The Dow Jones has just recorded nine up days in a row.
That’s the longest winning streak since November 1996.
I have just released a new video revealing why the odds are now incredibly high that we’ll see a stock market fall in the immediate future – perhaps as early as next week – and how you can successfully trade this move for profit.
You see, there comes a time in trading when you need to back yourself and stand firm in a view.
That moment has arrived for me.
After what has seemed like an eternity the ASX has now done the work necessary and set itself up beautifully to catch many investors and share traders with their pants down.
The long overdue correction in prices is very close.
That doesn’t mean prices won’t eventually find support and then turn back up again, it just means that the risk is well and truly to the downside from here for the immediate future.
The next time the ASX 200 closes below 5025 my conviction levels will increase dramatically.
The most amazing thing about price action is its ability to constantly fool the great majority of traders. Even after watching prices for many years it still astounds me how consistently the stock market can tempt you into a bad position.
It all comes down to the underlying structure of price action. Let me explain…
Prices trace out distributions that have many false breaks at either edge of the range before breaking out of the range and shooting higher or lower.
Share traders tend to place stop losses outside the extremity of the range. That means the false breaks stop out those traders, while also sucking other share traders into bad positions at exactly the wrong time.
The current set up in the ASX 200 is a perfect example…
From the very small scale to the large scale we’re now getting signs that a sharp correction is around the corner.
One of the key things I like to look for is when a distribution occurs around an important point, such as a key support or resistance level.
This is quite logical when you think about it for a minute.
If there is a very important technical level, then every man and his dog will be looking at that level and making decisions based on whether they think that level will hold or not.
If everyone focused on this ‘line in the sand’ so to speak, then the most frustrating thing that can happen is if prices create a distribution around that level. Both bulls and bears will be whipped out of positions before the price is ready to either breakout above a resistance level or fail to hold above it.
The major high of 5025 in the ASX 200 is a perfect example of this phenomenon.
All the commentators are saying that ‘prices have broken out to multi-year highs’ because the stock market closed for one day above the 5025 level, which was the high from April 2010.
Look at the chart below to see what I mean:
Click here to enlarge
First of all let’s analyse the price action around the low from May 2010.
You can see quite clearly that prices spent over a year tracing out a distribution around that 4175 low from May 2010.
If you knew there was a probability that prices would do this then your task becomes trading the distribution that occurs around that very important point.
There were plenty of opportunities to do this over the last year.
Next, look at where we are now:
Click here to enlarge
You can see from this close up of the ASX 200 that prices are in the early stages of creating what will probably be a distribution around the key 5025 level.
The false break of the high of this range at 5106 is the first low risk opportunity to short sell this stock market. But you would get out of any short position if we close above the recent highs at 5163.
That means you only need to risk 57 points (1.1%) to find out if you’re right. The upside from being correct is the potential of seeing a fall towards the Point of Control of the long-term structure at 5600. That’s a 500 point (10%) fall from here, makes the potential risk/reward of this trade 9:1.
Even a fall to the bottom of the current range would see a 131 point fall to 4975. This gives you a potential 2:1 risk/reward which has a pretty high probability of coming off.
The more conservative approach from here is to wait for further confirmation that the correction has begun.
As I said previously, a close below the key 5025 level from here is important. Last week’s low was 5010, so a weekly close below that level would also create a weekly sell pivot, having had a false break of the high.
If we saw that happen this week then I would feel very confident that next week was going to be a bloodbath for the markets.
As I look at the markets I can see a lot of complacency. Many traders and investors think that things are on the mend and the stock markets will continue to rally. Trouble is…nothing could be further from the truth. Traders need a dose of reality to remind them that markets never go up in a straight line.
This current set up has been many months in the making.
The stock market is incredibly overbought at the moment and the fact is when you rally so far so fast, when the music stops there is very little technical support below the market.
That means once the selling begins it will surprise everyone by how quickly it can fall.
Well, everyone that is, except you.
Editor, Slipstream Trader
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