The price of Copper has been given a horary higher degree based on its ability to forecast and lead the entire commodity market. The price of Cu has been in a falling equidistant channel since 2011. Cu started the year at the lows of the channel and over the past few months has rallied impressively. The market seemed to be charted a very positive inverted head and shoulders reversal at the lows and based on that commodity counters made strong percentage gains.
On the 22nd and 29th of April 2016 the Cu market tried to break through the neckline of the inverted head and shoulders reversal. This would have confirmed a bottom in commodities but as you will all have seen the bulls failed. The Cu price was sold at this level by commodity bears on poor news out of China. The selloff has been strong and the first level of support defined by a simple trendline joining the lows between February and April failed during the week past. Yesterdays (Thursday 12th May 2016) price action charted an “outside day” which is a very bearish pattern which suggests more downside. The next support should arrive at 78%of the last range. Few reading will actively trade Copper but it’s hard to see commodity shares such as Anglo, Rio Tinto and BHP doing much until the price of Copper stabilizes. If you have bought into commodity shares please manage stops actively and do your best to protect at least half of your profits.
In Anglo the recent selloff has not been severe as yet. In the last week the share has broken the trendline defining support from the start of the rally off the January lows. There will be plenty of time to accumulate good quality commodity counters when this final “shaking of the tree” is done and dusted. I will become interested in Anglo at around 350 to 450. That’s based on a 62% or 78% retracement of the rally of 2016. The company is in the process of a large series of non-core asset sales. This will be the sale of 4 billion dollars of assets during 2016. Cutifani the CEO states that this will mean that the company becomes cash positive by the end of this year and that it will have sufficient cash on hand to expand production if required.
The balance sheet of BHP is in much better condition than that of Anglo but there is doubt about operation in Brazil after the disaster last year. Should the Cu price and commodity prices find a bottom and demand rises then BHP and Rio Tinto should be better placed to fund any expansion.
In the UK stock market the Primary Wave and underlying trend are UP and the market remains of a Confirmed UP since the middle of February. The DEW market timing system that I follow is however still on a SELL signal and I haven’t done anything during the week save monitor stop losses. The USA market fell strongly into the close on Friday and most of this 180 point move occurred after the close in London. All things being equal I would expect a gap down when we open on Monday in London. In the US the Color Guard printed a red light after the close on Friday with a black star within the red light. This indicates that the selloff in the USA is gaining steam. In both countries the DEW timing system is on a sell signal.
On the Dow there is an ugly head and shoulders pattern. The neckline of the pattern is easy to see and draw. In the selloff of Friday the neckline was broken to the downside by a few points. The target from the reversal pattern is roughly 600 points and that would take the Dow down to around 16900. As I said above watch those stops in the week ahead and ruthlessly protect capital. Short term traders be warned that the 650 points will be fiercely competitive with many false starts if it happens. The level to watch is around 17500. The bulls will be accumulating at this support level. The H4 chart of the Dow cash is shown below.
It was a quiet week for my short term trading using my pattern analysis. I don’t have a problem with this and over the years have developed the patience to sit and wait for the “plums” of opportunity to come along. In his courses, trading psychology guru Van K Tharp calls this the process of “stalking the trade”. In my short term trading over a few hours to two days I trade best when busy. I put in the order with stop and target and leave. The screen is frequently NOT your friend.
One such trade happened on the 10th May. I noticed a rising wedge on the Dow which is a bearish pattern. The top trendline defining the wedge and a 78% retracement of the last range were on the same level and that’s a powerful confluence. I shorted the Dow at this level of 17825 and the market fell nearly a 100 points quite quickly but regained the points just as fast when the US opened. Because of this sudden reversal it’s now difficult to see the rising wedge at all. I got stopped at entry on half of the position and banked 50 points on the first half. The Dow then went higher and flushed out the stops at the old high of the 2nd of May before falling for the rest of the week.
I took a second trade on the Dow long on the 12th May. This was at a 78% retracement of the last range and a Gartley 222 pattern. Again the market rallied against the trend 100 points prior to the move failing. I managed the trade in a similar way to the short. In lesson 2 of the Quick Start Course on VectorVest the concept of never giving back more than half of your profit is discussed. It is an exceptionally useful way of managing the trade robustly without a great deal of pointless analysis. There is two types of capital. The first is the cash and the second is your emotional capital. There is no faster way of flushing the latter away than letting winners turn into losers. Remember success in this business and in most sports and business comes down to perfect execution of a few simple rules without fear or hesitation.
The “Lost Motion” trade in Gleeson that I mentioned last weekend is still in process although the progress, although positive, has been slow. Marshall’s looks poised for a strong move and I will add to this share as soon as the DEW turns back upwards. Keller is making good progress and Trifast also. Dart had a good week and looks like breaking higher soon. There has been profit taking in JD Sports that’s pulled the share back a little. The share has made its short term target from the ascending triangle that I have pointed out here many times in the past. Victoria pulled back to the last old high once more this week and needs to be watched closely. Persimmons is the weakest share as sorted by RT and during the week has charted a pattern that chartists refer to as an ABC corrective wave. This is a positive development and with some market strength should break higher from here. I have given this share a lot of rope. If it hits the VectorVest stop then it’s gone.
Building had a poor month in March with output falling 3.6% compared to February. This is being blamed on poor confidence surrounding the Brexit debate and vote. A particular weak spot in construction is the building of factories and warehouses where a survey shows output to be down 14% over the past three months. From a seasonality viewpoint UK building shares seem to go to sleep between April and October every year. I still think there is a lot of life to come in housebuilders in the year ahead.
The Wall Street Journal reports that during this year to date 90 billion dollars has been pulled out of the stock market with 8 billion leaving in the last month. This is due to fears of low growth and falling earnings and the inability of central bankers all over the developed world to do much about it.
In his weekly essay DR DiLiddo the founder of VectorVest addresses SP500 earnings in detail using the VectorVest Market Climate indicator. This should be a vital part of your weekend preparation.
Watch that support level on the Dow at 17550. If you see a close below Fridays low then extra diligence on stops is required.
14th May 2016
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