Professor’s Comments May 26, 2016

Posted by OMS  at May 26th, 2016

The Dow rose 145 points, closing at 17,652.  Volume was moderate, coming in at 105 percent of its 10-day average.  There were 103 new highs and 10 new lows.

Stocks continued to rally yesterday in what appears to be the start of wave ‘C’ up of Major Wave 2 up. 

The rally was enough to turn The Tide and all of the other cockpit indicators positive..

So now with a positive Tide, and positive indicators, we need to look at the pattern and find a likely target.  For starters, it appears that the Dow should as a minimum re-test the 20 April high of 18,168.  However, if we use the ‘Stick’ of the Hockey Stick pattern that formed since the market started to rally back in early February, the target projects significantly higher, possibly another 1,000 Dow points.

And that will be a problem for traders. The reason for this is that IF we’re now dealing with a Wave ‘C’ up, and there is no certainty at this point that it is a wave ‘C’, the thing we know about it is that it will likely be very complex, with several large moves, making it difficult to trade.

The other thing we know about a ‘C’ wave coming at this point is that it can truncate at any time.  So while the odds favor a move above 18,168, anything beyond this level is pure speculation.  The pattern could complete at 18,169, 19,000 or anywhere in between. 

So without a solid target, this is the time that we will need to pay particular attention to The Tide, Dean’s List, and the other cockpit indicators.  As long at the indicators remain positive, I will start looking to establish small ‘trial’ positions to the long side.  This is very similar to what I did with my ‘trial’ short positions when the cockpit indicators turned negative near the 17,900 level.  I started buying a few inverse ETFs from the Dean’s List and took profits when they reached pattern targets near 17,500.

But now the only target I feel comfortable with is the 18,168 level.  And that’s only 300+ points from yesterday’s close.  So before I look to establish a long position from the Dean’s List, I’d really like to see the market pull back a bit. 

After yesterday’s trading, the 2-period RSI Wilder on the Dow (DIA) showed a reading of 96.31.  The reading on my VTI was 47, telling me the market hasn’t started to trend yet.  This means that the market will likely experience a small pullback soon to relieve the EXTREMELY overbought RSI.  IF this happens, this is where I will look to establish my long positions.

The market is still in the very Bullish pre-Holiday trading period, so it’s likely that any pullback will not occur until after we get back from the Memorial Day holiday.  On the other hand, a lot of traders will be leaving their trading desks later today, and they may want to take some risk off before the weekend.  If the market pulls back during the next 1-2 days such that the 2-period RSI becomes oversold (below 30), I’ll look to establish a few long positions.  Otherwise, I’ll wait until I see what happens after the Holiday.

BTW, gold (the metal) fell slightly yesterday to 1227.  The wave 2 target for gold is below 1200, closer to 1980.  GLD fell 0.32 to 116.98.  I’m still looking for lower prices closer to the 200-day moving average.  The past few days of trading caused the 2-period RSI Wilder on GLD to become buried deep in oversold territory (0.7).  My tend indicators are still showing No Trend (remember, it’s likely a wave 2, so I don’t expect a trend).  All this means is that with oversold conditions and no trend, GLD will likely pop before it starts to head lower.  I would view the pop as confirmation that wave 2 down is underway with lower prices ahead. Be patient.

That’s what I’m doing.

h 

Market Signals for

05-26-2016

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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