Professor’s Comments December 22, 2015

Posted by OMS  at December 22nd, 2015

The Dow rose 123 points, closing at 17,252.  Volume was light, coming in at 86 percent of its 10-day average.  There were 26 new highs and 1765 new lows.

It appeared that yesterday’s bounce was part of a small sideways triangle pattern within the down trend that started after last week’s Fed announcement.  If this is the case, then it’s likely that once this sideways wave completes, the market will resume its decline and make one more wave down during the next day or so before starting a Santa rally.

At this point it’s still not clear which major pattern, either the Five Waves to a Top, or the Ending Diagonal, is taking place.   All of the cockpit indicators are either negative or neutral, but the Dow still has not broken convincingly below the 17,200 level.  So either scenario is still possible.

Last night, I spent a lot of time looking at the trend indicators. Two of the three I follow remain in a non-trending mode.  This is one of the reasons the market bounced yesterday.  The market was oversold going into yesterday’s session with no trend, and whenever this happens, it usually bounces.  But when the bounce does not turn the breadth indicators positive, it usually means that the rally is part of a consolidation pattern and NOT the start of a new leg up.  In other words, it likely means that the market will re-test last week’s low before any retracement rally begins.

So looking beyond the next day or so, the question is how high will the retrace rally go during the next leg up?  Will it re-test the 18,350+ level for a wave 5, as in the Three Waves to a Top Pattern?  Or will it only be a partial retracement for a wave 2 after the Ending Diagonal?  Right now either scenario has an equal probability, and this condition will remain as long as the trend indicators stay in the non-tend mode.

If the Dow breaks below the 17,200 level convincingly and the trend indicators start showing trend conditions, then it’s likely the market has topped and is heading below 16,000 which is the target for the Ending Diagonal Pattern.  But right now, we still don’t know this.  

So until the situation is resolved, I will continue to scalp trade.

I spent several hours’ yesterday scalp trading a few of the stocks I mentioned in the WSR.  When the Dow starting off higher, I immediately started looking at 5-minute chart of JetBlue (JBLU), one of the stocks Emeritus highlighted last week for the Honor Roll.

If you look at the chart, you will see that even though the stock popped right out of the gate, the Money Flow indicators did not cooperate in generating a Buy signal.  You had to be patient and wait. Remember, the initial pop was likely a result of the TLB Pattern that formed on Friday.  But once the initial pop occurred, the pop from the TLB pattern was over.  You had to wait for a new pattern to develop.

The wait didn’t take long.  By 11:30, the stock had popped and pulled back to form a beautiful Hockey Stick pattern with two lower lows in the Blade.  Everything was set-up for another move higher. 

At 11:45, the Fast Stochastic signaled ‘get ready’.  And by 11:50, the other two indicators gave the ‘go’.  If you managed the trade properly, it was worth about 0.35 cents or about $350 for every 1000 shares of this 20-dollar stock.

You could have done the same thing with Royal Caribbean (RCL), which gave its Buy signal about the same time for a gain of about 1.6 points. 

If you played golf early in the day or had to do some last minute Christmas shopping, you still had plenty of time to catch the Delta Airlines (DAL) flight which took off for a 0.50 gain late in the day.

Again, this not the type of trading I like to do.  I usually prefer to Position Trade where I buy something and hold it for a few days or weeks.  But when the market is undecided about its future direction and is showing a lot of volatility, you have to scalp trade to get paid. 

Once again:  When there is a clear trend in place, we position trade.  When the market is consolidating, like it does in waves 2 and 4 with NO Trend in place, we scalp. This is probably the most important lesson that new traders must learn. 

Scalping.

That’s what I’m doing,

h

BTW, the markets will be closed on Friday for Christmas.  So tomorrow’s Comments will be my last for the week.  I’m really looking forward to spending some time spoiling my granddaughter.  Besides relaxing with a good cigar and a glass of Tennessee Whiskey, spending time with my grand-kids is my favorite thing to do.

I hope you take some time off this week to enjoy your family.  Forget about the market; it’s gonna be there when we get back. For now, go enjoy your family.

Merry Christmas!

Market Signals for

12-22-2015

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.