Weekend Strategy Review August 20, 2017

Posted by OMS  at August 20th, 2017

The Dow fell 76 points on Friday, closing at 21,674.  It was down 184 points for the week.  The NASDAQ was down 5 points on Friday and down 40 points for the week.

The Dow, NASDAQ, and SPX appear to have finished their large degree Ending Diagonal Patterns and are starting to head down. The cockpit indicators have turned negative and all four inverse index ETFs for the U.S. markets are now on the Dean’s List.

Friday’s decline saw the Dow drop close to its 50-day moving average at 21,629.  Given that the Dow has been in an Up Trend since 19 April, I would expect the 50 to be a very important level of support.  As of Friday, my VTI-volume indicator is still neutral, with the VTI portion of the 2-part indicator still showing a slightly positive bias at 56.7.  Also, the 2-period RSI is now EXREMELY oversold at 6.74.  So, the market is oversold with No Trend in place.  IF the Dow is going to rally next week, it will likely do it from support near the 50. 

One of the first things students learn in my Class about the Professor’s Methodology is the importance of the moving averages.  Professional traders always want to know if their stock or a particular index is above or below the 50 and the 200.  It’s always the first thing they look at when they analyze a stock.  The reason for this is simple.  It’s how you determine whether a stock is in an up or down trend.  

So now that the Dow is flirting with its 50, a lot of professional traders on Wall Street will be watching.  As long as the Dow remains above its 50, traders will perceive the 500-point decline from the 8 August top as a mere correction.  Many traders will see it as a buying opportunity.  After all, IF the Dow trades down to its 50, it will be EXTREMELY oversold with NO Trend in place.  Normally, this is where I love to establish long positions.

But this time might be different.  The thing most traders are not paying attention to is the pattern.  It’s that Ending Diagonal thing that I’ve been talking about for weeks.  The fact that the Dow has completed five waves up since November, which was followed by another five waves up since April makes this market an entirely different breed of cat.  So, this time, even if the market rallies off its 50 next week, we need to pay attention.

Instead of looking to buy this market, I will be looking to short any rally.  Why?  Well, since the 8 August top, the market has fallen in five distinct sub-waves, followed by an a-b-c correction.  Five waves down and three waves up suggests the primary trend of the market is changing from up to down.  Then after these first two waves, the market has declined impulsively, suggesting it is wave 3 down of a new Bear Market.  Most traders on Wall Street haven’t recognized this yet.  But the signs that things are different this time are there.

There’s one thing you need to remember now from a timing perspective.  Although earlier this month, I mentioned that the markets would likely start to decline in mid-August, this decline is only a preliminary bout. The main event will come later.  The decline you saw this past week is only the first few waves of Wave 1 down.  Once this wave is complete, Wave 2 up will likely retrace a good portion of the decline.  In other words, even though the Dow is declining now, the crash waves of the Major decline I expect (Wave 3 of 3 down) are still probably a few months away.  This doesn’t mean that you should be comfortable with your long positions, because the markets will likely be under pressure for the next few months, even with a Wave 2 rally.  But students need to realize that the Dow is still above its 50, and until this level is broken, it’s likely that once wave 3 down completes, we’ll see some choppy trading action occur as corrective wave 4 develops.  This trading action for sub-wave 4, most likely develop as a small five wave triangle.  It will confuse a lot of traders. The triangle will actually be a battle for control of the 50. 

So, if you see the choppy trading of a triangle develop next week, just remember that triangles are consolidation patterns.  Also remember that prices usually leave a triangle in the direction they entered the pattern.  In this case, the direction is down. 

This means that at some point, probably later next week, the 50 will be broken.  Once this happens, the next target for the Dow is the 200, currently located near 20,600.  And if the Dow starts to move down and breaks below its 200, the ‘Rope Jump’ would identify the move as Major Wave 1 down of a new Bear Market.  This is why students should be watching to see how the battle for the 50 develops next week.  It’s important!

It’s also why I will be looking to short any rallies next week.  Given that any triangle pattern that develops will likely break to the downside as sub-wave 5 of Wave 1 begins. This gives me a potential target of about 1,000 Dow points from current levels.  It might not get there, but IF this market is going to crash later this year, the first thing that MUST happen is a ‘Rope Jump’ to complete Major Wave 1 down. 

Like I said, we’re only watching the preliminary bouts now. 

Have a great weekend.

That’s what I’m doing.

h

BTW, thank you for all the nice emails I received during the past week.  Feedback like this is why I continue to do the things I do.

Market Signals for

08-21-2017

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