It's been a couple of weeks since I last wrote an article, although not much has happened since that article, other than a bunch of chop in the markets, but we are finally at some long standing targets, although I initially penciled in a 12800-13000 on the DOW before the markets bottomed in June 2012. As most of the trading world was looking for silly targets under 12000, yet I was willing to go it alone (as I have done on many occasions) and called for a strong bounce.
Before
After
Yet here we are above 13000 on the DOW and the market sentiment is firmly bullish as I expected it would be, it reminds me of the May 2012 highs and most traders were looking higher, yet ignoring the fact that the European markets and risk FX pairs had already started heavy declines since the March 2012 highs, only the US markets were ignoring it, but gravity eventually took hold.
I suspect the markets have finally won over the last remaining bears and pushed everyone to one side of the boat. So I find myself in a familiar situation where I am once again going to go it alone.
As the evidence I see supports a potential set up for a strong break lower. Of course every idea comes with an element of risk and it would be silly of me to suggest to keep standing in front of a market that gets stronger on the upside from here.
However what we have been seeing is the internals getting weaker on each push higher, as the market has been making those highs, it then fails to hold those gains, so the bulls have got a chance to hold the gains here and push higher from the gains last week.
The R2000 is diverging heavily from the large caps.
It's up to the bulls to hold their ground as if they fail to push higher IMO renders this market vulnerable to a big reversal.
2008 Analogue
I first looked at this idea few weeks back and it's something we have been following.
March-May 2008
Fast forward and it appears that we have now come into the time window for this analogue, the March-May 2008 rally was a total of 176 2 hour periods, and the 176th period comes on Monday, so it will be interesting it see if it follows this analogue.
June-Present
For those that are not convinced that history has a habit of reproducing itself or a similar outcome then I would like to bring to your attention a similar fractal and analogue I was following on the EURUSD around the end of April 2012 when the EURUSD was trading at approx 13250, at the time most traders were very bullish the EURSD and calling for 136 and higher, once again I went alone and called for 126. You never saw anyone call 126 back then.
Well as they say the rest is history the EURUSD surpassed 126 in a little under 1 month, that call was using a prior fractal and analogue in the EURUSD when it was trading near 145 in August 2011. Yes you guess it! When the EURUSD was at 145 there were calls for 160 that dropped over 1200 pips back then.
Using history as our guide has its benefits as humans are creatures of habit and by using that same information we can use that to our benefit.
Traders are generally bullish at the highs and bearish at the lows, before the June 2012 lows there were silly calls for 10k, yet I was looking 12800-13000, you will not find many looking for 12000 as I am now and looking for an aggressive reversal.
It's easy to call the markets going higher after 1000 point rally, yet I bet you never saw many calling for a 1000 point rally back in June or even before June 2012.
Now look at those charts again and what do you see? Do you notice the same sort of choppy upside and sideways grind? That is a characteristic of a market that suggests a strong break to the downside.
Now not all the setups work out the way we expect, but it has a high percentage and I am willing to use history as my guide and see if the 2008 analogue plays out, the good thing is that it won't take much risk to find out.
I would rather sell the markets near 1390SPX than 1300SPX when most were still bearish, now you won't find a bear in sight. Funny what a rally does to the most hardened bears, yet I am at my most bearish at the top of a suspected trend and my most bullish (as I was at the June 12012 lows) at the bottom of a trend reversal.
It should be a good week,
Have a profitable week ahead.
