Professor’s Comments July 28, 2015
Posted by OMS at July 28th, 2015
The Dow fell 128 points, breaking below key support of 17,465 to close at 17,441. Volume was heavy, coming in at 111 percent of its 10-day average. There were 18 new highs and a whopping 485 new lows.
By closing below 17,465. it appears that the Dow completer a truncated top on 19 May and first waves down of the new Bear Market are underway.
That’s the easy part. Now it becomes a matter of looking for opportunities to get short.
As you know I expected the Dow to bounce yesterday from the oversold conditions on Friday. But sometimes news takes precedence over the technicals, and this is what happened yesterday with China. All yesterday’s decline did was make the market even more oversold, so it should bounce today. But this time, the bounce will be different. It will now be a Bear market rally.
Rallies in a Bear Market are usually very strong. This is because a lot of traders have already started to establish large short positions, and once a rally starts, they panic and start to cover. This is what I expect will happen today. The rally could continue for several days, possibly longer.
I would expect the rally to complete somewhere near the 17,750 level, +/- 50 points. Once this rally completes, the Dow should start to decline to the 16,500 level as wave 3 of 3 down unfolds.
Yesterday’s decline caused all of the indicators on the cockpit to turn negative.
So now as long as The Tide stays negative, all I will be doing is watching for a bounce and looking for opportunities to get short.
Remember, this is my primary strategy for trading this Bear Market. I will mostly be using inverse index ETFs and not shorting individual stocks. This is because there are a lot of acquisitions still going on now, and the last thing I want to do is be right about the overall market, but be wrong about an individual stock. A lot of stocks are starting to look cheap now, and when they look cheap to me, they probably look like a steal to a competitor with a lot of cash.
You typically see a lot of mergers and buy outs at the early stages of a Bear Market, mostly because it hasn’t occurred to an acquirer that a new Bear Market is starting. The acquirer has built up a lot of cash from the Bull Market, and can’t wait to go shopping for a competitor stock. What the acquiring company doesn’t realize is that the reason company they want to buy is cheap is because the economic conditions have changed. IF they waited, they probably could buy the company for a lot less.
Once the acquiring companies start to realize that the changing economic conditions are also impacting them, they will stop buying other companies and start conserving their cash. This is when it will be a lot safer to short individual companies. Not now. Right now, I’m gonna limit my shorts to the indexes.
Once again, my primary strategy for trading this Bear Market is based on The Tide. When the Tide turns negative, I simply look for inverse index ETFs to trade as they start to appear on the Dean’s List. With yesterday’s decline, QID, the inverse index ETF for the NASDAQ-100, appeared on the List. So now, it too is eligible to trade.
BTW, the Dow has now fallen over 475 points since The Tide turned negative. Always trade with The Tide!
One other thing to note was that yesterday’s decline caused UDN and ULE to appear on the Dean’s List replacing UUP and EUO. Also the DMI on UDN, the inverse U.S. Dollar ETF, turned positive yesterday. This tells me that the dollar could have topped near the 100 level. The pattern on UDN is a classic turning pattern complete with a TLB and Hockey Stick. If I’m right about this pattern, it could means that the Dollar is about to begin a strong decline that could last several years. As I mentioned before, my initial target for the Dollar is the 75 level. Beyond that I’m looking for it to fall below 50. In other words, the charts are telling me that Dollar will get cut in half as the Bear Market unfolds.
So now with UDN and ULE on the Dean’s List, telling me that there is a good chance the decline in the dollar has started, I will start looking for gold stocks and ETFs to appear. When they do, I’m a buyer.
That’s what I’m doing,
h
Market Signals for 07-28-2015 |
|
---|---|
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
FAQ
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Category: Professor's Comments