I have no idea who first used the expression “markets climb a wall of worry”, but it correctly describes the present situation. Two weeks ago, I felt that there was further upside in the stock markets that I follow (US, UK and SA). I still hold that view.
Below I show a daily chart of the VectorVest Composite of the USA. This is an equally weighed index of the 7665 shares that we follow on all the American exchanges. It is the broadest measure of the US market that I know of. The ascending triangle that I pointed out a few weeks ago has broken upwards as per the forecast and based on a repeat of the last upthrust, still has a way to go.
On the chart, you will note that although the price has broken upwards the MTI has not followed as yet. This is bearish normal divergence and it’s a warning that the cycle which started in November is becoming mature. Also the market would seem to be rising on falling breadth as measured by the VectorVest Buy/Sell ratio. This is also a warning that safety hats need to be close at hand.
For many years, my trading partner Tom and I called the market each and every morning in our live trading room. In the trading room, I became infamous for my ability to forecast based on several FIB based patterns. One of these is known by technicians schooled in FIB analysis as a “rising wedge” or a “three drives” pattern. A rising wedge has bearish implications, while a falling wedge is bullish.
Unfortunately, my green tea addled mind spots rising wedges on both the USA and UK markets. The charts of the VectorVest composite of the US and UK and these patterns are shown below. They add to my worries that the cycle which started in November is getting long in the tooth. The US Composite is charted with the black background.
Rising wedges have a hit rate of around 70%. That means they are incorrect 30% of the time, and in those 30% there is a “failed pattern” setup. A failed rising wedge invariably wrong foots the shorts and a “short squeeze” follows. This causes prices to rise vertically. Great fun if you are long and disaster if you are short. I keep telling folk that selling something you haven’t got, demands more skill and attention. They rarely listen until after their first gut wrenching short squeeze.
On VectorVest, the trends are UP and Up on both the US and UK markets. This means both the short term trend and the long term trend are positive for the longs. In the UK, we have “three green lights” on the Color Guard on the VectorVest program. All of the market timing systems from short term to long term are saying Buy.
I am fully invested and holding positions and will ride the trend until it turns. I am still of the view that the trend can stay intact into April and May. I am holding Sopheon, Galliford Try, 3I, Trifast, Carnival, JD Sports, Ab Dynamics, Cranswick, Hill and Smith and Hastings.
Although I am holding these shares, they may not be suitable for anyone reading this blog.
Let’s trade market and not the forecast. Stay present and focus on exactly what the front page of VectorVest dictates. Put your portfolio into a watch list and re-sort by RT. That will put the strongest shares by trend to the top of the list. The work needs to be done at the bottom of the list should any of your shares hit their stop-loss values.
Although the cycle may have a few months to go, it is mature. This means exits are a vital part of your trading plan. Don’t wing it, please. Review lesson 2 of the Successful Investing Quick start course on the VectorVest program and get this part of your plan down on paper.
February 12th 2017