Home—Online trading—Spread betting explained—Spread betting blog—This Dow ‘wedge’ is making me nervous
Oct 22, 2012, 04:03
Posted byJohn C Burford
On Friday, markets retreated in powerful selling waves. This afternoon, I want to show how this has affected the Dow. This picture is mixed, to say the least.
In my article on 15 October, I pointed out that the textbook Elliott wave patterns to the move off the 5 October 13,360 high was a clear indication that the trend had changed to down.
In that article (see: The Dow follows the script beautifully), I noted the likelihood of a rally starting that morning.
The chart is reproduced below.
I had my first level of resistance at the pink bar.
(Click on the chart for a larger version)
Well, it sliced right up through my pink zone and headed for the upper reaches of the Fibonacci scale!
In fact, we had a lovely A-B-C with negative momentum divergence at the C wave high. And the C wave reached the Fibonacci 76% level.
Time to look for a short trade!
Now, remember I have been regularly making the observation that the Dow has a reputation for making very deep upper retracements of its down-moves. And this is its latest manifestation.
So how did I locate a sensible entry point? Here is a close-up of Friday’s action:
(Click on the chart for a larger version)
I have drawn my short-term tramline pair using the excellent prior pivot points as anchor points for both lines.
Note that where my upper line intersects the Fibonacci 76% (horizontal) line, that was where I had a slight overshoot and then a pull-back into the trading channel. That was a clue that I had reached the rally top. The market was not comfortable above this area.
Then, setting a sell-stop order just below the lower tramline – and also below the minor lows in the A-B-C sequence – would be a high-probability, low-risk trade, and would catch the down-move if it was to occur.
So if the market had touched off my sell orders and then reversed upwards in a ‘head fake’, a protective stop inside the channel was a sensible strategy.
On Friday, the downward break was genuine and by the close, the market had fallen 180 pips or so beneath my entry. Nice trade!
Claim your FREE report: The six-step game-plan for
spread betting profits
I like to keep an eye on the larger picture, so here is the updated daily chart I showed last time:
The market is rolling over away from my centre tramline and towards the lower line. My first major target remains the 13,000 area.
Let’s have a look at the possible Elliott waves:
If the first wave down off the 5 October high is wave 1, and last week’s deep upward retracement is wave 2, then we could well be in wave 3 down.
Confirmation would come if the 13,300 lows can be taken out and then rapid progress towards the next major low at 13,000 (my first major target, remember?).
Third waves are ‘long and strong’, so if we do have a third wave on our hands, rallies should be brief and declines large. That is what I will be looking for.
But what is the alternative scenario? After all, markets are probabilistic, anything is possible, but not everything is probable!
Here is one possibility:
On this hourly chart, I can draw a rare example of an expanding wedge, where the lower line represents support. A rally back to the upper line can occur at any time.
One possibility is that the Chinese and Japanese stock markets are now in rally mode! Check out the Nikkei and Shanghai or Hong Kong markets and you will see what I mean.
Also, the latest AAII report shows a growing bearish-leaning US public. This is potentially supportive to US stocks.
The question I have is this: has Friday’s wash-out set the stage for another assault on the highs? It has taken out many weak longs – are there many more left to shake out of the tree?
All of which means that I am a nervous Dow bear today!
• 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
• 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
. If you have any queries regarding MoneyWeek Trader, please contact us here.
Published in Spread betting blog
More articles by John C Burford
By John C Burford, May 15, 2013
By John C Burford, May 13, 2013
By John C Burford, May 10, 2013
By John C Burford, May 08, 2013
Leave a comment
(22 October 2012, 05:30PM)
Complain about this comment
Interesting to see your nervousness, John, and the explanation for it. I have long worried that we were NOT heading to your target of 13,000, and indeed I think there is every possibility we could not only head back up to the top of the wedge, but break clean through it. Using some of your techniques and my own, I think we are on the verge of a major year end rally.
This will be the name displayed with your comment.
This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
The trades on this blog are all 'closed', past trades. These aren't trades for you to copy, they are there to teach you some useful trading tactics for your own spread betting. And always remember: spread betting carries a high risk to your capital as you can lose more than your original stake.
Cut through the trading jargon with MoneyWeek's easy to understand guide to spread betting terms
In his easy-to-understand video tutorials, John C Burford outlines some of the essential concepts you need to know to become a successful spread better
15 May 13
13 May 13
10 May 13
Compare the leading providers' online trading accounts for spread betting, forex trading, share dealing and CFDs, and open an account online. Plus, get MoneyWeek's tips and advice on trading online.
Copyright © MoneyWeek 1999-2013. All rights reserved.
Registered office: 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London SE1 8NZ.Registered in England with company no. 04016750 and VAT no. GB 629 7287 94. MoneyWeek and Money Morning are registered trade marks.