The Dow has struck one of my targets

In recent days, I have been swinging between covering gold and the Dow – and ignoring the euro. This is because I really have nothing new to say about the euro – the market has been working lower for a month now towards my major target as the US dollar has been gaining strength (contrary to much learned opinion, please note).

But action in the Dow has been anything but normal. In Monday’s post, this was the picture:

Dow Jones spread betting chart

(Click on the chart for a larger version)

The critical 13,000 support level had been decisively broken – and that alone would have been a great reason to take a short trade.

And this week, the market has dropped back down to my lower tramline.

I had expected at least a partial bounce back to try for the underside of the 13,000 pink zone. But Mr Market was in full flight down and since I believe we are in a very large third wave – and these are generally relentless in their thrust – this was totally in keeping with my interpretation.

Why I’m breaking my own rule

Dow spread betting chart

(Click on the chart for a larger version)

On Wednesday, the market moved sharply lower and broke below my lower tramline. 

Now, this tramline is not terribly secure because it has few touch points, especially in recent trading (only one!). I may have to adjust its position.

Not only that, but my upper line only sports two touch points – also not a terribly secure line. I would have preferred at least three.

I am not relying on these too much until I see more chart work. That is why I am not yet taking my short trade off the table, as is my rule for when the market hits – or overshoots – the lower tramline.

Has anyone noticed the Dow dip?

I have a short swing trade working from the 13,250 area and I will need more evidence to give me a reason to take profits. Where can that come from?

Here is the updated daily chart showing the Fibonacci retraces:

Dow spread betting chart

(Click on the chart for a larger version)

I have taken the October 2011 low as my low pivot point, and observe how the 4 June low lies exactly on the Fibonacci 50% level – and that was before the recent highs were put in! I see this phenomenon frequently – and when I do, it gives me confidence in the targets I derive from these Fibonacci levels.

Trade tip: Look out for these events, which can occur in any time frame.

The market is heading for the 38% level (pink zone) at the 12,450 area.

There is one thing I currently find remarkable: I have scanned the media and cannot find a reference to the fact that the Dow has lost over 1,000 points in about a month. Am I the only person to have noticed?

And this brings up the question of sentiment. In the media at least, there is little discomfort at this large “dip”.

I have recently written about sudden changes of sentiment with my frozen pond story. My question is: has the bullish sentiment suddenly reversed?

To help answer this, I turn to the VIX measure of fear:

Vix chart

(Source: Yahoo! Finance – Click on the chart for a larger version)

Even with this 1,000-point ‘dip’, the VIX is only just getting up off the floor (where it was on the summer rally). A low reading indicates complacency and a high one indicates panic (usually a selling panic as in October 2011!).

All of this is telling me that there is little fear of a major rout out there.

Could there be a major sentiment change?

But is the market ripe for a major change in trend? Here is the latest committments of traders (COT) data:

Non-commercial Commercial Total Non-reportable positions
Long Short Spreads Long Short Long Short Long Short
OPEN INTEREST: 51,112
COMMITMENTS
14,735 6,462 1,859 26,955 38,500 43,549 46,820 7,564 4,293
CHANGES FROM 30/10/12 (CHANGE IN OPEN INTEREST: -2,725)
-1,737 -2,226 769 -894 -1,467 -1,862 -2,924 -863 199
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
28.8 12.6 3.6 52.7 75.3 85.2 91.6 14.8 8.4
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 92)
26 14 6 36 27 65 44

The large speculators (aka hedge funds) are still better than two-to-one long, while the small speculators are almost two-to-one long. The changes in the week are interesting. The hedgies reduced their longs (expected in a decline), but also reduced their shorts by a massive 25% – just before this week’s big swoon!

That’s called timing – very bad timing. But the little guys are getting it right – they reduced their longs and increased their shorts.

Because of the small sample size, I cannot take this data too seriously, but I believe it adds to the case for a major sentiment change, which is also supported by the latest AAII data. Remember, this is a survey of US ‘mom and pop investors’ who are more likely to be in the trenches of the real economy than hedge fund managers:

W/e 14 Nov Change in week Long-term average
Bullish 29% -10% 39%
Bearish 49% +9% 30%
Neutral 22% +1% 31%

I find these numbers staggering. There has been a weekly swing of almost 20% to the bearish cause. Maybe they have noticed the 1000-point Dow ‘dip’ too.

The other fascinating point is that the neutrals are only at 22% – a full 9% below the long-term average. This is getting into record low territory I believe, and surely indicates that the markets are getting even more polarised – as is the entire world. 

Last time, I had a possible Elliott wave picture for this move down. I may have to make a major adjustment for the wave 1 low!

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

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