Three Market Timing systems on a SELL

The UK market gave a Primary wave DOWN signal after the close on the 21st April. That’s two weeks ago. After the close last Friday the 29th of April the DEW market timing system turned down. The Primary wave can be noisy in a cluttered market but the signal of the 21st timed the top of the 11 week advance since February perfectly. After trading yesterday on the 5th of May the Color Guard printed a red light in the price column which indicates that the VectorVest Composite is down day over day and week over week. Within the red light there is a black star. This visually shows that the red light sell signal is confirmed by the RT Kicker trading system. Simply put this means the price is falling and the momentum to the down side is rising. The Primary wave is down, there is a red light confirmed by the RT Kicker and the DEW has given a sell signal. The sky is darkening.

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A poor jobs number followed the dismal growth numbers out of the USA today. This has taken the possibility of a June hike in interest rates totally of the table. CME futures traders reckon that there is less than a 10% chance of a hike in June and around a 50% chance of December. The 160000 gain in new jobs was the smallest rise since October last year. That’s the reason both the Dow and the Ft100 have rallied into the close of the week. The market feels that the era of loose monetary policy is to continue. As I have long argued the ups and downs of the markets in 2016, led by the USA, has been all about the cost of money. There was a technical pattern that predicted the countertrend move on the Dow on Friday and I will discuss that below. Akin to all countertrend moves the market action upwards was very volatile with a pullback after the initial rise that would have ejected only the bravest.

A slowdown in the USA in my experience poses a string threat to other economies included the UK. During the week, reports showed that manufacturing, construction and services in the UK are at their lowest ebbs for the last three years.

In the last week with both the Primary Wave and the DEW shouting sell I have been using spread bets to take intraday trades on the FT100 index and that’s been very profitable. The technique used was trivial and I just entered short where the 1 hour chart broke a level and then came back up and kissed the level. I have resolved in my intraday trading to only take trades if the direction of the Primary Wave and that’s helped my hit rate and bottom line immensely. My only countertrend trade was the trade long on the Dow on Friday using my falling wedge pattern that I was developed over the years.

Last week I outlined 5 steps to be taken whilst the DEW is on a SELL signal. I hope that this has helped add some structure to how you manage your portfolio in this downturn.  My portfolio has done OK during the week with only Gleason giving me a headache. The share broke down thought the support offered by a symmetrical triangle and yesterday (Thursday) fell to the last low which occurred in February. On the same day it hit the VectorVest stop. As you know I don’t put stops into the system if I have purchased a share without leverage.  I rather manage the stop based on a EOD close as the spikes have taken me out of excellent positions just one time too many.

On Thursday Gleason charted a “Doji” or indecision candle at the low and also setup a “Lost Motion” type trade. This is exactly what happened in Persimmons a few weeks ago. On Friday the share traded an inside day. I have held the share for now and instructed that I will exit if Thursday’s low fails to hold. That’s a stop at 510 which be executed with no further dithering.

The reason for the mental conflict is that I have done very well from my “Lost Motion” trades over the years. This is simply a share (with good fundamentals) falling to a major low and then reversing. If you study Howden Joinery since last October there are many examples of the trade. If my mentor MR Gann were here he would in theory have been a buyer of Gleason at 525 with a stop below the low of Thursday at 510. The high spread between buyers and sellers may have put him off the trade. His target would be the last major high at 610. He would argue that by risking 15 to make 85 he would never go broke. It takes strength to trade the “Lost Motion” setup as the hit rate is only around 60% but the risk to reward is awesome even without adding to the position. MR Gann and I always like to be much bigger when we are correct in our bets. Adding just once increases the risk to reward and it’s a common trait of all winners in this business. A key point in adding is that the initial stop must be moved to entry before this is done. This means that the profits from the first tranche of shares is financing the risk on the second.

The “Lost Motion” trade, the Gartley 222 pattern and the wedges (both rising and falling) are corner stones of my swing trading and spread betting setups. I have been observing their nuances for nigh on 25 years. I have a plan to teach these to VectorVest members who wish to try swing trading in the second half of the year. We will use these setups and some others to find “long” trades in shares with impeccable fundamentals and to “short” those shares where the fundamentals are on a downward or erratic path. I am looking forward to this exercise immensely.

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JD Sports is still running strongly and Victoria has found support at the last old to and has moved upwards in a negative week. I expected Dart to have pulled back to 600 but it seems strong at 625. Trifast is solid after the breakout of the large ascending triangle and has held its price during the down week. Marshalls is pulling back to trendline support at around 310 and if and when the market turns that where I hope to accumulate a few more.

Last week I felt that market would find support at the April lows and today there was a strong move at and around this level. Eagle eyed chartists should have spotted a falling wedge pattern on the Dow which indicated that support would come in at 17580. After the NFP jobs number the Dow fell to this level and below and found strong support. The low of the day came in at 17542. The move lower than that forecast by the wedge support line, was known on the trading floors as the “sweet zone”.  The rally in the Dow on Friday was difficult with the market pulling back strongly after the initial surge. At the close the Dow made the high of the day at the top trendline defining the falling wedge. The target from the wedge pattern is 17800. I didn’t hold the position over the weekend.

The falling wedge is shown below using an h4 chart.


The falling wedge is a bullish formation and could very well precede a change in trend. However if the wedge fails to make its target then it would technically be a failed pattern. Please watch Friday’s low at 17542. If the Dow falls below this level then the selloff will proceed apace.

David Paul

May 6th 2016

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