US Stocks have more to come?

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It’s been a big week in the US stock market with the Dow breaching the 20000 mark for the first time. As I write the Dow cash closed the week at 20075. I remain long of the index from an entry late in the week ending Friday 20th January. I explained the setup in my post of last weekend. It is based on the teachings of WD Gann and Richard Wyckoff and is an example of a “low risk entry”. I have added to the position during the week.

Below is the chart of the VectorVest Composite of the USA stock market. This is an equally weighted index of the 7660 stocks that we follow over all US equity markets. I have marked an ascending triangle on the chart and it is clear that the market broke from the triangle on the 4th attempt. I can nearly see MR Gann smile.

From a chartists perspective the move from the low in November to the breakout of the triangle should be repeated and thus I feel that this move in the US has still got a lot of legs. I remain bullish and will add to my position (a spread bet) upon a resumption of the trend. This possible move can easily last into March or April.

Stocks in the US are being driven by pure optimism based on a slowly improving domestic US economy and also by the belief that the new President will deliver on his election policies. So far that seems to be the case whether you like them or not. These involve slashing both corporate and individual taxes, investing a trillion dollars on infrastructure and widespread deregulation of the economy. These are all measures that Wall Street greatly warms too. At the same time as stocks have advanced US interest rates on 10 year notes have increased from 1.8% to 2.4%.

A strong dollar is an important headwind for US corporate profits. The FED indicates that it will hike at least twice this year. A combination of tighter monetary policy (interest rates) and loose fiscal policy (Government spending and taxation) would seem to indicate that the dollar will get considerably stronger.

While the US has had a great week the London market has churned sideways and lagged. This is probably due to the strength in the pound over the last few days. The Pound/Dollar pair (Cable) has risen from 1.2 to 1.26 since the 16th January. For those unfamiliar with spot currency quotes the number represents the amount of the secondary currency to purchase 1 unit of the base currency. In the case of Cable, the pound is the base currency and the dollar is the secondary currency.

I feel that the strength of the pound is temporary and that further weakness is on the way. In my webcast of last Monday I detailed the position in the Dow and also described my strategy in trading the Cable. Again the objective is to find a “low risk entry”. Please meditate on these three words. Put them on your fridge door. My objective as a consistently winning trader is to test my trading idea for a little risk as possible. Below I show the four chart of Cable as described last Monday. The webcast is recorded at www.vectorvest.co.uk. Then click on live events and scroll down to archived webcasts. The title is VectorVest UK Q and A January 23rd 2017.

Cable charted a perfect 5 wave impulse pattern downwards and then rallied in three waves. I placed my “low risk entry” at the 78% retracement of the move down. I entered as the market reversed back down through the level. I call this process “stalking a good and elegant entry”. I am short of the Cable at 1.2610, slightly in the money and holding my small initial position over the weekend. If the move continues I will add. All of the trades don’t move like the Dow of last week, more is the pity.

The UK Composite is shown below. The trends here are Down/Up as was the case last week and nothing has changed in relation to leading divergences between the price of the Composite and the MTI. The highs of October are still acting as current support and that’s a bullish sign.

If I am correct about the pound and the USA stock market then sooner or later the London market should follow the US. I am holding all of my positions and remain fully invested at this time and will remain so until VectorVest tells me different. The Primary wave is down and VectorVest advises caution. Please sit on your hands and only add to stock positions if and when the Primary wave turns back up.

If I am incorrect about the Dow and about Cable then this will show up immediately on the Color Guard. A  DEW sell signal would indicate a weakening of the technical position. Please don’t hesitate to manage risk and protect the considerable profits we have made over the past few months. I suggest reviewing lesson 2 of the Quick Start Course on VectorVest to prepare for this event. Whether it comes next week or in May, it will come. Markets are living entities. They breathe in and they breathe out.

David Paul

28th January 2017

Try VectorVest for 5 weeks and start finding stock market winners for your portfolio – click here

Watch David’s recent webinar recorded on 21st January 2017 – click here

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