Home—Online trading—Spread betting explained—Spread betting blog—There could be a big move coming on the Dow
Aug 01, 2012, 04:23
Posted byJohn C Burford
So what do you think – is the Dow about to rally further?
That might seem an odd question to ask after a 600-pip rally this past week or so! But then many are expecting another round of quantitative easing to fire up the market.
As you may have noticed if you’ve been following the tramline set I’ve had in place for a few months, there has been an upward break above the upper tramline on the hourly chart.
You can see it in the chart below.
Of course, this would normally signify a bull run lies ahead as the next target would be a higher tramline. It would be time to get long.
(Click on the chart for a larger version)
But, as with all things in life, we must look at context.
What I mean is that we need to consider the context of this tramline break. Remember: It could possibly be a ‘head fake’, of which I have shown many examples over these past months.
Recall from my previous Dow coverage that I believe much of the sharpness of the recent rally has been due to a massive short squeeze put on to the late-coming bears who have been seduced by the overly gloom-and-doom sentiment that has prevailed.
And not only has the US public been very bearish – as evidenced by the AAII data – but the mainstream press has also been in a funk with very few bullish articles in the sources I read.
This has created the ideal scenario for this snap-back rally. But to put the Dow rally into perspective, I want to show you another stock index which is more representative of the market as a whole – the S&P 500.
Remember, the Dow Jones Industrials index, which I trade, contains the 30 largest cap stocks on the NYSE board – these are the household names and are generally good solid dividend-payers.
When risk is 'off', investors flock to these shares in preference to the perceived riskier smaller cap shares, such as contained in the S&P 500, where dividends are more uncertain.
So let’s look at the S&P now to see if there are any differences with the Dow in the current rally:
And guess what? The equivalent tramline pair is shown and there has not yet been a break, although the market has touched the upper one. Naturally, we cannot expect the touch-points to be lined up perfectly on tramlines, and we must employ a certain amount of ‘dodging’ to get the best fit.
But I believe with the good prior pivot point (PPP) – to the left of the chart – I have a decent pair. And so far, the tramline has held. The normal trade here would be a short, of course, as the market bounces off the upper tramline.
Incidentally, the S&P is the most heavily traded US stock index, especially its incarnation as the e-mini S&P – the day-trader’s favourite.
The other major US stock index is the Nasdaq. This is considered even farther along the risk scale, as many components are in the tech and biotech sectors and are definitely not household names.
If we are truly in a risk-off environment, I would expect the rally in the Nasdaq to be weaker than in the S&P and the Dow. And that is what we find:
See how the upper tramline has not been hit, indicating a lesser preference for risky shares.
To sum up: the rally off the lower tramline a week or so ago is stronger in the Dow, then weaker in the S&P and then weaker still in the Nasdaq. This tells me something – mainly that I should be suspicious of the Dow’s poke above its tramline – in other words that it could well be a head fake.
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So let’s take a closer look. Here is the 15-minute Dow chart:
We have last Thursday’s upward break and since then, I can see the move to the 13,100 area is accompanied by a possible negative momentum divergence. Then yesterday, the market broke back down below the tramline; and this morning, it is kissing the underside of the line.
With the above evidence of the weakness of the other indexes, and the form of last week’s action above the tramline, an aggressive trader would think so! And a sensible place for a protective stop is just above the 13,100 level for a 50-80 pip risk.
And if we suppose that the 13,100 level will hold, then can I find a different tramline set to describe long-term trading? Here is the daily chart:
And just look at the terrific touch-points going back almost a year! To me, these are very convincing – and notice that the current rally has not even touched my newly-drawn tramline (second one up).
So maybe my old set is dying out and I should be getting ready to kiss it goodbye.
When tramline trading, we all have the same problems – how much do I rely on my existing tramlines, especially when they have worked so well, as these have? And when should I look for new ones? There is no easy answer.
But one of the great benefits of tramline trading is that we can find sensible low-risk trades that have a high probability of success. We can locate good stop-loss positions – and that is one of the many topics you learn in my next MoneyWeek Trader workshop. (We’re still finalising venue details, but should be ready very soon.)
As you probably know, there are more than the usual number of important events looming, with meetings from the Fed to the eurozone. Politicians – in true King Canute mode – are desperate to save the world!
That means volatility is set to increase this week and there is a real possibility that we shall see a burst of buying, followed by huge selling in a spike.
If so, this would take out many shorts (again). It should be a great spectacle – and we need to trade carefully, using strict money management and discipline. Let’s see how it pans out…
Do you have a view on the market – bigger rally or bigger sell-off? Share your thoughts here.
• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
The essentials of tramline trading
Advanced tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Trading with Fibonacci levels
Trading with 'momentum'
Putting it all together
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Published in Spread betting blog
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(01 August 2012, 04:58PM)
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Thank you John! i'd just started reading this, got as far as the bit about the Dow breaking above the upper tramline, and like the overly keen kid in class was about to raise my hand and make lots of noise about the S&P and Nasdaq. Then I read on... and there it all was! So, my only remaining question is: why not short the Nasdaq or indeed the S&P instead of the Dow? If markets really break down, there will be more money to be made in shorting those.
(01 August 2012, 06:03PM)
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Technically speaking only, the trend from 27th to today is in decline but is about to cross with the up trend from 25th starting at 12517 the longer trend would win out here but with FED news out at 2.15 ET its best to sit it out for now.I have to say, I suspect it won't be long when the talk comes out everyday or atleast until the law of diminishing returns applies and they have try and find another cheap way to goose the markets!
(01 August 2012, 08:14PM)
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News arrived and BB did the right thing. Temporary fall below up trend bouncing from support of the declining trend. Now running up the line. By 8am tommorrow direction should be confirmed.
(01 August 2012, 11:17PM)
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The Dow has now ended the day (from the 30th high) at slightly above my support target of 12969. If this does not hold it would no surprise to see it eventually reach the 62% mark at 12750 ish.Having said that, again no surprise if there is a small drop first before a decent bounce as the decline from the 30th has been slow and small over the 3 days.
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