Markets now are a trader’s paradise

The huge surge volatility has made markets a trader’s paradise. John C Burford. Explains how he’s been playing things.

The huge surge in volatility recently has made themarkets a trader's playground. Daily swings of many hundreds of Dow points have been the norm.

Fear is now stalking the markets. The VIX fear index shows that the market has been roused from its complacent pre-Black Monday slumber to a sudden state of terror:

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.
150902-MWT-01

When markets suddenly switch from a somnolent state of bullishness to a state of fear, that spells opportunity for alert traders especially on the short side. And that is where my tramline methods start paying their way.

But for buy-and-hold investors, the action has been totally out of character (at least since 2009) and is doubtless giving many sleepless nights.

Advertisement
Advertisement - Article continues below

I have been following many of the twists and turns in the Dow in these articlesand highlighting how terrific swing trades were made in the past few days by simply following the signals offered by my tramline method.

Here is another one.

I found the perfect place to short the Dow

I drew a new roadmap for the Dow

wave 3

I had forecast earlier in the week

150902-MWT-02

I thought the rally on Tuesday was unlikely to be the final wave 4 top because it was too brief. I felt there was one more rally to a new relief high in store hopefully to the Fibonacci 50% or even 62% retrace of the entire wave down.

Advertisement
Advertisement - Article continues below

As Friday dawned, I noted the lovely five wave pattern to my C wave, which had hit the Fibonacci 62% level on a negative momentum divergence. Bullseye! That was the place to enter new short trades; the odds were high that I had found the wave 4 top and the market would then move down, especially after it broke below the lower tramline, which it did later on Friday.

And on Bank Holiday Monday it pays to be awake at all times! - the market opened down with a very large gap:

150902-MWT-03

On Monday and Tuesday, the market moved down by over 700 points off last week's high and offered a terrific three-day profit if taken.

Why would you take the profit there? Well, here's a great reason:

150902-MWT-04

The move down hit the Fibonacci 50% support level on the nose and on a positive momentum divergence to boot! The odds were high that the market would stage a bounce and taking the profit was a prudent play. As I write, we are in that bounce.

Note that I did not use guesswork, or gut feel to make a decision I used the well-established rules and guidelines of my tramline method.

Advertisement
Advertisement - Article continues below

This morning, I have two alternative paths: either the market will go on to make a new wave 4 high, or the rally will top out under the 16,700 area and resume its path along wave 5.

The news really does follow the market

"Early shutdown on cards for 40 North Sea platforms".

As anyone who has studied economics will know, a low price is a cure for a low price. Prices that fall under costs of production inevitably lead to production shut-downs and curtailment of exploration plans and make future supplies tighter. Of course, these seismic shifts in production levels take time to work through. But markets are very good at anticipating these changing dynamics.

Traders must also anticipate these developments. If you are using the news to guide your trades, you are usually too late to catch the turns. It is often a case of shoot first, ask questions later.

But that is what the art of tramline trading is designed to do it offers rules and guidelines that can be followed with scant regard to the current news.

Let's look at yet another great example of the news following the markets. US crude has rallied over $10 in only three days its biggest gain in over 20 years. Overnight on Monday, reports that US crude production was being revised downwards along with OPEC's willingness to discuss output curbs emerged.

Advertisement
Advertisement - Article continues below

Naturally, the 'buy the rumour sell the news' boys were busy taking profits on that. And the market is easing off its highs as early birds are selling to the latecomers who follow the news (and buying at a top).

There is no doubt that the historic swings we are witnessing in many markets are the result of fundamental shifts in investor/trader sentiment and social mood generally. There has been a near-consensus view that with central banks willing and able to pump as much liquidity into propping up asset markets, markets will never collapse.

This view is now being exposed for what it always was a reflection of a bullish mania that has bred historic complacency. And after complacency comes panic.

Advertisement

Recommended

Visit/519524/how-my-2019-spreadbetting-tips-fared
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
Visit/519285/bettingon-politics-some-safe-labour-bets
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
Visit/518916/ds-smith-will-deliver
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
Visit/518908/betting-on-politics-28
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular

Visit/economy/600691/money-minute-friday-24-january-the-key-to-uk-interest-rate-cuts
Economy

Money Minute Friday 24 January: the key to UK interest-rate cuts

Today's Money Minute looks ahead to the release of data that could hold the key to UK interest rates cuts. 
24 Jan 2020
Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/investments/funds/600697/how-the-boom-in-passive-investing-could-create-better-run-companies
Funds

How the boom in passive investing could create better-run companies

ESG investing, or "ethical investing" as it used to be called, is mostly about the marketing, says John Stepek. But it's not all bad.
24 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600672/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
24 Jan 2020