Professor’s Comments January 23, 2015
Posted by OMS at January 23rd, 2015
The Dow rallied 260 points, closing at 17,814. Volume was moderate, coming in at 105 percent of its 10 day average. There were 284 new highs and 34 new lows.
Things are starting to get complicated. On the surface, yesterday’s strong rally appears to be the start of wave ‘e’ up, the final wave in a five wave sequence that would complete the Major Ending Diagonal Pattern that has been in place for most of 2014. If this is the case, then the Dow should easily exceed the 18,000 level, probably completing somewhare between 18,200-18,300. This is what most of my indicators are telling me now.
When I say ‘most indicators’ I mean The Tide, The Dean’s List, and the DMI, all of which turned positive yesterday.
However, there are still a few indicators that are NOT cooperating and because they still remain negative, the possibility that the Dow will rise another few points and then start to decline remains on the Board.
Why? Well even though most of my indicators are saying ‘go’, there is NO trend in place. And anytime the 2-period RSI Wilder becomes overbought without a trend (CCI>100), the possibility exists that what we saw yesterday was just a continuation of the retracement rally that we have been seeing for the past week.
In other words, yesterday’s rally could still be part of corrective wave 2 of 3 down.
The only way we’ll know for sure is if the Dow exceeds the 17,923 level which is where wave 1 of 3 down began.
This is why I said things are getting complicated. It’s not so much in the overall patterns…they haven’t changed. But what’s getting complicated is how to trade them now.
If the Dow is on its way above 18,000, we need to assess the upside potential of the move to determine an appropriate risk vs. reward. And anytime you’re dealing with the 5th wave of an Ending Diagonal Pattern, it’s difficult. The wave could extend or it can truncate. There is NO way to tell. The only thing one can do is use a trend line or the upper Bollinger Band to provide an estimate of the move. And right now, the upper Band sits at 18,195, about 380 points above yesterday’s close.
So the potential upside is about 380 points.
On the other hand, IF the wave 2 scenario is what’s happening, then forget about those 380 upside points. IF wave 2 completes somewhere below 17,923, the next wave down should be 3 of 3, or a major impulse wave down. The potential downside for this wave is below 17,000, probably closer to 16,300. That’s over 1,500 Dow points from current levels.
So right now, the risk vs. reward for an upside trade is about 4:1. I don’t like those odds. Besides these odds are being calculated based on the most favorable conditions. They don’t take into account the possibility of wave ’e’ up truncating, which happens about 50 percent of the time in an Ending Diagonal.
And it doesn’t take into account the negative MACD or the diverging volume indicators. I’m including a chart of the Dow with a few of these volume measures so you can see why I’m concerned.
Anyhow, because The Tide remains positive, I MUST respect it. I NEVER like to trade against The Tide. But just because the Tide is positive, it doesn’t mean that I have to trade. I’m probably going to stay on the sidelines today and watch the 17,923 level. It’s only about 100 points away, and with all the large moves that we’ve seen in the past two weeks, 100 points is nothing.
Besides, the MACD is still negative on the Dow, S&P500 (SPY), and Nasdaq (QQQ), so IF I took a positive trade now on one of the indexes, I would be breaking the rules.
I’m still watching crude oil and energy stocks. Yesterday Halliburton (HAL) rose 13 cents to 40.82. The rise was not enough to turn the MACD positive on the Daily Chart. Same for Superior Energy (SPN) which also rose 12 cents to 20.17.
If the market does rally today, I’ll look to trade a few energy stocks. That’s because while the Dow may or may not be ready to move above 18,000, it appears that several energy stocks have a shot of some type of bounce. So IF I do trade now, I would rather bet on something like HAL which has narrow Bands and is in the Trend Mode with a CCI of 129.05, than the Dow (DIA) which has wide Bands and a CCI of 3.14.
That’s what I’m doing,
h
Market Signals for 01-23-2015 |
|
---|---|
DMI (DIA) | POS |
DMI (QQQ) | POS |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
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.
Category: Professor's Comments