How to spot when the market is on the turn

Spread betting expert John C Burford explains the strategies he uses to spot turns in the markets, and how you could profit from them.

Did the decline in the FTSE 100 on 28 January come as a surprise? If you had been following the stock indexes using the Elliott wave (EW) and Fibonacci principles that I use, the answer would definitely be 'No'. I'll show you why.

I'll take the FTSE as my example. The other indices I follow the Dow, S&P and Nasdaq all could have been used, and the same conclusions reached.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Here is the weekly chart to give us perspective:


(Click on the chart for a larger version)

Advertisement - Article continues below

The all-time high at 6,765 was made in the summer and autumn of 2007 (showing a good double-top). This was of course, followed by the biggest bear market since the 1920s. The FTSE hit a low of 3,455 in early 2009 (on a beautiful positive divergence with momentum, please note). Since then, the FTSE has been in a strong bull market and has recently made a new high for this move.

Waves within waves

Let's have a look at this rally in more detail, because it will give us clues as to where we can make good trades. If we take the March 2009 low and make an EW count from there, we can see one wave up (wave 1), a wave 2 down, then a very strong wave 3 up, followed by a complex wave 4 down, and then a spike up into wave 5.


(Click on the chart for a larger version)

The form of this five-wave pattern obeys all the Elliott rules and guidelines indeed it's a textbook case. Why do I say that? Simply because after making wave 5 (an ending wave), the market turns tail and tumbles in a violent change of trend. This included the infamous 6 May 'Flash Crash' (when the Dow Jones toppled by more than 1,000 points at one point).

This action confirmed my EW count as far as it went. In fact, trading off the April 2010 high would have been very profitable in a short space of time. But that may not be the whole story for the rally off the 3,455 low. We always need to keep in mind the possibility that we may have made a correct count, but it may be a part of a larger wave pattern. One clue that this may be about to happen here is that the April rally to 5,850 took the market to a point between the Fibonacci 61.8% and the 76.4% levels in other words, the market was in no-man's land. A top at a Fibonacci level would have been much more convincing.

After five waves, can the market recover to new highs?

The collapse in May to the 4,800 area was traumatic or exciting if you were short! During these turbulent times, it paid to be a very short-term trader. When the market made its low in July, it started to rally again. This was around the time when Ben Bernanke made his announcement that we'd see another batch of quantitative easing (QEII).

Advertisement - Article continues below

Many bears including me believed the rally would be short-lived. But in fact the market rallied off each dip, as is shown clearly in the daily chart below:


(Click on the chart for a larger version)

As the market rallied, I could then label the three-wave correction A-B-C (in yellow). Before that, the count was not clear.

Then the rally from July showed clear tramline trading features. At the November high, I could draw my tramlines. This now gave me a target area for the next dip, as I projected the lower tramline into 2011.

Back to the drawing board

By November, I knew this rally was not simply a bear market rally, as a new high above the April high had been made. In other words, I had to change my EW ideas! But I was still looking for a possible final high and I went back to my weekly chart.

In early January, the market was heading for the Fibonacci 76.4% retrace at the 6,000 level. We know that round-number levels are very often targets and can repel further advances, at least temporarily. That suggested that I should be looking for a top around the 6,000 level.

Advertisement - Article continues below

And in January, the market did make it and traded around that level for a few days. So I then applied my hourly chart to try to pin-point an entry, and this is what I found:


(Click on the chart for a larger version)

After trading above 6,000, the market broke down through my support/resistance line. That was the first clue to expect a change in trend. On 20 January, the market made another attempt to rally, and made it back to the exact 6,000 level on 26 January.

Then, the break through my support line on 27 January was all I needed to short the market. I knew where my target was from November near the lower tramline (you can just see the bottom tramline in the bottom right-hand corner of the chart above). That was a possible 140 pip trade.

So that was a trade based on the use of EW and Fibonacci, with help from momentum divergences. The drop on 28 January was not a surprise, as the EW count had indicated that a top was imminent.

NB: Don't miss my next bit of trading advice. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .



Spread betting

Build profits with this industrial equipment rentals company

United Rentals is poised to benefit from higher spending on infrastructure. Matthew Partridge explains the best way to play it.
26 Feb 2020
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
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
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

Most Popular


Will coronavirus kill off the bull market?

It seems clear now the coronavirus will at some point go global. And when it does, will it bring down the stockmarket’s bull market? John Stepek looks…
27 Feb 2020

What to look out for as panic over coronavirus spreads

Markets have started to get properly worried about the coronavirus outbreak. And it’s not just stocks, says John Stepek. Here’s what you should be kee…
28 Feb 2020
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020