Advertisement

Will stock markets rally in the charts?

Right on cue, the Dow Jones has taken a pasting, says John C Burford. But now the market has reached a very interesting point.

On Friday, I asked the question: Is this the start of a big downward correction in shares? Today, I want to examine this question further in light of last week's action.

This was the chart then:

14-4-11-MWT-2

You can see that the Dow was rallying into a kiss on my lower tramline. If the market could finish its kiss and move down off strong resistance in a classic scalded cat bounce, it would validate my theory that stocks were indeed on a downward path following the initial tramline break. Remember, a genuine tramline break signifies that the short-term trend has likely turned.

Advertisement - Article continues below

And on Thursday and Friday, stocks were hit hard and my scalded cat bounce materialised on cue.

But this morning, the market has reached a very interesting point: the Dow is at the round-number 16,000 level which previously was a support level.

So today, I want to analyse the chart and see if I can come up with some trading strategies now that I have a short trade working from Thursday.

Could we see a significant rally?

14-4-14-MWT-2

That move late last week provided more evidence that the main trend had changed. But before I can say that with confidence, there are some very high hurdles the market must first overcome.

Advertisement
Advertisement - Article continues below

The market has fallen to the precise Fibonacci 50% retrace a common support level from where a bounce could start.

The 16,000 level has been strong resistance/support before (see red arrows). The market believes this level is significant and the market could stage a large rally from here as it has since mid-February.

Advertisement - Article continues below

The move down is in three waves only. Instead of this being the start of a five-wave pattern (indicating a new down trend), we could have an A-B-C (indicating a correction to the on-going bull trend).

Together, these factors could well support a case for a significant rally from current levels.

This looks like it could be a decent rally

14-4-14-MWT-3

I can now draw in a new tramline set. The second line down is my original lower tramline. The new upper line is very reliable since it contains a lovely PPP (prior pivot point) and runs across the minor highs.

The wave 1 low was stopped right on my third tramline, bounced up for the kiss, and then broke that tramline to hit my fourth tramline, where it is now trading on that support.

But that is not all my waves 1 and 3 are of equal height to within ten pips! In Elliot wave theory, waves A and C of an A-B-C pattern are often equal. This is called the equality rule and is a common relationship in corrective patterns.

Advertisement - Article continues below

In addition, there is a large negative-momentum divergence at today's level, which indicates selling pressure is drying up.

Putting all this together, the case for a third wave has weakened considerably. Rather, the case for a decent rally from current levels has gained strength. Whether this rally turns into a more substantial leg up, or just a small rise before the 16,000 level is broken time will tell.

Advertisement
Advertisement - Article continues below

But with this evidence, the gains on my short trade at the 16,450 level on Thursday appear vulnerable. That is why I decided to use my split bet strategy and take the 400-pip profit on one half of my position.

I have left the other half open and moved my protective stop to break even, following my break-even rule. This is classic use of my split bet strategy.

The downtrend has been stopped for now

The Nasdaq has been leading the charge lower in the flight from risk:

14-4-14-MWT-4

Note the rally into last week's high was accompanied by a very wide negative-momentum divergence, which usually heralds a large correction, which we have seen.

Advertisement - Article continues below

Here too, the Nasdaq has fallen to a major support level.

And here is the FTSE 100 chart:

14-4-14-MWT-5

Right on cue, the market is testing the Fibonacci 78% support level again.

In all three markets, prices have hit major support.

This is compelling evidence that the downtrend has very likely been stopped at least for now.

My win-win trading strategy

But with my trading strategy, I have taken a good profit and at worst will suffer no loss on the open trade if the market rallies strongly through my stop.

And if the market does break down, I will be ready to add to my open short position which is already in profit.

This is a win-win strategy and note that it does not rely on my making a definite forecast as to direction. I have a winning (and not losing) strategy for any eventuality the market may throw at me.

Remember, swing trading involves finding the path of least resistance and having the courage to go with it whether it is up or down. Having a pre-determined view is fatal. Stay nimble with an open mind.

Advertisement
Advertisement

Recommended

Wayfair will lose its way – short it now
Trading

Wayfair will lose its way – short it now

The share price of Wayfair – the online homeware retailer – has bounced for no good reason. Short it, says Matthew Partridge.
11 Aug 2020
The pound has been trending higher against the dollar – will it last?
Sponsored

The pound has been trending higher against the dollar – will it last?

Sterling has been rising against the dollar. Dominic Frisby sets his trend lines in the charts to see where the pound is heading next.
10 Aug 2020
Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
Stuart Wheeler : the granddaddy of spread-betting
People

Stuart Wheeler : the granddaddy of spread-betting

A lifelong obsession with gambling helped make Stuart Wheeler his fortune. By using that to back the Brexit campaign, he changed the face of British p…
2 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Should you take advantage of the UK’s new breed of domestic holidaymakers?
Buy to let

Should you take advantage of the UK’s new breed of domestic holidaymakers?

With Britons choosing to holiday in the UK this year, the owners of the country’s holiday cottages are cleaning up. Should you buy in, too? Merryn? So…
10 Aug 2020
The pound has been trending higher against the dollar – will it last?
Sponsored

The pound has been trending higher against the dollar – will it last?

Sterling has been rising against the dollar. Dominic Frisby sets his trend lines in the charts to see where the pound is heading next.
10 Aug 2020