The Dow starts its big move down
The bull market in the Dow is starting to show signs of nerves. The market is primed for a fall, says John C Burford. But how far will it go?
Before I get going on the subject of today's post, I want to set the record straight about the nature of my MoneyWeek Trader posts.
I noted two negative comments following my Wednesdaypost: The Dow edges up, but are we near the top?, and I wish to address them to clear up any confusion out there.
Here is a comment from Beasties: "The only time I've EVER placed a trade on an actual recommendation (extremely rare as they are!) from John the trade moved in the opposite direction from his analysis BIG TIME. He wasn't even close to being right."
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13,100 for one of the most powerful trend-change indicators
OK, so how is my Dow trade working from Wednesday? Then, I showed the expanding wedge on the hourly chart and this is the update:
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The market briefly touched the upper wedge line on Tuesday at the 13,330 level, and since then, has bounced off it like a scalded cat.
Recall I placed a short trade at the 13,270 area on Tuesday and now my protective stop is at break-even.
So let's zoom in on the finer detail. Remember on Wednesday, I said that the 13,100 area was significant and to watch it closely?
(Click on the image above for a larger version)
The first reason is that the 13,100 area (pink bar) represents massive support from the congestion zone since 5 August. All attempts to push below this area were rebuffed until yesterday. Now, sell-stops are being hit under 13,100.
With the pink bar lying above the market, this area now becomes a resistance to rallies.
The second reason is that if the Dow can close below 13,100 today, we would have a weekly key reversal one of the most powerful indicators of a change of trend. I discussed this on Wednesday.
Time for a long, strong third wave?
So, it appears the market is being primed for the big move down that I have been waiting for.
Let's examine the Elliott wave implications here.
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I have labelled the Tuesday high as the top. The first wave down is wave 1 and the rally (in a clear A-B-C form) is wave 2. The move below the 13,100 area yesterday puts it in contention for a big wave 3. Remember, these are usually long and strong.
But we must always keep in mind the alternative scenario that the move down off the top is an A-B-C, leading to a resumption of the uptrend.
For now, I believe the odds favour my first analysis. Why? For one thing, the public have become bullish on the rally (a bearish sign), and the internals (items such as put/call ratios, new highs/new lows, and so on) spell a bull market living on borrowed time. This is not a strong bull market. In fact, it is a very nervous one.
Just look at what occurred yesterday after release of the US Initial Unemplyment Claims data the figure was only slightly greater than expectations, and yet the market sold off sharply. That was nervousness.
To confirm my analysis, I need to see a rapid decline to extend the third wave down next week.
Wednesday's homework exercise
On Wednesday, I set a simple tramline quest.
(Click on the image above for a larger version)
I drew in T1 and T2, which I showed then. I could draw T3 equidistant and parallel. In Wednesday's post, the market had fallen to T4, which is equidistant from T1-T3.
After a plunge down, the market rallied to kiss the underside of T4 a classic opportunity to enter short trades. And the market is extending its losses as I write.
The kiss also has hit a terrific Fibonacci level:
(Click on the image above for a larger version)
The combination of the kiss, the 50% hit, and the A-B-C form to the rally made this a compelling short trade just above 13,200.
The key level for me is the previous major low at 12,800 and then the lower wedge line at the 12,600 area.
I shall be watching for the big third wave next week!
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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