Professor’s Comments August 25, 2015
Posted by OMS at August 25th, 2015
Wow! What a day. In all the years I have been trading markets, I never saw volatility anywhere close to what occurred yesterday.
In my Sunday post, I mentioned that the Dow would likely open a few hundred points lower given the ‘panic’ I saw going into Friday’s close. But over 1,000 points lower? It was the biggest point drop in the history of the Dow.. The volatility drove the already high VIX to 53, the highest reading since February 2009. The volatility was so rapid, the total movement during the first 90 minutes alone was over 3,000 Dow points. By day’s end the Dow total intraday move was over 4,900 points. It was a trading day for the ages.
The large decline probably eliminated any possibility of the Fed increasing interest rates until at least next March. I believe that there is now zero chance that the Fed will raise interest rates in September or December. If anything, the Fed is probably starting to think about some type of stimulus program! And this not only applies to the U.S. Fed, it’s probably something that central banks around the world are thinking about now. Look for more printing, even more printing and devaluations.
I found it interesting that at yesterday’s close, the Dow finished within a few points of where I projected Major Wave 1 down to end. My target was 15,855, and yesterday the Dow closed at 15,871. But to tell the truth, I’m not sure if this means anything. It’s just strange that on the most volatile day in the history of the market, the Dow ended up just 16 points from my target.
Volume on the NYSE came in at 172 percent of its 10-day average. There were only 7 new highs and 1,336 new lows. No, that s not a misprint, and it’s not something you should not take lightly. Extremely high volume with 1,336 new lows is what you start to see at the start of a Major Bear Market.
Anyhow, let’s think about what yesterday’s action probably means?
First of all I do not believe the market will crash within the next few days. After that, it could start feeling like a crash. Things could start to get real ugly.
The A-D oscillator came in with a ridiculously oversold reading of 335.7 This reading is on top of Friday’s EXTREME oversold reading of 228.48. So the odds are overwhelmingly in favor of a strong rally today. And IF the market rallies, it will likely trigger a VIX Buy Signal that could cause the rally to continue into week’s end.
But after that, it looks like the slide will start again.
This is because yesterday’s decline was sooooo large. When a market enters the panic mode, it does not follow a well-defined pattern. For all practical purposes, you can throw away the targets once panic sets in. A market in the panic mode trades purely on emotion. And this is what happened yesterday. There was no rhyme or reason to explain why the Dow dropped over 1,000 points at yesterday’s open. It should have been down 200-300 points. But panic turned those 200 theoretical Dow points into 1,000 points. Once the market started to panic, the buyers simply disappeared.
The reason I want to spend a few words talking about panic this morning is because two months from now, you’re probably gonna see a lot of panic. A few weeks ago, I mentioned how we could see declines of several hundred points during a wave 3 of 3 down in a Bear Market. Just remember that right now, the Dow is setting up for a Wave 3 of Wave 3 of Major Wave 3 down in a few weeks from now. If this happens, three to-four hundred point declines could be commonplace during that decline. A few weeks ago, many of you didn’t believe that declines like the one we saw yesterday could happen. But now you know that not only can they happen, they can happen quite easily. So If the Dow starts to retrace in the next week, I hope you respect the fact that the Bear is now alive and hungry. More than anything else, we need to think about protecting ourselves first, and making money second.
I’m purposely avoiding any discussion about targets in this post, mostly because I need to see the market stabilize and settle down for a few days, If the Dow starts to rally from the incredibly oversold conditions I mentioned earlier, I’ll start looking for another opportunity to put on a few shorts. For now, I’m gonna use 16,300-16,400 as a potential target for the next wave up. This assumes that yesterday’s strong decline and recovery was the completion of impulse wave 3 down and the start of wave 4 up. In other words, it appears that there could be more decline coming once wave 4 up completes.
On the other hand, it is also possible that Major Wave 1 down completed yesterday, and any bounce now is part of Major retracement wave 2 up. If this is the case, the rally during the next few days could go even higher. But given the fact that all of my indicators are so negative, I have to give this scenario a much lower probability. For now I’m gonna stick with the wave 4 retracement above 16,000+ with another down leg, wave 5 of Major Wave 1 down, to follow.
Bottom Line: I’m going to look for the market to rally above 16,000 and then fall about 1,500 -2,000 Dow points before Major Wave 1 down completes. My new target for Major Wave 1 down is significantly lower that my original target of 15,855, but after yesterday’s panic decline I MUST adjust the lower target. It’s now pushed down to 14,600, over 1,200 Dow points lower. Right now I’m not putting a lot of weight into this new target. But if the Dow does rally back above 16,000 during the next few days, and it does it in a choppy movement, the new target will have more credibility.
I’m not really anxious to trade the upside now. If I do, it will only be intraday scalps. My basic strategy is to wait and see what develops during the next few days and then look to establish inverse positions from higher levels.
BTW, gold stocks took a small hit yesterday. I believe gold has started its wave 2 pullback. The next week should present several opportunities to add to ‘trial’ positions in both stocks and options before the next wave higher begins. If I’m right, you’re going to see a lot of traders flock to gold and gold stocks once wave 5 down in the equity markets begins in another week or so. I’d like to see GLD pull back to the 108 level before I look to re-establish my December Call. I believe that GDX near current levels is going to prove to be a bargain in the coming months.
Protect yourself.
That’s what I’m doing,
h
Market Signals for 08-25-2015 |
|
---|---|
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
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Category: Professor's Comments