Professor’s Comments January 28, 2014

Posted by OMS  at January 28th, 2014

The Dow fell another 41 points to close at 15,837.  The SPX shed  9 points to close at 1781.  Both numbers are below the lower limits I talked about last week, so the odds are that the final wave of the Ending Diagonal Pattern I have been talking about for months has truncated, and a new Bear Market is underway.

Yesterday’s decline was accomplished on moderate volume that came in at 106 percent of its 10 day average.  There were 25 new highs and 78 new lows.  So now the number of new lows is outpacing the new highs.

Several things happened yesterday that changes the technical picture.  However given that the Fed meeting starts today, we won’t know with any degree of certainty until after tomorrow’s announcement.

The first thing that happened is that the A-D oscillator came in with an EXTREME oversold reading of -171.44.  The last time we had a reading anywhere near this level was on December 11, 2013 after which the Dow rallied for 885 Dow points.  If the decline that has been occurring the past 5 trading days is actually the first wave down of a new Bear market, then I would expect to see a retracement rally start very soon that should take the Dow back near the 16,100-16,200 level before the new Bear starts to get ugly.  The retracement should take the SPX back to 1820-1830, but not much more.

Given that QQQ has now fallen off the Dean’s List causing it to turn negative, I can no longer maintain my positive bias.  I MUST now view any rally from current levels as a selling opportunity.  At least until proven otherwise.

The other thing that causes me pause is The Professor.  Yesterday, even though the market was weak all day, he went back to sleep.  I was running the algorithm at hourly intervals all day yesterday with the same results.  He continued to sleep with only 3 longs and 2 shorts.  Only TWO SHORTS???  I smiled when I finally realized what he was trying to tell me.

Bear Markets, like any other markets move in waves.  And right now the most likely reason that The Professor is not getting excited is because he knows that IF the past few days were in fact the start of a new Bear Market, then a significant retracement rally is coming.

If you look at the decline that has taken place during the past 5 trading days, you will note that it has been impulsive, and NOT corrective. This tells me that IF we do get a rally, it will likely be a fake out correction that could either be followed by another small decline to new lows at which point the real a-b-c retracement will begin.  The a-b-c retracement rally could also start from current levels without falling to new lows.  It really doesn’t matter.  The bottom line is that IF a new Bear Market is starting, it will likely not start until all of the indices have a chance to develop their retracement  Blades.  In other words, if I assume that the trading action of the past 5 days is part of wave 1 down, then I MUST expect that it will be followed by an a-b-c retracement Blade for the negative Hockey Stick pattern.  The numbers mentioned above for the Dow and SPX are the likely targets where the ‘c’ wave of the pattern would complete.  If these numbers are exceeded and The Professor and the Dean’s List start to turn positive when these numbers are reached, then the odds would shift again that another Bullish leg is developing.  However, until proven otherwise, I MUST now assume and take precautions against the start of a new Bear.Market.

Yesterday, the VIX fell 0.72 points to 17.42.  The decline was not enough to generate a new VIX Buy Signal, as the Upper Bollinger Band is at the 16.66 level.  If the market does rally today as I expect, the VIX will likely fall back below the 16.66 level generating a new VIX Buy Signal.  This would tell me that wave 1 down has completed and the next few weeks will likely consist of choppy trading as the up-down-up legs of Blade start to develop.  BTW, IF you start to see this choppy trading occurring during the next few weeks, it would be further confirmation that the Bear Market has started.

The final thing I want to mention is what happened to Apple (AAPL) last night after releasing less than stellar earnings.  The stock fell 45 points to 505.89, a drop of about 7 percent.  Ouch!  If you recall, I have watching Apple as the markets have been declining the past 5 days, saying that I couldn’t imagine that a new Bear Market was starting without AAPL participating.  Well, after last night’s drop, even Apple showed that it was not immune to the bite of the Bear.  The after-hours decline puts the stock slightly below the 200 day moving average.  So now the stock has ‘Jumped the Ropes’ to the downside, after forming a THT Pattern AND a negative Hockey Stick complete with a DMI change.

Apple is a stock that should be watched during the next few weeks.  AAPL represents more than 12 percent of the tech heavy NASDAQ.  It is also widely held by the institutions and most mutual funds.  And because it is so widely held, it could likely impact your IRA and 401K investments.  So during the next few weeks, we need to watch AAPL very carefully.  IF AAPL starts to rally now that it ‘Jumped the Ropes’ we need to watch how it forms its retracement Blade.  The quality of the Blade will help us determine the next major move in the markets.

During today and tomorrow, I will be watching for the retracement rally to start (because of the oversold A-D oscillator) and  waiting for tomorrow’s Fed announcement.

That’s what I’m doing,

h

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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