What triggered the Dow's plunge?

Pundits are falling over themselves trying to explain the stock markets' recent falls. But there's no point looking for explanations after the fact, says John C Burford. Everything you needed to know was there in the charts.

At the start of what I expect will be another tumultuous week, it is good to ask the question: were you taken aback by the recent stock plunge?

Do you remember way back in July?

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The investment air was filled with optimistic projections for company earnings, low share valuations compared with bond yields, highly bullish investor sentiment readings, anticipated peaking of consumer price inflation figures, and decent future world GDP growth.

I even read an article from early July entitled "Small Investors Rediscover Shares' Appeal". They were piling into shares just in time for the big reversal.

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That was one headline that definitely helped firm up my bearish stance.

And look where we are now just a month later! Sentiment has totally reversed.

Are you in a state of shock/panic/denial? If so, you will have lots of company.

Well, if you have been following my trading emails, you should not be.

In fact, you should not only have been fully prepared for these shocking events, but also seen ways I have profited from them.

Since the most recent significant top at 12,800 in the Dow on 22 July, I have been accurately calling the massive gyrations of the market. I have been trading from both the long and short side and taking considerable profits from the huge swings. You may wish to go over the archives to discover my rationale for these trades.

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Stick to the three pillars' of trading: tramlines, Fibonacci, and Elliott waves

OK, you may ask: How did I know the 12,800 top was the precursor to a huge 2,300 point slide (so far)?

Well, I didn't for sure, of course. But I had very strong reasons to suspect the 12,800 was a major top beforehand, because it was in the position of a fifth Elliott wave (these are always ending waves prior to a reversal) of the very large C wave.

Predictably, the pundits are now out in force explaining away the plunge after the event, of course. Where were they on 21 July when they would have been of some use?

Then there was the larger Elliott wave picture which clearly said to me that if the 22 July 12,800 level was a second (large) Elliott wave, then we can expect a large third wave and these are usually very powerful and unrelenting down.

Briefly, what has kept me on the straight and narrow is the simple application of the three pillars to my trading tramline trading, Fibonacci, and Elliott waves.

Of course, one missing element is discipline. But you have to supply that yourself!

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We are about to offer free video tutorials that I have made on my three trading pillars, together with a bonus video Putting it all together'. Be sure to watch out for them in the days ahead.

For traders, the news' is just noise

I rarely give a mention to the current economic news or fundamentals'. That is because I firmly believe (from experience) that the markets create the news (or at least, the conventional interpretation of the economic data) not the other way around.

Also, the markets anticipate the economy. By the time the news is out, the market has already moved.

Trading tip: Learn to observe what others are saying, but do not be swept up by the crowd's responses. They are usually not at all useful for making trading profits, except in a contrarian way. Learn to develop a questioning attitude, guided by what has worked in the past.

Now the market has turned, notice how all of the news is bad'.

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At the 22 July top, much of the news was good'. (The next big turn up will occur when the majority is convinced the market is doomed).

Sentiment is king!

But to benefit from the plunge before 22 July, you had to ignore the siren calls from the herd and make the bold decision to go against it. That takes guts.

It proves once again that trends can continue for a long time until they don't. At the tops, that's when most traders reach a pinnacle of bullishness.

So what triggered the unexpected' turn-around?

After the fall, the post-mortems are inevitably thick on the ground. Most people will look for something in the news for the answer.

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My answer? There was a completed fifth Elliott wave (minor) up, and the start of a new third wave (major) down.

OK, we have not had any charts yet, so here are this morning's.

MWT-11-08-22-1

(Click on the chart for a larger version)

Last week, the market retreated to my major up-sloping tramline, and is currently toying with it but on reducing momentum.

A good rally from here is entirely possible for another shorting opportunity.

But looking at a close-up:

MWT-11-08-22-2

(Click on the chart for a larger version)

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The market is currently caught between two separate major tramlines.

Remember, most upward corrections will be in an A-B-C format. If this is one, my upside target will be around the 11,000 level, or somewhat above.

That could be a great place to short the market.

I shall be on the lookout for this, but if the market weakens from here, it will challenge the 10,700 area. Breaking that will produce another massive sell-off.

There is lots to go for, and of course, those long-term traders who shorted at close to 12,800 a month ago are sitting very pretty indeed.

And don't forget to watch out for my video tutorials coming soon!

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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 .

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