Parabolic Patterns – Stocks, Bonds, Volatility and Bitcoin

Technical Analysis and Trading Ideas

Parabolic Patterns – Stocks, Bonds, Volatility and Bitcoin

 


Weekend Update January 21, 2018 – Dow Jones Industrial, S&P500, US and EU Interest Rates, VIX and Bitcoin


In this weekend update, I would like to provide a follow up on my latest views on the US Stock Markets, and in particular the Dow Jones Industrial and the S&P500.

Furthermore, interest rates at at key levels and breaking these key levels might be the trigger for a correction in stocks. Last, but certainly not least, I will share several interesting charts regarding the XIV (inverse VIX) and Bitcoin.

Let’s start with the bigger picture and then work our way back through some very interesting chart patterns.


 

 


US Stock Market Patterns


When I analyze the markets, I mainly use historical patterns and cycles, as I believe that history rhymes and everything has happened before, we just need to find the right period. Same play, different actors.

The first chart I want to start with is the Monthly Chart of the Dow Jones Industrial and that chart explains why I’m very bullish for stocks for the next 10 to 15 years but very bearish for the next couple of months to come.



DJI Monthly Pattern


In the previous updates on the US Stock Markets:

I explained that the 1970-2000 period seems very similar to the 2000-2018 period. If history will repeat, then we should see a DJI of 100.000 after 2030. Of course, there will be corrections along the way of 10%-30%, but the general idea based on the chart below is to buy the dip for target $100.000 after the year 2030.


 


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DJI Monthly Chart Zoomed In


This is the same chart as above, but zoomed in and it signals we could be close to finishing nr. 7 up.

Nr. 4 in the charts marked the low after a multi month correction.

Nr. 5 marks the break out.

Nr. 6 is a cooling off period, a higher low and the start of the final surge up.

Nr. 7 is the blow off top and in 1987 it marked the start of a correction that was 1) massive in price (-40%) and 2) quick and dirty, lasting only 3 candles/months.

Now, if you take a look at the right side, then it all looks very familiar: 3 & 4 correction (check!), nr. 5 is the break out, nr. 6 is the higher low and nr. 7 the blow off top to reach the blue trend line again.

The difficulty is: when will it happen? When will nr. 7 break to the downside? It could be this week, but it could also take another 3 weeks (mid FEB is also where several major cycles are lining up).

I understand that some of my readers are getting impatient and really want to see it break down now, but although it is annoying, we simply have to wait for certain key levels to break down (DJI key level @ 25.000 = black trend line).




 DJI Weekly Chart – Hanging Man Candle Stick

A hanging man is a bearish candlestick pattern that forms at the end of an uptrend. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up so that it closes at or near the opening price. Generally, the large sell-off is seen as an early indication that the bulls (buyers) are losing control and demand for the asset is waning.

During the 1987 top formation, the DJI formed a candle stick that looks very similar to the Hanging Man: a sell off during the week, but a recovery into the close to close higher.


 

 


 

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Weekly Charts


DJI 1987 vs Today



Japan 1990 vs S&P500 2018


Different period, similar pattern in play. After the blue arrow up, price has to reach and overcome the black trend line = red box = reduce overweight long stocks, buy protection in the form of shorts and put spreads.

This is what I see:

After a multi week correction, the Nikkei (left chart) broke out to the upside and formed a sideways consolidation, to find support at the black trend line. The bright green arrow marks the low and a break out to the upside followed into the green trend up. The blue arrow marks the start of the final surge up and finished after reaching the black trend line again.

Basically, I see the same pattern happening for the S&P500: the bright green arrow marked the low after a consolidation towards the black trend line. The blue arrow marks the final surge up, towards the black trend line again.

So in my view, this pattern could finish anytime now and if it does, it could lead to a break down that will be just as quick as how we got here with one major difference: the direction will be down.

 


 

 


Daily Charts – DJI 63 degree angle


These charts show an interesting pattern, in which the angles ot the wave up are almost identical.

During the 1986/87 period, the market went up in a 47 degree angle, then a 56 degree angle and then a 63 degree angle –> trend up becomes steeper and steeper, which makes sense since we’re looking at a parabolic patterns, and they almost end vertically.

Now, if we take a look at the right side, then we see similar patterns evolving: 47 degree angle (check!), 56 degree angle (check!) and the final surge up, a 63 degree angle (in progress).

Sa,e story as before: we simply have to wait till the black parabolic pattern breaks to the downside, a retest follows (dead cat bounce) and that’s the time to overweight short positions. At the moment, I have hedged my full equity exposure. I will add to my hedge portfolio (and become overweight short) if the DJI breaks to the downside/black and bounces back up to form a lower high (red box).



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DJI 2017/18 vs Oil 9 years back


The pattern of Oil, 9 years ago, looks very similar to the pattern of the DJI today.



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US and EU Interest Rates – The REAL BUBBLE Trade – This is why I’m Short Sovereign Bonds = Long Interest Rates


Left side: monthly chart & right side: daily chart


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German 2y and 10y Interest Rates – This is why I’m Short Sovereign Bonds = Long Interest Rates



 

 


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Bitcoin – Sideways Pattern $10k-$13k for next few weeks?


See the Chart of the Day section for more information on my Bitcoin trades. For now, I mainly focus on the Silver pattern: sideways between 10k and 13k.


 


 

 


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Weekly Chart XIV – Inverse VIX Short Term ETN


The XIV is showing another parabolic pattern and if correct, this could break down in the next couple of weeks/months and reach my target zone of 60.

Target zone 60 = potential draw down for XIV = almost 60% based on current price of 140.

In my view, if you have time, patience and liquidity, then selling the XIV (buying VIX,VXX) could be a very profitable trade for the next couple of months to come.

Potential Reward: +80

Potential Risk: -20 (assuming 160 is still possible).

Reward to Risk = 4 : 1

I have some long VIX and VXX exposure. If the XIV reaches 150+, then I will add short positions XIV.



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Latest Updates: 


For the latest update on Bitcoin, please check this pages and posts:


Total Portfolio Strategy 2018


If you want to read more about my Total Investment Strategy, then please read this update first: 2017 Performance and Total Portfolio. 

Or read my latest update on the US Markets: Dow Jones Industrial, Party Like It’s 1987! 

This is what I will do over the next couple of weeks/months:



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4 Responses

  1. Edwin van den Berg says:

    Guys (and girls),

    Feel free to drop your questions! I will be more than happy to answer them all!

    Enjoy your weekend!

    Cheers!

    Edwin.

    • XIA WANG says:

      Thanks for your update! I have two questions about DJ and Bitcoin:

      1. Do you think the shutdown of the U.S. government will be the trigger for DJ’s reversal?

      2. When Bitcoin fall to the target 8K, will the other altcoin also fall down? Can you give your opinion?

      TP: What is your opinion of XRP Coin?

      • Edwin van den Berg says:

        Hi Xia!

        1. Yes, it could be used as an excuse for the media/analysts to explain a possible drop. But we have seen news event like this before, at the close all was forgotten. News is just noise in my view. Tomorrow we’ll see what price does 🙂
        2. Yes, if BTC hits 8k = -30% from current levels, then the altcoins will also be impacted but it’s impossible to say by how much. As long as BTC is in a downtrend, then the rest will not break out massively. Same as US stocks and Apple…Apple is lead singer, same as BTC (for now).

        I see no reason to hold Ripple, I prefer BTC, ETH, LTC and some other altcoins for now.

        I forgot to add the DJI weekly chart this morning, it’s added now.

      • Edwin van den Berg says:

        And if the altcoins rise while BTC goes down, then it’s also a signal: BTC losing dominance. And that might pave the way for a new King…if we only knew if and which one 😉

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