Professor’s Comments October 29, 2014

Posted by OMS  at October 29th, 2014

The Dow rose a whopping 188 points yesterday, closing at 17,005.  Volume continues to be light on the current rally, coming in at 89 percent of its 10-day average.  There were 187 new highs and 29 new lows.

I received an interesting email yesterday from Peter S. asking the following:  “Does the market manipulation undermine the principles we apply in our decision making? It seems as though we are swimming against a tidal wave.”  Hmmm?

While yesterday’s rally was expected because of the pattern and the small change in A-D oscillator, I expected the rally on the Dow to be about 100+ points, or close to the 16,825 level. In actuality the rally was for 188 points, a bit more than expected.  However the Wave 2 pattern continues to remain in place.

Here’s the thing:  As I often say when I talk about Wave 2s…. they are extremely difficult to trade.  That’s because while they usually retrace anywhere between 38 and 62 percent of wave 1, they can and sometimes do retrace all of Wave 1.  Most wave 2s take the form of a simple a-b-c pattern.  However this particular wave 2 appears to have evolved into a complex zig-zag. 

During this retracement, it is not unusual for the Dean’s List and the PT indicators to conflict with the pattern, but his does not change the overall pattern.  This is why trading wave 2s is so challenging.

When you have a very important election only a week away, and a PPT that appears to be active in supporting the markets, it makes trading retracement waves even more difficult.  What is normally a simple a-b-c retracement can morph into two connected a-b-c patterns to form a zig-zag.  I believe this is what we’re seeing now.

The Fed will conclude its 2-day meeting at 2pm today and announce its latest plans for interest rates and QE stimulus.  Just about everyone expects the Fed to terminate its QE bond buying program.  It will be interesting to see how the market reacts to the announcement, especially if the market interprets the announcement negatively.

Yesterday, the A-D Oscillator came in with an EXTREMELY overbought reading of 256.26.  Overbought readings like this almost always lead to a pullback in the market within 1-2 days.

Bottom Line: With an overbought market and a Wave 2 retracement pattern that appears nearing completion, I’m just going to wait to see how the market reacts to the Fed announcement.  If the next impulse wave down is going to start, all the conditions are now in place for it to happen.

That’s what I’m doing,

h

BTW, shares of Facebook (FB) are getting hammered in the overnight market.  The company actually announced decent earnings and a slight beat on revenue.  Facebook is the second major technology company in as many days to get hit after an earnings announcement. Yesterday Twitter (TWTR) fell almost 5 points after being Red for a week.  The negative HS Pattern predicted a drop to the 42 level.  Yesterday TWTR fell to 41.76 before closing at 43.78.  So it appears that our Hockey Stick pattern continues to work, despite what the PPT may or may not be doing.

Right now FB is in a THT Pattern.  If the PT indicators turn negative today, the stock will qualify as a short. This should be a concern to investors in overpriced technology who are starting to see these shares being trashed.  This is not the time to be owning stocks with extremely high P/Es. (FB has a PE of 89!, TWTR is losing money, so it doesn’t even have a P/E!!!) The P-volume on the NASDAQ 100 tracking index (QQQ) is nowhere even close to supporting the recent rally. Actually, it’s pretty scary!

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.