Chart of the week: Proof that you can predict a market top

by from interactive investor |

Technical analyst John Burford references a harsh lesson handed to investors 400 years ago to plot the next 'devastating' trend for Amazon stock.

Amazon sells tulips

With many of the formerly high-flying US Tech Titans suddenly falling off their perches, many investors are puzzling why that category-crusher Amazon.com is not still shooting for the moon.  After all, we hear almost daily of the 'Amazon Effect' that is said to be destroying our high streets and cutting a swathe through our retails giants especially.

As I keep repeating ad nauseam, share markets always top out when the future appears wonderful to the majority – and with the constant media coverage of the Amazon Effect (as the TV cameras pan the almost-deserted Highs Streets, save for the charity shops and bookies), the message is being rammed home with force.

Yes, AMZ appeared invincible and the shares were destined to keep shooting for the moon as it is now set to conquer home food delivery and pressure the supermarkets.  Or is it?

Bullish sentiment has certainly been riding high - and this is my ideal hunting ground for a major top. Many say they are contrarians but in reality, a true contrarian must have a time-tested strategy and only go against the crowd when the timing is pin-point perfect.  Otherwise, you may be caught in another upward lurch – and that is painful, as Tesla shorts are now discovering.

Incidentally, I refuse to trade Tesla as it is the most heavily shorted on the board and subject to massive manipulation (Mr Musk is a prime offender).

I like to show this Amazon chart as an example when a mania gets out of hand and blows its top:

Source: interactive investor     Past performance is not a guide to future performance

Does this chart remind you of anything?  Perhaps this:

Yes, I thought so – the famous accelerating uptrending Tulipomania chart from the 17th Century!  Note the final bust ended lower that that at the start of the mania – a very typical path for most manias (AMZ investors beware!).

And in a supreme irony, Amazon does sell tulips (even fake ones, but cheaper than those earlier!)  And they have at least one thing in common – the speculation in both was purely about future price appreciation (in modern parlance 'momentum-chasing').  So after almost 400 years, some things don't change, especially in the matter of human nature.

I had been following the progress of my pink ending diagonal (a pattern that is valid only when at the end of a very long trend) and with the break down on 5 October, that was my sell signal.

Source: interactive investor     Past performance is not a guide to future performance

Loyal readers will know that I make a speciality of detecting trend changes (in real time) using my Tramline Trading methods.  Of course, this is in violation of the oft-stated mantra from pundits that it is impossible to time market tops and bottoms. I like a challenge!

Now, the plunge has occurred in a clear five-wave impulsive pattern - and that means the main trend is now down with high degree of confidence.  

My guess is that the maximum upside for wave 2 is a kiss on the blue trendline, and then a devastating third wave down to mimic the path taken by those ancient Gouda tulips centuries ago.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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