Professor’s Comments December 18, 2015
Posted by OMS at December 18th, 2015
On the day after a Fed induced rally of 224 points, the Dow gave back all of its gains falling 253 points to close at 17,496. Volume was moderate, coming in at 102 percent of its 10-day moving average. There were 41 new highs and 183 new lows.
In yesterday’s early Comments I mentioned that I would be looking to buy any pullback from yesterday’s rally. The reasons I felt the market would pullback was because of what happened after Wednesday’s Fed announcement.
If you recall, the market started to rally immediately after the 2pm announcement. It appears that the rally was caused by large institutional traders buying back the protection (futures and options) they used to hedge their large stock portfolios. Then once the announcement was made, they immediately started buying back this protection causing the market to rally.
So yesterday, once this protection had been unwound, the market fell back to where it was before the ‘artificial’ buying took place. In other words, Wednesday’s rally was an aberration. It was not sustainable.
We see this happen a lot on Fed announcement days. Last year I did a webinar for AIQ Systems that discussed how to take advantage of this trade. It was called “Fed Day, Pay Day” and is still available from AIQ Systems.
The basic idea of this trade is to get long near the close the day before the Fed announcement (Tuesday) and then sell just before the announcement.
Once the announcement is made, I generally remain on the sidelines for 10-15 minutes to avoid the post announcement volatility, and then enter a new position once the market stabilizes and starts to develop a trend into the close.
The post-announcement trend is usually driven by the buying back of protection, so I only stay with the trade into the close. I always exit the trade by day’s end because most of the hedge protection has been bought back by then.
And with this hedging gone, the market usually reverses course the following day.
This is what appeared to happen yesterday.
As things turned out, the wave 2 decline I expected did not complete where I thought support would come in. It made another leg down. This is why I only bought a small position of DDMs.
So today, as long as the Dow stays above 17,200, I will continue to look to add to my initial position. If the current wave down is wave 2 of the pattern, then it should complete somewhere above the 17,200 level.
However, we need to be cautious now. The Tide has turned negative, and I never like to fight a negative Tide. Also, 3 of the 4 inverse index ETFs have moved onto the Dean’s List. So any decline today could turn the List negative. And IF the Dow starts to move below 17,200 with a negative Tide and a negative Dean’s List, it would likely mean that the next Major move down is underway.
Remember, I currently have two negative scenarios on the Board. My primary scenario suggests a short-term choppy move to 18,350+ before falling. The second, which is the Ending Diagonal, suggests the Major decline has already started. As long as the Dow stays below 17,978, the Ending Diagonal Scenario remains in play. Both are termination patterns.
Trading cautiously.
That’s what I’m doing,
h
Market Signals for
12-18-2015
DMI (DIA) | NEG |
DMI (QQQ) | NEG |
COACH (DIA) | NEG |
COACH (QQQ) | NEG |
A/D OSC | |
DEANs LIST | NEU |
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