Trends only start when (almost) everybody is wrong

Trends change when almost everybody least expects it, says John C Burford. Let the charts be your guide.

On Friday, I explained how I use my 'headline indicator' to help forecast a rally in crude oil. This is a very useful tool in any trader's toolkit, so today on this (UK-only) Bank Holiday, I will delve a bit further into this much under-used indicator.

Most pundits and junior and senior mediareporters alike labour under the misconception that it is the news that makes the markets. Follow the news and you will understand how the markets work. It sounds so reasonable, doesn't it? A plausible story can be written around it and we all love stories.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Of course, when you read an article on finance it is usually about a market event that has already happened. For instance, Friday morning's headlines after Thursday's surge in crude tries to explain why it 'suddenly' jumped by $4.

Bloomberg's headline read: "Oil surges most in six years on faster US economic growth", referencing that day's GDP report that showed a slight uptick in Q2 data.

Advertisement
Advertisement - Article continues below

But how many times have we seen the markets rally hard on poor data? If the market had fallen on the news, the headline would doubtless have read: "Oil collapses despite faster US economic growth".Reporters cannot lose! But traders and investors can, of course.

Traders have to anticipate market moves and tomorrow's headlines a long time before they are written, and the headline indicator is one more aid to help pinpoint turns.

Time after time in these postsI have shown that cause and effect is so often reversed the news follows the markets.

Also, the vast majority of people when making a forecast, simply extrapolate what has just occurred. If the market has been falling for some time, a growing majority will come to accept that as the status quo and general agreement is reached that the market will keep falling.

And when just about everybody is on board, that is the time of maximum confidence in lower prices and lurid headlines start appearing calling for even lower prices. That is when a 'surprise' rally occurs. And that is often just shy of the headline target.

Remember in 2011 when gold was on its way to $2,000? It hit $1,920 and then started a big bear trend that continues to this day. Also, the euro was supposed to hit parity with the dollar last March it hit 1.06 and then rallied.

Advertisement
Advertisement - Article continues below

Round number targets are rarely hit. So is petrol at £1 a litre just pie in the sky?

Yes, markets can and do trade in established trends, but the trend starts from a point where almost everyone is wrong and that is when my headline indicator is the most useful.

Markets are fractal that is they trade in waves of many degrees of trend. The waves are produced by changes in sentiment.

Have you ever read a mediaarticle headline that says: "Oil surges most in six years on termination of the fifth Elliott wave"?I thought not. In fact, you could only read such a headline here and in a few other publications.

The other notable event last week was Black Monday where I pointed out that Tuesday morning's headlines were so apocalyptic that an upward reversal had to occur and that is what we got.

My wave analysis of the Dow (below) shows exactly why that reversal occurred. Black Monday's wipe-out is my wave 3. The wave 4 rally since then has been in a typical A-B-C three up. And my C wave sports a lovely small-scale five up (green lines) with a large negative-momentum divergence:

15-8-31-MWT-1

Also, the C wave has hit resistance at the Fibonacci 62% level making the odds high that wave 4 has reached its peak.

Advertisement
Advertisement - Article continues below

The only thing that could spoil that is for the market to rally above the Fibonacci 62% level and perhaps go on to the 78% area. This market has been plagued by many very deep upward retracements of 78% or even more before peeling away again, so I would not rule it out entirely.

So, keep scanning the headlines (you don't have to read the articles!) and you should get a better handle on the markets than most pundits.

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
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
Visit/519524/how-my-2019-spreadbetting-tips-fared
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
Visit/519285/bettingon-politics-some-safe-labour-bets
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
Visit/518916/ds-smith-will-deliver
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

Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/investments/property/house-prices/600795/uk-house-price-rise-brexit-bounce
House prices

Is the jump in house prices just a Brexit bounce, or is it more durable?

UK house prices rose sharply in January. Some of that is down to the end of Brexit uncertainty – but not all. There is a real risk that prices will ke…
7 Feb 2020
Visit/economy/uk-economy/brexit/600778/winners-and-losers-from-a-hard-brexit
Brexit

Winners and losers from a hard Brexit

Our exit from the EU is likely to be of the hard variety, says Matthew Lynn. Investors should back the industries that will flourish
9 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

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