Professor’s Comments August 21, 2015
Posted by OMS at August 21st, 2015
The Dow had its worst day in almost 4 years as it fell 358 points to close at 16,991. Volume was heavy, coming in at 115 percent of its 10-day average. There were only 8 new highs and 363 new lows.
Yesterday’s decline was a reminder of what happens during an impulse wave in a Major Bear Market. Yes, the new Bear is definitely underway now. The current leg, which appears to be wave 3 of 3 down, should complete near the 16,500 level, before corrective wave 4 starts to develop. Then once this retracement wave finishes, the Dow should end up where the Ending Diagonal Pattern started last October at 15,855.
A few weeks ago, when the Dow was trading closer to 18,000, talking about a decline to 16,000 didn’t seem very likely. But after yesterday’s decline, the 16,000 level is less than 1,000 Dow points away. And my target for wave 3 of 3 down is less than 500 points away. Heck, that could happen in the next few days!
The fact that a significant decline not only could happen, but IS happening is starting to sink in. There’s a lot of pain taking place now in the portfolios of the folks that are still long this market. It’s going to get worse for them.
But the point I want to make today is that even with yesterday’s decline of 358 points, I want you to understand that it’s only the beginning. All yesterday did was confirm that this market is likely going a lot lower.
I want you to understand that even though the past few days have been very tough on the portfolios of most investors, the current leg down is only part of wave 3 down of a 5 wave sequence for Major Wave 1 down. This Major Wave should complete during the next few weeks. After that, it’s likey that a complex a-b-c retracement wave will develop into early October taking the Dow back above the 17,000 level. This Major Wave 2 will make a lot of people start to feel comfortable again, thinking the decline to 16,000 was just a normal correction in a Bull Market.
Don’t be fooled. The is NOT a normal correction. If the Dow falls to the 16,000 level on the current decline, ANY retracement after that MUST be viewed as the ‘Blade’ of a negative Hockey Stick Pattern. And IF the Dow does get back down the 15,855 level, it means that the ‘Stick’ will be almost 2,500 Dow points.
This means that IF the Dow retraces back to 17,000 into early October, the next decline for Major Wave 3 down projects to the 14,500 level as a minimum. If Major Wave 3 down is like most wave 3’s, then it should be about 1.5 times the Major Wave 1 ‘Stick’ or about 3,700 Dow points. This would project a Dow closer to 13,300. And after that, once Major wave 3 down completes, there would still be two additional waves to go.
The Bear market decline will likely take 3 -4 years or more to develop and take the Dow down below 10,000. Some of the charts I’m looking at now actually project a much lower Dow, but it’s much to soon to project that far out. A lot depends on where Major Wave 1 down completes and how far up Major Wave 2 up retraces. If Major Wave 1 down ends closer to 15,000, and Major Wave 2 up is weak and only retraces 700-800 points, and then Major Wave 3 down extends, the pattern would project a significantly lower Dow, possible below 8,000.
Will it happen? Hmmm? But think back a few weeks ago. Did you think the Dow would shed over 1,100 points in the last 4 weeks? Heck, at this rate of decline, a move below 10,000 could easily happen as long as the current Bear Market pattern continues.
And that’s the key. The Pattern.
This is what I want you to understand this morning. Forget about listening to the commentators on FOX news or CNBC. They are only cheerleaders and wishful thinkers. They are NOT looking at the pattern.
The fact is that right now, there is NO other pattern on the Board. Yeah, things might change during the next few months and a new Bullish pattern could develop. But right now, the only pattern I have to work with is Bearish. And it’s not only near term Bearish Pattern, it’s long term Bearish Pattern as well. I wish I could tell you something more positive, but I can’t. I’ve spent a lot of time trying to analyze how the current pattern could morph into a more positive pattern. But I can’t find one right now. So I have to deal with what I see.
And as long as The Tide, the Dean’s List and the two Money Flow indicators remain negative, I have to respect the current pattern.
Yesterday near the close, I lightened up on my aggressive short positions by closing out my Put Option on the SPY at a nice profit. Put Options are very sensitive to volatility, and when the SPY has a large one day decline like it did yesterday, they become very overpriced. So when I saw the ‘windfall’ price increase in the Put, I booked the gain. I bought the option because I believed that wave 3 of 3 down was about to begin. And after the Dow fell 600 points in 3 days, it was time to take profit and bring my aggressive short position back to more normal levels.
I also sold a few shares of TWM because I didn’t like what I was seeing in the short term Money Flow indicator. Also, TWM made a positive ‘Rope Jump’ yesterday, and it would be perfectly normal for it to rest and consolidate during the next few days before moving higher. The 50 is still significantly below the 200 on TWM, so it appears the ETF has some work to do before it can strengthen and enter an uptrend. I don’t like to hang around while an ETF is doing its work.
Gold also had another nice day yesterday. Most gold stocks, including GLD,GDX,and RGLD, moved above their 50-day moving averages. Usually once a stock in a turn around pattern moves above the 50, it needs to rest. These stocks are now overbought and NOT in a trend yet. So they probably will consolidate near the 50 before they can start an assault on the 200 for a ‘Rope Jump’.
The important thing to note with gold stocks now is that they are doing EXACTLY what they are supposed to be doing. So the thing to watch now is for a consolidation along the 50. If the consolidation lasts about a week, it would form a picture perfect ‘Blade’. So If gold stocks trade sideways or pull back slightly, and you see the ‘Blade’ develop, you might want to think about adding a few shares. The formation of a ‘Blade’ would tell me the next move will likely be an assault on the 200. That’s my target for all gold stocks now…the 200-day moving average. I need to see them perform a ‘Rope Jump’.
That’s what I’m doing,
h
Market Signals for 08-21-2015 |
|
---|---|
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
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