A few more weekend thoughts – Sun, Oct 13th, 2019

Posted by professor  at October 14th, 2019

In my WSR, I discussed how the technical picture changed when the Dow broke above the 28,600 level.  But with all wave counts, it’s also possible that Friday’s rally could be a head fake, and the Dow will not rise to new highs in the weeks ahead.

The reason I say this is because the rally off the 3 October low of 25,744 was a five wave a-b-c or zig-zag pattern.  Zig-Zags or a-b-c patterns are usually patterns associated with a corrective wave structure, in this case part of final wave ‘c’ of Wave ‘D’ up. So even though the breadth and volume numbers were robust on Friday, it’s still possible (low probability) that Friday’s rally marked the end of a retracement rally.  If this is the case, the market should begin to decline next week.

So how will we know which Scenario is taking place?

Well, if the Bullish Scenario is real, the Dow should continue to rally and in doing so, break above the 16 July high of 27,399 on its way toward 27,650.  This should be where Wave ‘D’ up ends.  With positive indicators on the cockpit, it is my primary scenario.

But IF the Dow starts lower next week, the alternate Bearish Scenario will come into play.  This Scenario will start with the Dow trading down to the 3 October low of 25,744 and then breaking below 25,340. If this should happen, it would mean that Wave ‘E’ down is underway which should lead to a decline to the December 2018 low of 21,712.

Now I realize that with the Dow currently at the 26,817, the 25,744 level is over 1,000 points away.  This is way too many Dow points for it to be useful in determining which Scenario is taking place.  So, this is where we will need to pay attention to our indicators and how the market trades.  Right now, with mostly positive indicators, it’s likely the Bullish case is occurring.  But IF the indicators turn negative, which could happen early next week, I want you to be aware of the bearish possibilities.

One thing is for sure…. this is NOT the time to be aggressive. Again, with the Dow at 26,817, the upside appears limited to the 27,650+/- level. The move could happen fast, within the next 2-3 weeks.  After that, the market should begin a significant decline.…back to the 21,712 level.

So be EXTREMELY cautious with your trading during the next few weeks.  Shorten up on your time period and be careful with what you hold overnight.  If the Dow is headed for a new high on this rally, the way up will be marked by a lot of volatility.  On the other hand, if the Dow is headed lower, next week should be marked by a severe and persistent decline.  That’s because the next wave down should begin with a series of impulsive moves. Friday’s late decline of 200 Dow points could have been the start of that impulsive decline. If this impulsive move to the downside continues early next week, there’s a good possibility that the Friday’s rally was just a head fake and the market is headed lower.

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BTW, on Friday, Bonds appeared to have completed a five wave decline which is likely the end of wave 1 down of Wave 3 down. So, IF Bonds rally early next week in wave 2 up, I’ll be looking for an entry point to buy TBT for the Model.