Professor’s Comments 3/6/2020
Posted by OMS at March 6th, 2020
The Markets fell hard again yesterday. The Dow dropped 970 points to close at 26,121. The NASDAQ and SPX were down 280 and 106 points, respectively. Volume on the NYSE was moderate, coming in at 96 percent of its daily average. Once again, we saw more volume on a declining day than on the previous advancing day (89 percent). This change in the nature of the volume is happening on all the major indexes which is another sign of a weak market.
OK, so where are we after yesterday’s action? Well, there’s a good possibility that the Dow and the other equity indexes are tracing out a large triangle for Wave ‘B’ of Major Wave 2 up. The past four days have seen major (800 point) moves both up and down. This type of action is usually found in triangles, as it is NOT impulsive. Also, as long as the Dow stays above the 28 February low of 24,681, I can’t say for sure that Major Wave 2 up is complete. So at least for the short-term, the triangle is a real possibility.
What does this mean specifically and why did I exit the DXDs I established for the Model yesterday? Well, first, the BLS will be releasing the results of the February Jobs Report at 8:30 today. The Jobs Report always has the potential to move markets. And given the 800 point swings we’ve seen the past few days, I don’t want to be on holding a lot of stock if the market moves against me.
As I’ve said many times before, triangles are consolidation patterns. Prices leave a triangle in the direction they entered the pattern. In this case, the direction would be up. Remember, the triangle…if this is what’s happening, started with a move up after the completion of Major Wave 1 down. In other words, from the 28 February low. After that low, the market rallied, then pulled back, rallied again and then yesterday fell 970 points. So, yesterday’s decline could have been Wave ‘c’ of a very large triangle. If this is the case, once Wave ‘c’ completes, there should be a Wave ‘d’ rally, followed by one more decline before Wave B of 2 up completes.
Bottom line: The market could continue to swing between 24,500 and 27,000 for another week. After that, there’s a possibility that the market could move back to the 27,500+ level before Major Wave 3 down begins. All this assumes that the Dow stays above the 28 February low of 24,681. If the Dow breaks below this level, all bets are off.
From a trading perspective this extreme volatility should be a wonderful opportunity for scalp trades. However, if you’re holding stocks or ETF during this period, the volatility could be unsettling and painful.
This is the reason the Model has been on the sidelines for most of this period. Once things begin to settle down, the Model will begin to establish a few new positions But right now, I feel very comfortable with the Model being safely in cash.
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Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
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Category: Professor's Comments