Advertisement

Profit from the Dow Jones - whichever way it heads

With recent falls suggesting the Dow Jones's bull run may be ending, John C Burford examines the charts, and looks for potential trades whichever way the market goes now.

Last Friday, I wrote on the morning before the release of the dreadful US employment report, which must have shaken the stock bulls: The secret of successful trading: have a system and stick to it.

Recall, in the morning, the Dow was trading at or around my short-term tramline:

MWT-11-07-11-1

(Click on the chart for a larger version)

Advertisement - Article continues below

To me, it looked vulnerable to a break and that is exactly what we got later that day. Here is the latest chart:

MWT-11-07-11-2

(Click on the chart for a larger version)

The key for me was the potential textbook five-wave Elliott wave pattern that was forming.

The break of my short-term tramline at the 12,730 area confirmed the end of the rally (marked by the yellow bar).

In the afternoon, the market dropped rapidly to an important level where there was significant support.

The Dow hits support - but will it hold?

So now, we have a major test of support. If that gives way, the odds dramatically shift to the view that the top is being formed.

MWT-11-07-11-3ii

(Click on the chart for a larger version)

On Friday, I had two scenarios. If I were a more adventurous trader I could have short the market on a break of the short-term tramline at the 12,710 area (yellow bar on the chart).

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

The other scenario was if I were a more conservative trader, who would want more confirmation of a trend-change, to wait for a clear break of the major support provided by my central tramline before pulling the trigger (marked by the purple bar).

Incidentally, in a very pretty confirmation of how the Dow adheres closely to Fibonacci retracements, look at the exact point of support at the 23.8% retracement at 12,564 from where the market bounced (red arrow in the above chart).

Again, this is textbook stuff.

Even if I ignored the Fibonacci picture, as an experienced trader I would have expected some support in this area simply because of the trading congestion from last Monday to Wednesday.

Prices were confined to a narrow zone on those days.

That meant that there were traders who positioned themselves short and were staring at a loss as the market rallied on Thursday and Friday morning.

Advertisement - Article continues below

When the market broke back on Friday afternoon, they grabbed the opportunity to cover their short trades to limit losses, and their buying helped the market to stabilise.

There are two ways the market could go now

But now, at support, where is the Dow heading? That is the question. Let's assess the evidence.

Here is the first clue that the trend has changed.

I have a beautifully complete Elliott wave five-wave count to the top at 12,770 on Friday complete with a negative momentum divergence.

I also have a clear break of my minor tramline at the 12,710 area, and on the long-term charts, I see massive resistance at 12,700 + or 100.

If my central tramline still has any validity, a good break here would give me another strong clue. Ideally, I would want this to happen soon within hours.

But, as ever, there is another side to this coin!

I have painted an ideal scenario for a bear, and so far so good. But what if the market hasn't finished its rally?

Advertisement - Article continues below

Because anything is possible in the markets (but not everything is probable!), I must consider the possibility that the rally is intact.

Here is an alternative forecast:

MWT-11-07-11-4ii

(Click on the chart for a larger version)

In this scenario, wave 5 may well be a wave 3, and the current correction may be forming a wave 4 before running higher to new highs in a wave 5.

The overbought momentum readings are currently being corrected, so this scenario is possible.

I shall have to wait and see what the market provides for me, but in the meantime, a short trade in the 12,710 area can be protected by moving stops to break-even (following my break-even rule.)

Conservative traders will be looking at the 12,550 level with interest!

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

Advertisement
Advertisement

Recommended

Visit/trading/spread-betting/601322/trading-its-time-for-investors-to-dump-matchcom
Spread betting

Trading: it’s time for investors to dump Match.com

The dating group is grappling with regulators and looks absurdly expensive.
20 May 2020
Visit/trading/601233/trading-switch-over-to-itv
Trading

Trading: switch over to ITV

Broadcaster ITV is in solid shape and the market slump has left it looking far too cheap.
4 May 2020
Visit/trading/601168/buy-united-rentals
Trading

Buy United Rentals

United Rentals shares are extremely cheap and thecompany should benefit from spending on infrastructure
19 Apr 2020
Visit/trading/601091/trading-you-can-be-sure-of-shell
Trading

Trading: you can be sure of Shell

Oil won’t stay low forever – and Anglo-Dutch oil giant Shell looks both lean and cheap.
5 Apr 2020

Most Popular

Visit/economy/eu-economy/601422/heres-why-investors-should-care-about-the-eus-plan-to-tackle-covid-19
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Visit/investments/stockmarkets/601423/as-full-lockdown-ends-what-are-the-risks-for-investors
Stockmarkets

As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020
Visit/investments/funds/601385/in-support-of-active-fund-management
Funds

In support of active fund management

We’re fans of passive investing here at MoneyWeek. But active fund management has its place too, says Merryn Somerset Webb.
25 May 2020