Uncertainty and mystery are energies of life. Don’t let them scare you unduly, for they keep boredom at bay and spark creativity. R. I. Fitzhenry
Bull Flag Pattern: Forget Patterns Focus on Trends
In September we penned a second article in the Alternative Dow theory series, titled “Dow theory no longer relevant-Better Alternative exists where we stated that the Dow theory as it stood was no longer relevant. Here is a brief excerpt from that article.
The transports topped out in November of 2014, and according to the Dow theory this is a big negative; the Dow industrials should have followed suit. Instead, the Dow soared higher paying no heed to this theory proving to a large degree that this theory has lost its value. After all, it is a theory and the definition of a theory is “a supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained.”
That is why way back in 2006 we offered a Dow theory Alternative that has proved to be far more accurate and reliable than the Dow theory. Just to let this sink in, the transports topped out almost two years ago and instead of trending lower the markets have surged to new highs. If you look at the above chart, the Transports appear to be finally gathering momentum and to break out. In the Dow theory alternative, we stated it was the Utilities that lead the way as opposed to the Dow transports, well let’s see if that holds true.
Bull Flag Pattern: Focus on The Trend & Sentiment
Instead of the markets breaking down, due to the negative divergence between the Dow Transports and the Dow Industrials, the market after experiencing a very brief shock due to a Trump win, recouped and went on to soar to new highs. For the record, we predicted in September that a Trump win would prove to be an excellent buying opportunity in advance of the development.
From a pure trading perspective, a Trump win would provide contrarian players with an incredibly attractive buying opportunity. Like Brexit, the crowd is bound to overreact as they stampede for the exits, creating opportunity instead of a disaster. The experts were dead sure that Brexit was going to create chaos; turns out that the only mess it created was amongst the experts when they were forced to eat their rubbish.
Before Brexit, we stuck to our theme that any correction should be viewed as a buying opportunity. Just as Brexit was all bark and no bite; the same phenomenon is likely to play out if Trump wins. All the Naysayers from every crack and crevice will emerge screaming the end of the world, and when the world does not end, they will be forced to crawl under the rock again. It would be good to keep this saying in mind if Trump wins “dance when the crowd panics and stand still when they jump up with joy”. Regarding who is the better candidate, we will let our readers make that call. Tactical Investor
This Bull Has Strong Legs
The simple answer is no; the stock market is not ready to collapse. It is, however, ready to experience a correction in the not too distant future. The correction could range from mild to slightly sharp, but a crash is not imminent. Human nature is such that, it does not favour simple answers, it looks for multiple answers even if they are unwarranted.
The only reason we brought Trump up in the article we penned in September was because the sentiment was intensely negative; we knew that if he won, it would create a shock effect, similar but stronger in nature than Brexit. As the trend was up, such an event had to be viewed through a bullish lens. The Trump effect falls more along the lines of Gossip, so we are not going to delve into it much.
On a side note, such a strong market will generate many stocks with a Bull Flag Pattern.
Trump’s effect on market sentiment and the Financial Markets
There is a mania gripping the markets, which is almost irrational in nature to some degree. Some Individuals seem to have assigned Trump with a demigod status, and they believe that he can solve all their problems. This is an impossible task for anyone, so there is bound to be some disappoint going forward. Whether the disappointment will be mild or extreme is something that time will tell. However, as far as the financial markets are concerned, the Trump Stock Market Bull Rally is showing no signs of letting up.
He has done a few things that seem to resonate well with his followers so until they abandon him; it is likely the Trump effect will run for a bit longer. If he sticks to his promise of getting rid of red tape, lowering corporate taxes and getting rid of two rules for every new rule created, it should provide an environment that is conducive for business. The markets are forward-looking beasts, and they view Trump through a bullish lens; never fight the trend, unless you want to experience the bitter feeling of defeat.
The Trend Is Up
The trend is strong, the masses are still nervous so every sharp Pullback has to be viewed through a bullish lens. The greater the deviation the better the opportunity. Panic when the masses are euphoric and turn bullish when they are nervous. As the masses are sill nervous there is no evidence that the Trump Stock Market Bull Rally is going to run out of steam anytime soon.
A fool despises good counsel, but a wise man takes it to heart.
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