Hopium is Inflating Traders and Markets
"A discovery is said to be an accident meeting a prepared mind. " - Albert Szent-Gyorgyi
Talk about a week of Unexpected proportions! The anticipated taper didn't happen and the S&P 500 is now up 20.8% on the year. With the Fed coming out with the statement "the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases." Was just another case of red bull being fed to the crowd. We stay focused on taking our emotions out of those trades as we repeat over and over again in our training classes, DVDs, and in our latest post on Benzinga titled You Need To Ask Yourself This Key Question. Our WaveBOOMmembers are familiar with this question and familiar with how to answer it honestly.
A perfect example of keeping emotions out is how our trades in Apple (Nasdaq: AAPL) have played out since last week. You may recall in our last WaveThinking newsletter we discussed the Apple short trade that we were in last week as the DSE warned of the price moving lower. We were able to grab the decline and with the paltry iPhone release, our emotions wanted to stay short but by Monday the DSE was warning about being short Apple and we got out of our trade at a profit. By Thursday Apple finally entered the 475 +/-5 zone we targeted on Monday and overnight last night Apple reached our ideal 480 +/-5 in overnight trading, and has backed off to 473 just after the Friday open. If you are continuing to follow the DSE on this one, 488 will fill the gap left on the day of disappointing announcements day last week, but is not required to be filled. There is a potential 5 wave rise off AAPL's 445 low, which is likely the end of wave A up of an ABC correction, and now, 462 will be the wave B target, before 485 +/-3 is seen in wave C. Then, the march toward 300 should follow. If the correction becomes more complex, and 510 is broken, 560 +/-15 is next resistance, and 599 is no-man's land, where prices would have only hours to live before heading South in a very dynamic way. We'll be keeping an eye on this all week for our WaveBOOM members
By Tuesday the markets were getting ready for the Fed to speak. Maybe that is why no one noticed or mentioned what we saw when we were examining our futures roll. In Sunday's slight new high in the futures occurred in the Sept. ES contract, as the forward rolled to the Dec. The ES contract was in play, and the same bump didn't occur in the Dec. contract itself. This is likely due to the shorts needing to roll to Dec. at any price, causing an uber-squeeze to buy to cover, suggesting the new high above that of August in the Sep. ES contract was possibly the 'bull trap' of all time. That extra 5.5 ES points and extra 40 YM (Dow futures) points essentially happened in the rear-view mirror of liquidity moving to the Dec. contract; or in other words, without relevance. If you are saying this is so trivial, it may be, but when measuring the micro changes in crowd herding behavior, it's the little things that have set WaveBOOM apart when buying and shorting Apple, Facebook (Nasdaq: FB), Google (Nasdaq: GOOG), Herbalife (Nasdaq: HLF), and dozens of others over the past decade.
While the crowd waited for the Fed, Microsoft (Nasdaq: MSFT) prepped for their financial analyst meeting on Thursday by announcing a buyback renewal and a dividend boost. Talk about desperation? This chart has been used to tell the story here for years, and there is no change to it yet; wave (C) is due to bottom in a couple years at the end of the blue vector, where massive, but long term buying/holding can be done.
By Wednesday, we were just as ready as everyone else awaiting the Fed news. Our message was a little different though. Step away from the keyboard...and just watch.
Human greed often makes us believe we must act upon a news event, so we can prove how right we are about the reasons things happen, or some other "fabricated in our mind" reason to flex our ego muscles. Most falsely believe that fear and greed are our basest, caveman motivators, but actually "avoiding pain" and "seeking pleasure" (in that hierarchy) are. To prove this, ask yourself if you can seek pleasure if you are truly in life threatening pain, and the answer will be no. However, if you are in a pleasurable state, can you still be motivated by avoiding pain? Abso-freaking-lutely you can, right?
The point is that right here, with stock indices up big this year, and the inevitable about to happen, today or next month, of TAPERING the stimulus that has been propping up the banking system, and by collateral benefit, the stock market, for 4.5 years is ending, which will allow interest rates to rise, since the artificial pressure on them is lessening. That is not conducive to all time highs in stock prices; in fact, the opposite. Hence, risk is higher now than at any time since at least '07, if now '00, and possibly much further back in time. Using the logical flow chart, if risk is at extremely high levels, pain is a probable outcome for those that ignore the risk, so the herd should be "avoiding pain" here, not seeking pleasure. Seeking pleasure was appropriate at the '09 low, the '02 low, and the '94 end of a two year consolidation, as well as the '90 low, and the '87 low. Now is like past "windows" of avoiding pain like "07, '00, '98, '87. See the pattern?
By Thursday nearly all markets were AT LEAST at short term extremes, including the euro at the upper 2 sdb and BB (Bollinger Band), as well as overbought on stochastics at daily and weekly degrees of trend. So, although the upper 1.30′s can't be ruled out, the next year or two should see the euro crash below 1.20. That will push the dollar into the 90+ area.
DSE has warned also that this week was NOT the time to be short metals, as "at least" a bounce was needed to relieve the oversold extremes on short term measures. Gold is not 80 points off yesterday's low, and silver is 2 points (a 10% one-day move). The coming corrections of these moves can be used to get long, and we might add to our exposure. The Aug. lows will be the "line in the sand" for protecting this posture, as gold's rise is ONLY a corrective structure and silver's is questionable.
Stocks are beyond overbought, but the Fed has managed to dislocate the indices from reality over the past few years. However, the M.O., as shown above, is at overbought extremes that don't allow much further price rise, and an inflection is perfectly times with the full moon today to cause the bulls some indigestion if they continue to gorge today. Gorge you say? Look at this chart of the feasting at the Fed's buffet that Wall Street is still enjoying.
EWT teaches that parabolic curves ALWAYS end with a return to the beginning of the parabola. In this case, since we're seeing money printing, and not herd enthusiasm for a stock (fad), this chart implies that the US dollar will eventually be 'devalued'. Now THAT is currently UNexpected by 99.999% of the herd, huh? Prepare! How? Own some gold and silver here, 10% lower, and upon breakouts of the August highs, as well as above the breakouts of the '13 highs. No, I'm not kidding.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.