Professor’s Comments August 20, 2015
Posted by OMS at August 20th, 2015
The Dow fell over 200 points early, then staged a nice rally after the Fed minutes were released, only to close down 163 points at 17,349. Volume was moderate coming in at 101 percent of its 10-day average. There were 36 new highs and 284 new lows.
Yesterday’s decline was enough to turn The Tide negative again. So now both the Tide and the Dean’s List are negative. This tells me that wave 3 down is underway.
Yesterday’s down-up-down decline was typical of the type of stair-step decline that occurs during a wave 3 of 3 down. You get a hard decline, followed by a brief rally, only to be followed by additional declines. It’s the mark of an impulse wave. Expect a lot more of the same as the Dow continues to move lower.
All I do during an impulse wave down is hold my inverse ETF positions and look to add to them on any bounce. The Dow closed near 17,350 so if I’m right, it should still have about 800-850 points to go before wave 3 of 3 down completes.
With the CCI on the Dow back below -100, it’s also telling me that the downtrend is underway. I’m not checking any roots now. All I’m doing is watching my flowers grow.
Same for gold. As the equity market moves lower, money is starting to move into gold. You can see this just by looking at the Dean’s List and the Money Flow indicators on most gold stocks. But while the equity markets are starting to trend down, the metals have not started to trend up yet. They are still in the turning process.
So far most gold stocks have only bounced after making a TLB pattern. If you look closely at GLD, you can see that the DMI only turned positive yesterday. As most of you know, a DMI turn after a TLB pattern is my Buy Signal. But it’s only a signal for a partial position. This is because GLD is still in a down trend with the 50 below the 200.
Now one might wonder why I’m being aggressive with my inverse equity positions now, but being cautious with gold? After all, the Dow is still technically in an uptrend. It’s 50-day exponential moving average is still above the 200. So why am I being aggressive with my inverse equitiy positions and not doing the same with gold? Hmmm?
The answer is that the patterns are different and I don’t have a Tide for gold. With equities, the major pattern on the chart is the downside breakout from a Major Ending Diagonal Pattern. This pattern has a target of 15,855. I’m willing to risk more money on something that has a reliable pattern with a potential reward of 1,480 points lower.
But with gold, my current target is not that reliable. For example with GDX now trading at 15.2 and supporting a positive DMI, the target is the 18 level. And while this represents an 18 percent increase in price vs. a potential 8 percent decline if the Dow falls to the 15,855 level, the rise in gold is far less certain at this point. The pattern is simply NOT as reliable. This is why I MUST limit my gold purchases to ‘trial’ positions.
However IF gold performs a ‘Rope Jump’, telling me that the move up was likely wave 1 of a Major rally wave in gold, well, that’s another story. If gold makes a ‘Rope Jump’ and then pulls back to form a Hockey Stick, that’s when I’ll start to become very aggressive with my gold purchases.
So while I’m currently aggressively short in equities, I’m still only picking away at the metals. Their time will come after they make a ‘Rope Jump’.
I did buy a few call options on GLD yesterday, picking up several December contracts at the 119 strike price. After looking at GLD’s interim high of 117.88 made on 8 May, the 119 strike seemed to fit. IF I’m right and gold does start to rally hard, the 49 cents I paid for each share could be a bargain. We’ll see.
Also, while I was watching the market drop yesterday, I received a very nice email from Mike N., a long time subscriber. It touched me deeply, and I thought I would share it with you. Here’s what Mike said:
“I was reflecting a little today and can’t remember a time in the past where the market taking hits didn’t give me great concern.
After attending your classes, updates, and using the website, I see as much opportunity in a declining market as an advancing market! Thanks again!”
Thank you Mike! I always appreciate receiving feedback like this from my students.
Watching my flowers grow.
That’s what I’m doing,
h
Market Signals for 08-20-2015 |
|
---|---|
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEG |
THE TIDE | NEG |
SUM IND | NEG |
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