The fog clears in the Dow Jones charts

John C Burford uses Elliott wave theory to line up what promises to be a very profitable trade in the Dow.

On Friday, I outlined my case for an immediate turn-down in the Dow (among many other stock indexes) based on my reading of the Elliott wave pattern and my use of the Fibonacci levels to pinpoint two very accurate reversals at the 78% level.

Today, I want to follow up on this story, because it highlights several important principles for traders, and will reinforce the lessons that the new members of the Trade for Profit Academy are learning.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

This was the chart I left you with on Friday:

Dow Jones 1 Jan 2015-9 Jan 2015


And this is how trading developed that day:


But the fog cleared as Friday's trading developed. What appeared as a succession of small over-lapping waves later that day turned out to be something much more defined and potentially very profitable. As trading developed throughout the day, the market spiked higher following the bullish' US jobs report issued at 1.30pm UK time.

Advertisement - Article continues below

But then, the market started retreating leaving a stand-out formation a complete five-wave motive pattern. And when the market broke below the wave 2wave 4 line, that was a clear sell signal. If you had that chart in front of you at 3pm and if you know my methods, you could not have failed to spot the opportunity.

Incidentally, media reports yesterday were universally bullish on that jobs number, but a funny thing happened on the way to new US growth-inspired stock highs. What was not mentioned in the hoopla was the steady drop in worker participation rate and the unusual drop in average hourly earnings. So what happened to the idea that wages/salaries are now on the rise and set to exceed the consumer price index? So much for a booming economy.

As you know, I never tire of pointing out the unwise policy of taking media commentary seriously. It is entertainment, pure and simple (or rather, it can be used as a contrary indicator). The reversal following the knee-jerk spike higher was very likely a classic buyer exhaustion event.

Of course, I then needed confirmation that the market wanted to move lower to conform with my Elliott wave labels and my bearish expectation. Naturally, if the market moved higher instead, I was ready to abandon my bearish scenario.

But crucially, the market's move during the remainder of Friday was to hold terrific confirmation to back up my prognosis.

I will show this in the five-minute chart for added clarity of the waves:


The move down is a classic five down with long and strong wave 3 and the rally is a textbook corrective A-B-C with the C wave terminating at the precise hit on the Fibonacci 50% level.

Advertisement - Article continues below

It really doesn't get much better than this. The C wave high was an excellent place for a short trade at low risk. This whole pattern is a classic reversal signal.

The move down into the weak close has broken the small lower tramline and this sets up the probability that we have a small-scale wave 1 and 2 in place and have entered the wave 3 down.

Now let's combine this chart with the hourly chart and put all of this together:


The move down off the 26 December high is in five motive waves and the relief rally is also in five waves with wave 5 terminating at the Fibonacci 78% level.

That sets up the larger-scale wave 1 down and wave 2 up. And on Friday, the move down off the wave 2 high is in five waves down to wave, the relief rally of wave 2 is an A-B-C with the C wave terminating at the Fibonacci 50% level.

If correct, we should be in two wave 3s and we know what the implications are. Wave three of three is one of the most powerful patterns in the book and also one of my favourites to trade.

Advertisement - Article continues below

Of course, any trade could go wrong and you should always use stop-loss orders.

The lesson here: getting to grips with the basic ideas of Elliott wave theory can put you in the driver's seat and that is what members of my Trade for Profit Academy are now busy doing.



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
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

Most Popular

UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 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