Professor’s Comments April 27, 2018
Posted by OMS at April 27th, 2018
The markets rallied hard yesterday from oversold conditions. The Dow was up 239 points, closing at 24,322. It was the Big Move predicted by Wednesday’s ‘relatively’ small change in the A-D oscillator. The NASDAQ and SPX were up 115 and 28 points, respectively. Volume on the NYSE was moderate, coming in at 111 percent of its 10-day moving average. There were 60 new highs and 76 new lows.
Yesterday’s rally was likely sub-wave ‘b’ up of Wave ‘’e’ down in the Major triangle pattern that has been developing since 26 January. If this is what’s happening, the Dow should begin a decline to about the 23,500-23,800 level before Wave ‘e’ down completes.
In yesterday’s Comments, I mentioned that the Dow would likely rally to about 24,250 IF sub-wave ‘b’ up was occurring. The Dow actually got as high as 24,402. The rally was not enough to turn most of the cockpit indicators positive. So given the fact that the Dow is now slightly overbought with NO TREND in place, I would expect it to start to pullback as sub-wave ‘c’ down of Wave ‘e’ down begins to unfold.
If the market does start to decline as I expect, this is where things will start to get interesting. That’s because IF the Bullish Scenario is to take place, the 23,500 level MUST hold. No ifs, ands, or buts…the 23,500 level MUST hold on the next decline if this market is to go higher. Otherwise, the Bearish Scenario will start to unwind and things will get ugly…fast.
The Bullish Scenario is supported by the fact that the Dow and SPX have been developing a large triangle pattern since 26 January. Triangles are consolidation patterns and prices usually leave the triangle in the direction they entered that pattern. In this case, the direction would be up. And given that triangles usually develop as Wave 4 in a major pattern, once they complete they are usually followed by a major Wave 5 rally. The key word in this paragraph is ‘usually’. I can’t recall ever seeing a major triangle pattern morph into a topping pattern, but I’m told it can happen. If it does, it would be an EXTREMELY rare event.
Also supporting the Bullish case is the Sector Ratio. Even though the indicators are mixed, the Sector Ratio has remained mostly neutral to positive during the down legs of the triangle. So, IF the market does start to decline in sub-wave ‘c’ down, I will be watching the Sector Ratio very closely. I don’t want to see it turn extremely negative. If the number of negative sectors starts to increase, it would make it easier for the Dow to break below 23,500.
I’ll also be watching The Professor algorithm. After yesterday’s rally, he highlighted 28 stocks as longs. This is still far short of the number required to generate a Professor Buy Signal, but 28 stocks to the long side is the largest number I’ve seen from him in a long while. I wouldn’t get too excited about this positive activity yet, but it is something to watch. It means that a few stocks are starting to trend. When the number increases to 50 or more, it usually leads to rallies of 750 points or better.
Here’s my strategy now. Because the markets are overbought and still in the NO TREND zone, and the pattern suggests lower prices for the short-term, the odds favor lower prices. So, I’m going to move to the sidelines before becoming aggressive. If Dow does decline close to the 23,500 level, I’ll start buying a few long positions in stocks and ETFs in the Strongest Sectors. Then IF the indicators start to turn positive, I’ll become even more aggressive, adding to my positions as the market moves higher. I DO NOT want to be long equities IF the market makes a decisive move below 23,500. I believe a decisive move below 23,500 now would blow up the Bullish Scenario and confirm the beginning of a new Bear Market.
Watching.
That’s what I’m doing,
h
BTW, IF the Dow does start to decline and holds the 23,500 level on the next wave down, it could be one of the best buying opportunities since the November 2016 election. It could be good! That’s why I’ll be watching the indicators closely :>)
Market Signals for
04-27-2018
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEU |
SUM IND | NEG |
VTI | POS |
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Category: Professor's Comments