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What an admission! I really don’t know where the markets are going in the medium-term. I have a short-term sense and I have varying views for the long-term, but no idea for the medium-term. I am a medium-term player, so if I don’t understand what I am dealing with, I must stand aside.
When we don’t know what’s happening, we should say so. There’s nothing wrong with that. It just means now is not the right time for me. We don’t have to be in the market all the time.
I understand certain patterns and markets really well. I can trade them with confidence and better manage risk. But I am downright suspicious of some markets, including this one!
I prefer to take medium-term positions because I don’t want to have to check my positions several times a day. And I want to be able to sleep at night.
I could be a short-term trader and put in mechanical triggers to buy and sell. That can be a profitable enterprise but it is not what I want to do, it is not in my current competencies and it doesn’t suit my ‘psyche’. Further, I believe this approach is only suitable to a small portion of a trading account. If you tried to do this with most of your investment capital it would be a full-time job, which also does not suit me right now.
So I sold down last week, not that I had many positions. I was just ‘testing the waters’ anyway.
And so to the charts. First, the XAO:
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The Elliott Wave in this first chart looks fine and suggests a new Wave Five ahead. But the oscillator has fallen below zero, suggesting a period of weakness. The Wave Three peak to the current Wave Four is actually a retreat. It is not yet technically a ‘pullback’ as it has yet to fall 10%. Even so, I am gone, I am out. I do not like weak oscillators. I look to buy in strength, not weakness.
So I look around for other clues to test my simple hypothesis and to make sure I am thinking straight. And the short-term looks like this:
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Yes, the market is heading south, just as I thought. Could the move to Wave Four turn out to be a new Wave Five impulse pattern, that is, a new upward trend? That is possible. I have fallen for such trickery before and it does happen. But this time I don’t think so. We are heading down.
The second Wave Five (and even a Third) is likely and this would take us back to levels of a year ago:
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There is some confusion in these Elliott perspectives. Using the same monthly time interval as in the chart above we see:
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This could be nasty, perhaps even like ‘falling over a fiscal cliff’. I don’t believe there is a high probability of this happening but I do believe there will be better buying ahead.
For a break from all this gloom, let’s look at the weekly:
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This suggests there may be some peace after the near-term storm and we can then rethink the next phase. But we do not have to do that now.
Before we finish, let’s take a look at the DOW:
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This indicates weakness ahead too.
So it’s back to cash, where I will stay until new opportunities emerge. If we see a big enough pullback, there could be some structural lows to enable buying in for the longer-term, which would be nice.
If you are in the market and don’t want to sell out – for whatever reason – at least do some housekeeping. Even though we are not expecting a tsunami, it may pay to ‘batten down the hatches’ and to err on the side of caution.
Enjoy the ride
Tom Scollon
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