All the markets I cover have suffered major declines this week, which have validated my (so far) bearish stance. And they've provided me with significant profits, especially in the short term.
The Dow is no exception, as I look at in a minute.
But with the markets having fallen so far, it would be easy to get complacent, or even perhaps cocky. If you are new to trading, I must warn you that this would be very dangerous. As I have said on numerous occasions, markets manage to fool the majority and will turn around just when the majority least expect it.
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So what is the mood in the markets today? I've been warning of the deflationary effects of an imminent bank and sovereign debt implosion for months, but the politicians haven't been listening.
This week, though, there's been a major shift. Now we read statements from major figures especially in the eurozone that we're perilously close to a '30s-style depression.
Politicians rarely speak in such stark terms, and it illustrates that reality has filtered down to them. But they are reliably the last to respond to reality.
Very often, such utterances mark the end of a prevailing trend in this case, down. So I am on the lookout for major surprises to the upside.
Trader tip:As I never tire of saying do not marry your opinions. Be alert for turning points that almost always come when you least expect it. Being bearish today means we are now part of the crowd, whose members have bought into the gloom-and-doom scenario. It's becoming a more crowded trade, so beware.
Let's get back to the Dow. When I last covered it, I had identified a major top at the 12,300 level and was expecting further falls. And that's what we got a decline to my fourth tramline. Here's the chart with mediumterm tramlines drawn in.
The Dow is currently bouncing off this fourth tramline. It's approaching the underside of the third tramline. Will it hit this? First, let's look at the price action off the 12,300 top:
I have drawn a superb tramline pair, the lower one taking in the significant high marked by the red arrow to the left. And note the great hits on the yellow, blue and green arrows. This is about as good as it gets with tramlines.
OK, the market this morning is straining for the upper tramline once more will it make it? And if it does, will it rebound downwards? I have a few doubts, as I will now show.
Here is an alternative Elliott wave count:
The move down from the 12,300 high can be counted as an A-B-C. These are counter-trend moves and often indicate the trend remains up.
The waves down are overlapping and do not seem impulsive. This pattern also normally indicates a corrective phase.
So in my view, the Dow is near a major crossroads. What happens from here depends on market action surrounding the area marked by the blue box:
I have my Fibonacci levels, and the market is currently trading at the 38% level.
The blue box also contains the underside of my up-sloping tramline and also the upper down-sloping tramline, as well as the Fibonacci 50% level.
Altogether, this is a triple line of resistance.
The first test is the down-sloping tramline. With the possibility of an extension of the rally, the Dow is truly at a major crossroads.
Playing the percentages, I still reckon the odds favour the downside. But I've less conviction about this than I had last week.
I expect a more two-sided market near-term.
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:
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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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