The counter-trend stock rally I flagged came – and went – almost in a blink! Last night, stocks rallied sharply and this morning are back down to earth. I did warn that this bear market will see sharp, but brief rallies – and this was one of them.
But yesterday morning the signs were pointing to a rally immediately ahead.
So today I will lay out how I go about analysing a highly active market, and how I try to spot trends before they happen using my tramline methods.
This was the 15-minute Dow chart I captured yesterday morning:
I had two alternative paths – either an immediate rally in a purple wave 4 extension, or a new low in purple wave 5 before a sharp rally. And this is what happened:
In fact, the market made a new low in wave 5 just under the wave 3 low to complete the five down. That occurred late yesterday. Remember, fifth waves are terminating waves on all time scales and herald a counter-trend move, usually in an A-B-C form. The key is to identify where wave 5 ends (often a very tricky task!).
Then, with the huge momentum divergence which indicated selling pressure was drying up, the market was poised to scream higher. In fact, the Dow climbed by 300 points within half an hour and took out the stop loss buy orders just above my wave 4 high in a mini short squeeze.
This rate of ascent was steeper than any of the declines – and could forewarn of further sharp advances.
So has the bear taken control again this morning after that brief flurry? After all, the main trend remains firmly down.
Here are my tramlines on the hourly chart:
My lower tramline has four accurate touch points, making it highly reliable as a line of support and of resistance (following the break). And just to prove how good that resistance line is, the sharp rally was stopped bang on that line in a traditional kiss.
And that point was also in the region of the Fibonacci 62% resistance, which is another area of resistance.
So what is the immediate outlook for a swing trader? After all, we have a complete five down to yesterday’s low, which implies a decent bounce in an A-B-C form. If you examine the above chart (current as I write), we have a potential A wave and the market is declining this morning in what could be a B wave. So, does a C wave lie up ahead? If so, the rally could be just as sharp as in Wave A – and possibly extend to the blue tramline in another kiss.
If this happens, there is a 300-pip profit available. So how to play it?
Let’s take a closer look. Here is the 15-minute chart as I write (at 8:15 am):
The market is approaching the last line of support at the Fibonacci 78% level. If there is to be a C wave rally, odds are that it would start from around there, or perhaps from the lower tramline (which lies somewhat below the Fibonacci 78% support).
Note the excellent tramlines in my B wave with accurate touch points all round.
Using my tramline rule, a break above the upper line would indicate further strength and that is the place to enter a buy order to test my C wave theory. Unless it does, then doing nothing (and staying short) is the best policy.
Also note the pattern within the B wave – there is a mini five down.
Wave 5 has not yet completed and it could do that if it enters the Fibonacci 78% support zone or above.
The key to a reversal up is an upper tramline break. That is my signal.
I remain with a short position and would treat any long trade as a separate trade.
Media sentiment remains solidly bearish – here is a selection of headlines in yesterday’s Daily Telegraph:
• “Here are the three biggest threats to the world right now.”
• “BHP Billiton announces $7 billion writedown amid oil and gas slump.”
• “European shares close at 12-month low on oil price slide.”
• “Fears of emissions scandal at Renault wipes 5 billion euros off shares.”
• “Spike in UK companies suffering ‘significant’ financial distress.”
But it is the unprecedented RBS ‘sell everything’ advice that still sticks in my mind as a defining mark of this week’s utter despair among investors.