Professor’s Comments October 22, 2015
Posted by OMS at October 22nd, 2015
After an early rally, the Dow gave back all of its gains to close down 49 points at 17,169. Volume was moderate, coming in at 104 percent of its 10-day average. There were 74 new highs and 46 new lows.
One of the things I was watching yesterday was the Money Flow indicator on the 15 min chart of the DIA. The negative divergence (yellow line) was warning that the early rally would not hold, and once money started to leave the ETF, prices would start to fall.
The question now is will this decline continue? In other words, did the Dow top with yesterday’s early rally and was the decline the start of Major Wave 3 down?
Here’s the thing: While the DIA did NOT break through the first support level at 171 that I mentioned in yesterday’s Comments, the SPY and Russell 2K both did break their respective pattern support levels. So there is a good possibility that Major Wave 3 down started yesterday. It’s still very early and the initial waves of a major decline always take time to unfold. But it’s a start.
So now that the pattern appears to be completing, I’ll start watching for the indicators to turn.
There were no changes to the breadth indicators that make up The Tide last night, but all of them were hit hard by yesterday’s negative action. Another day or so of negative trading should be enough to turn the breadth and Money Flow indicators negative. Once they do, AND IF the DIA starts to break 171, and then 168.72, it will be a good indication that Major Wave 3 down is underway. Be patient.
One of the stocks I was watching yesterday was Canadian National Railway (CNI). As many of you know, I like to trade CNI as part of my China Has to Eat Strategy. However China’s growth is slowing and this has impacted CNI. The thing I find interesting about CNI’s year long slide is its pattern. It tells me that there could be a lot more downside to go.
CNI formed a top near the 75 level back in September 2014. Since then, the stock has made 5 picture perfect waves down, bottoming near the 52 level on 24 August 2015. The current move down appears to be a Major Wave 3 down.
After the August bottom, CNI then performed a classic retracement rally back to the 62.5 level.
If CNI continues to make picture perfect moves, the next move down should re-test the August lows near 52, with even lower prices likely.
Yeah I know that CNI might not be the most exciting short on the board, but anytime I see a well behaved stock tracing out a well-defined pattern, I take note. When I’m looking to short stocks, I always want to have the predictability of a well-defined pattern on my side.
This is why I started to short CNI yesterday near 61.60 based on the 15 min bars. This is a ‘trial’ trade only. If CNI moves above yesterday’s high of 61.02, I’ll exit the trade. If the indicators on the Daily Charts turn negative, I’ll add to my ‘trial’ short position.
BTW, another reason I’m looking for a transportation stock to short is because of the longer term chart pattern for the transports suggests significantly lower prices. Now I don’t want to shock you with these numbers, but the longer-term pattern suggests the transports could be trading below 2,000 in 2-3 years. That’s right…below 2,000! The Dow transports topped near 9,000 several months back, and then fell to about 7,500. The recent rally has them trading back near 8,000. So this 1-2 punch could be the initial waves of a much larger down sequence. We’ll see. This is a case where I simply can’t ignore the longer term pattern.
GLD pulled back a point yesterday to 111.73. It appears that the pullback was part of a small wave 2 Blade within a Wave 3 rally. If I’m correct about the wave count, the next move should take GLD to the 118 level. I remain on Buy Signals for gold and mining stocks.
That’s what I’m doing,
h
Market Signals for
10-22-2015
DMI (DIA) | POS |
DMI (QQQ) | POS |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | POS |
SUM IND | POS |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
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Category: Professor's Comments