I took yesterday morning when I made that decision:
My old labels had the wave A as my wave 1 down and my new wave C was my wave 3. This week's rally was my wave 4 but when the rally carried past the wave 1 low, that violated one of the golden rules of Elliott wave theory: fourth waves cannot overlap the wave 1 extreme. Something else must be going on.
That was the critical fact that made my original labels invalid.
So now, how do I play it? I already have a part-short trade open and I need to exit that trade (hopefully with a profit) and get myself long. I forecast a dip off the Fibonacci 78% resistance later yesterday and wanted to take that opportunity to pounce.
This is how I did it. Here is the hourly chart as I write:
The dip I had forecast arrived on cue and that is where I reversed my position from short to long. The remaining short trade I still had working was covered at the 17,700 area for a small profit of 160 points (from 17,850 entry), making a total profit on that short trade of 820 points. And in a strong bull market, that was no mean feat.
With a new long trade at the 17,700 level and with its protective stop now moved to break even, I can sit back, relax and observe. If my labels are correct, we are in a small third wave up that should carry rapidly above the early November highs. That is the litmus test of a third wave.
This should get interesting!
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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