Professor’s Comments August 18, 2015
Posted by OMS at August 18th, 2015
The Dow fell over 130 points early and then rallied into the close finishing up 68 points at 17,545. Volume was very low, coming in at 79 percent of its 10-day average. There were 96 new highs and 157 new lows.
Yesterday’s low volume rally to an intraday high of 17,545 was only about 150 points from my ‘theoretical’ target for wave ‘c’ of 2 up. I used the opportunity to add to my positions in inverse index ETFs. I also bought a few Put options on the SPY, (October 16, strike price 198, cost $1.60 per share or $160 per contract), something I have not done in awhile.
I don’t Buy a lot of options, mostly because the people who buy options usually lose money. When you buy an option, you not only need to be right about the direction of the move, you need to be right about the time period too. A Put option is a wasting asset, and even though the SPY could go down after the option is purchased, it needs to go down quickly to make money. This is why I always reserve my option buying for times when I believe there could be a rapid movement in price, like in a wave 3 of 3. And right now, the pattern is telling me that wave 3 of 3 down could start at any time.
From a pattern perspective, the Dow could still retrace back to the 17,700 level. However because yesterday’s low volume trading action looked very sluggish, I’m not so sure that it will. The Dow could have made its wave ‘c’ top yesterday. If that happened, we’ll know soon enough.
Yesterday the Dean’s List turned neutral again, so with a positive Tide and positive Money Flow indicators (both Coaches are positive), we have a nice set-up to signal the start of wave 3 of 3 down. In other words, IF the market starts to decline during the next day or so, watch for the indicators to turn negative. If they do, it will tell me that wave 3 of 3 down is under way. The decline should take the Dow down close to the 16,500 level. After that there should be a wave 4 bounce, and then a final decline to below 16,000.
If I’m right about a wave 3 of 3 decline starting, I will look to take profit on my Puts near the 16,600-16,650 level. This is because their could be a sharp retracement rebound from levels below 16,650 as wave 4 of 3 down starts to develop. I do not plan to hold my Put options during the retracement. Time will be acting against me if I do.
Anyhow, there’s still a lot that needs to happen before the Dow gets down to these lower levels, but I want to be prepared for a decline IF it does happen.
Most gold stocks had a nice rally yesterday, with GDX closing back above 15. The move cause the DMI to turn positive again.
Also, my ‘Stick in the Sand’ for gold, GLD, has re-appeared on the Dean’s List, so now I feel more comfortable with my ‘trial’ position.
If you look closely at a chart of GDX, you will see that since it bottomed on 5 August near 13, it rose slowly to the top of its Bollinger Band at 15.53. Since then it has moved sideways forming the ‘Blade’ of a small Hockey Stick pattern.
If I’m right about gold, and GDX in particular, the stock should start to break out from the 15 level and start attacking the 18 level which is near where the 200-day moving average is currently located. If this happens and GDX makes a ‘rope Jump’, it will tell me a lot about the next move in gold. It’s going a lot higher!
Anyhow, all I’m doing now is accumulating a ‘trial’ position.
BTW, Royal Gold, one of my favorite gold stocks, also joined the Dean’s List yesterday. Seeing Royal on the List adds to my confidence. IF the DMI on RGLD turns positive in the next few days, I plan to add a few shares to my gold holdings.
So right now, I’m preparing for two major events: A decline in equities and the start of a rally in gold and silver.
That’s what I’m doing.
h
BTW, I don’t teach options trading, nor do I advocate the purchase of options. So please do not ask me about the Puts. The fact that I only buy them on special occasions should tell you a lot about how I feel about the market as we move into September-October.
Market Signals for 08-18-2015 |
|
---|---|
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | POS |
SUM IND | POS |
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